This is a bit of a scary thought, but of all the people who bought homes in the United States within the last two years, 39% of them owe more money on their mortgages then their houses are worth. 39% is getting awfully close to HALF. Of course this is a very scary thought – and here are two main factors as to why that might be:
1. Falling house prices
2. Small or no down payments
Back when you actually had to have a down payment you had immediate equity in your house. But since zero-down mortgages became available you started out with zero equity. These mortgages were used partly because people just thought housing always went up – and some mortgage brokers may have been chasing commissions (once the mortgage is in place – they are out of the picture). The housing bull market (until now) had been the longest in history – and many first time homeowners weren’t old enough to remember the last housing market decline – perhaps they were under the illusion that housing markets didn’t decline?
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Those are big numbers, but should be put in perspective. The number of people who bought in the last two years in relation to the total number of people who are homeowners is quite small. The media always vascillates from wildly bullish to wildly bearish.
Still a sobering statistic though. Here in BC, real estate prices have gone sky high. While we don’t have the subprime mortgage problems they are experiencing in the US, the risk of a correction is definitely there. If I didn’t already own I think I’d be continuing to sit on the sidelines for a while. The thought of being in a negative equity situation on such a high dollar item makes me queasy.