When "Underwater" Isn't the Same as Negative Equity

The NYT has one of its big 2,000-word pieces on the housing market today, this time concentrating on the phenomenon of negative equity. The estimate the article cites is very high, and was greeted with some skepticism by Calculated Risk:

With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody's Economy.com.

But if you read the piece more closely, it doesn't quite say that "underwater" is the same thing as having a mortgage worth more than your house. Instead, consider the three homeowners it cites as grappling with this problem:

• Stuart Breakstone, who had to write a check for $65,000 when he sold his custom-built house for $170,000. He and his wife, who between them earn more than $250,000 per year, now have a $670,000 mortgage, which is "perhaps more than the house itself is worth".
• Collie Tuttle, who bought her house for $270,000 with no money down; she has since paid the mortgage down to $248,000. One potential buyer is willing to pay $269,000 for the house - 8.5% more than the mortgage, but not enough to cover the mortgage plus brokers' fees plus closing costs.
• Jane and Kevin Naus, who have a $192,000 mortgage on a house they're not living in; they have cut the asking price from $239,000 to $220,000. That's not only more than the mortgage: it would even cover all the costs of selling and leave them with $6,000 to spare. They're willing to continue paying the $1,400 monthly mortgage payments on an empty house for the time being, but they're not willing to cut the price any further (or, seemingly, to rent out the house and cover the mortgage payments that way).

So we have one rich couple who lost money on a custom-built house but seem reasonably comfortable. There's one woman who is more or less breaking even. And there's one couple who probably could have sold their empty home by now and paid off the mortgage with the proceeds, but who for unclear reasons haven't. If this is what is meant by "underwater", just wait until the United States starts suffering from real negative equity.

As for the graph accompanying the piece, it's frankly worthless. It shows that in mid-2009, one in four homeowners in the West will have zero or negative equity in their homes - but it doesn't say what kind of price appreciation or depreciation that projection is based on. Given that the number is pegged at about 10% now, one has to assume that there's quite a lot of house-price depreciation being assumed over the next year or so - enough to put just about anybody who's bought a house in the past few years underwater. It would be polite, I think, to tell us what that depreciation number is, so that we can judge for ourselves how realistic the negative-equity numbers really are.