Deutsche Bank (Stock symbol: DB) made a big splash last month when it predicted that 50% of U.S. homes would be underwater – what banks call “negative equity” - by 2011.
That’s troubling enough. What’s even scarier is that regular, staid traditional fixed-rate loans are in danger of drowning.
“We project the next phase of the housing decline will have a far greater impact on prime borrowers,” Deutsche analysts Karen Weaver and Ying Shen said in the report.
Of prime conforming loans, 41% will be “underwater” by the first quarter of 2011, up from 16% at the end of the first quarter 2009, Deutsche Bank reported. Forty-six percent of prime jumbo loans will be larger than their properties’ value, up from 29%, the report added.
As Snoopy would say, “good grief”. So how can you tell if your home is high and dry?
Here are three key signs.
Location, location, location. The largest single indicator that you’re home is headed for turbulent waters is your neighborhood. If, on your drive home from work or errands today, you notice more than three signs on your block that say “foreclosure”, chances are, you could be next. The real estate Web site Zillow.com has a formula for figuring out how fast that can happen. If one home on your block is under foreclosure, your home value will drop by 1%. But if two homes are going under, then your home’s value drops by 2% (at least) - and so on and so on.
Time on the market. Take another drive around your neighborhood. Take particular note of homes for sale. Homes that are on the market for more than three months could mean buyers don’t agree on the value of homes in your neighborhood. That causes sellers to drop their sales price, thus dropping the value of your home in the process.
An option ARM.Adjustable-rate mortgages – where borrowers can elect to pay a minimum amount on their monthly loans, but the payment doesn’t go to paying down the principal of the home – are another neon blinking sign that your home will eventually go under water. By not paying the principal or interest on your loan (via those minimum payments) the amount you owe on your home actually rises instead of declines. Plus, option ARM “resets” can jack up the interest rates – and monthly payments – of your home significantly. Deutsche Bank says that 77% of option ARMs were underwater in the first quarter of 2009.
What can homeowners do to stay afloat? If you’re able, hang on to the home. Real estate experts say that home values will rise again, and if you can manage to keep the payments rolling, your homes value should rise significantly in five to seven years.
Also, don’t borrow against your house. Any equity taken out of your home is tacked on to your home mortgage debt.
Being underwater on your mortgage is scarier than anything Dracula’s castle can throw at you. If you can manage, keep making those payments – and sit out the real estate bust as best you can.
Eventually, you’ll find the surface and breathe freely once again.
—For more ways to save, spend, invest and borrow, visit MainStreet.com.