Drowning

One of the serious problems facing the housing market in America is the concept of "underwater" homeowners.  Essentially, an underwater homeowner owes more on their house (i.e. their mortgage amount) than they could sell the house for (their market value).  With housing prices down 40-50% in many areas, it is easy to see how this is a problem.  For example, Jim (completely fictional) bought his house in 2007, just before housing prices fell.  He paid $500,000 for it and took out a $400,000 loan (20% conventional loan).  However, just a few years later, his house is only worth $250,000 on the market and he still owes $375,000.  In essence, Jim is $125,000 "underwater."  The only way for Jim to move would be to negotiate with his bank to either forgive the difference, or set up an arrangement where Jim would pay off the $125,000.  It doesn't take an Ivy League-educated mathematician to see that the math just doesn't add up.

The reason I bring this scenario up is because of a new report released by CoreLogic, an information and analytics firm that studies the real estate market.  According to their numbers, some 11 million households are "underwater," essentially trapped in their home for years to come.  This number works out to about 22.5% of ALL mortgaged homes.

According to CoreLogic, during an average or better real estate market, only about 5% of mortgage homes are underwater.  This creates a certain fluidity in the market and gives almost every homeowner the chance to move on if they so desire.  But in today's market, this just simply isn't the case, and the prospects for getting out of this situation don't look strong, at least in the short-term.