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Boise area faces epidemic of underwater home loans, even as housing prices rise

Boise area faces epidemic of underwater home loans, even as housing prices rise

Idaho Freedom Foundation staff
June 5, 2012
Idaho Freedom Foundation staff
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June 5, 2012

Treasure Valley residents who have suffered from the real estate downturn may be in for at least a slight reprieve. KTVB reported Sunday that Boise housing prices are on the rebound, citing a national survey by data aggregator Corelogic that ranks the area as one of the most improved housing markets in the nation—second only to Phoenix. Figures from Realtor.com support this report, showing a rise in median housing prices and a drop in both overall listings and the median length of time that listings stay on the market.

"The most improved markets were either hard hit areas that had significant room for improvement (such as Phoenix and San Jose), or markets that bypassed or experienced only minor housing and economic recessions (Boise, Salt Lake City and Denver)," wrote Mark Fleming, Corelogic's chief economist.

This news comes on the heels of a more sobering report released May 24 by real estate listings site Zillow, which provided the percentage of home loans throughout the nation currently in negative equity, or "underwater," a term used when mortgage holders owe more than their homes are worth. The Boise metro area is particularly hard hit by negative equity, with Ada County and Gem County tied at 48 percent of all home loans underwater, and a staggering 66 percent in Canyon County—placing the county in the top 1 percent in the nation. A little to the east, Elmore County has 59 percent of mortgages in negative equity, and Camas County has 51 percent. Jerome and Payette counties come in next at 44 percent and 41 percent, respectively.

This doesn't necessarily indicate, however, that people are in imminent danger of losing their homes.

"While the percent of homes in negative equity is dauntingly high, this percentage only represents a potential danger," wrote Stan Humphries, chief economist for Zillow. "The majority of underwater homeowners continue to make regular payments on their mortgage, with only 10.1 percent of the 31.4 percent nationwide being delinquent. Therefore, 3.1 percent of homeowners in the nation are at high risk for foreclosure near-term although there has been an increased utilization by lenders of foreclosure alternatives such as short-sales."

Although rising real estate values are a boon to those who already own homes and will therefore see a better return, or have a less drastic loss, on their investments, price increases also make homeownership less affordable for newcomers to the housing market. Economist Morris Davis argues that the federal government's efforts to surmount the cost barrier for many families are contributing to the waning economy.

"The cost of these policies is astounding," Davis wrote. "The Congressional Budget Office recently estimated that the total cost of Fannie Mae and Freddie Mac to current and future taxpayers is $317 billion, and some economists argue that the Federal Housing Administration will lose another $50 billion or more in the upcoming years. In addition, economists estimate that federal tax revenues would be roughly $60 billion higher each year if the mortgage interest deduction were eliminated from the tax code. Assuming a 3 percent discount rate on these lost tax revenues, the net present value of the $60 billion in annual tax losses is $2 trillion. When added together, the net present value of the cost of housing policy designed to promote homeownership is likely on the order of $2.5 trillion."

Despite this tremendous expense, Davis points out, the rate of homeownership has increased by only 2 percentage points since 1970.

Although real estate prices may be on the rise, for many current owners their home values remain far lower than they can afford. It may not be of comfort to people who bought homes during the real estate bubble, when prices were artificially inflated far past evident value, but this type of readjustment is exactly how markets recover, improving economic prospects on a widespread scale, according to Barry Ritholtz, chief executive of FusionIQ, a quantitative research firm.

"Regardless of the asset class — stocks, bonds, commodities, houses, etc. — assets do not merely stabilize. We have never seen a stock market run up into bubble territory and then revert to fair value. Instead, we careen wildly past that level, to deeply undersold and exceedingly cheap," Ritholtz wrote in the Washington Post. "That is the marvelous mechanism of markets. It is how assets are repriced, distressed holdings liquidated, capital markets stabilized, fools revealed, speculators punished — and money returned to its rightful owner, the prudent investor."

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