The Crisis in Deeply Underwater Mortgages, Unemployment Edition
Make sure to check out the Negative Equity Breakdown by Calculated Risk Blog.
I got a hold of the negative equity data by state and decided to plot the percent of owner-occupied households that were more than 50% underwater, so the incredibly deep underwater mortgages, against unemployment. Here is percent of mortgages underwater 50%+ underwater versus June 2010 U3 unemployment by state (click through for larger graph):
Now here’s the interesting part. I took the 1 year difference of U3 unemployment by state, so June 2010 minus June 2009, and plotted. A positive number here means unemployment is increasing over the past year:
We ran some back-of-the-envelope R modeling here and got an estimate of a homeowner making between 7 to 11 years worth of payments before he or she gets above water:
(Thank god FHA is going to penalize them with a 7 year lockout on getting a loan! A real credible threat when they are going to be paying 9 years of worthless debt off by staying in the property at a 150 LTV.)
These estimates are in line with some professional analyst work I’ve seen on this question of how long communities will be underwater. Mind you, this is conditional on housing stabilizing and the Fed starting to hit some inflation targets, both dubious propositions these days.
So unemployment increased more in places with a lot of underwater mortgages in the past year. Question: As the worst mortgage debt in the highest unemployment states continues to be foreclosed on, and no mortgage relief, cramdowns, or inflation is inbound, how much will this become a spiraling problem? Foreclosures depress housing values making unemployment worse increasing foreclosures? The link between how a further local depression in housing values could increase unemployment needs some more causation analysis, but I think there’s a real, and worrisome, problem here.
How many more states will end up in a Nevada spiral before this is done?
Mike Konczal is a Fellow at the Roosevelt Institute.