The Woodlands Real Estate

What does being “upside down” in your house really mean?  The number of upside down homeowners – those who owe more on their mortgages than their home is now worth - has been growing dramaticaly since 2006 as real-estate prices started to tumble in some areas.  By some estimates, between one in six and one in eight homeowners is in that position nationwide, most of them people who bought homes in the past few years or who put down small or no down payments.

This is a worry since owing more than your home is worth is the first step toward foreclosure.  And it’s a concern because foreclosures are roiling the financial markets and, closer to home, they drag down our neighborhoods.  (Most people who still have equity, by contrast, would rather sell their houses at a loss than lose what’s left of their investment.)

In response to concerns about rising foreclosure and delinquency rates, federal regulators are studying possible new programs aimed at needy homeowners.  There are concerns that such programs could attract a flood of applications from those who don’t truly need assistance or encourage lenders to push homeowners into foreclosure.  At the same time, lenders such as J.P. Morgan Chase and Bank of America have committed to working on new loan terms for the most-distressed homeowners.

But experts who have studied previous sharp housing downturns in Texas, California, New York and Massachusetts say that being upside down, while unpleasant, doesn’t lead huge numbers of homeowners to default on their mortgages and end up in foreclosure.

A study was done of more than 100,000 homeowners who were upside down in Massachusetts in 1991 and the study found that just 6.4% of them lost their homes to foreclosure over the next three years, according to a paper published in the September Journal of Urban Economics.  The vast majority of homeowners simply continued paying as usual because they focused on the affordability of their payments, not on what they owed, and they believed home values would eventually recover.

It was found that homeowners typically lost their homes only after at least two things happened: Their home values dropped, and they either couldn’t afford the payments or stopped making payments after losing hope that prices would eventually recover.

Typically, homeowners fall behind after a life change such as a job loss, divorce or serious illness.  In the current downturn, foreclosures are higher than in previous cycles because more homeowners reached beyond their means to buy their homes and simply can’t keep up the payments.