Like most pragmatic folks, I’m used to the divergence between perception and reality. But when the numbers and the intent fail to confirm one another, the skeptic in me tends to surface.
Take for example, an article in The Wall Street Journal on November 24, “One in Four Borrowers is Underwater.” The piece correctly states that, based on research by First American CoreLogic, 23% of all mortgage borrowers owe more than the actual value of their home. But the article also swells this figure to 28% when it includes those “near negative equity share,” which is defined as those within 5% of being underwater.
In other words, if someone were to buy a home recently and pay a brokerage fee, they would most like be included in this latter figure. That statistic also includes folks who are at break-even or slightly profitable on their home purchase.
The article is also correct in identifying borrowers instead of homeowners. According to The Wall Street Journal, about 24 million Americans own their homes outright. When combined with the 46 million existing residential mortgages, about 70 million folks live in a home purchased with a mortgage or with cash.
Using the 10.7 million figure of homeowners with negative equity, the percentage of Americans underwater is actually closer to 15%.
And about one-half of those underwater live in one of four states—California, Florida, Arizona and Michigan. The first of these three were the likely victims of overbuilding and speculation, while the fourth’s suffering can be tied to troubles in the auto industry.
When these troubled areas are excluded from the study, the percentage of mortgages that are actually underwater is much lower.
The housing market is truly in dire straits, and many people are suffering. But to mislead readers into thinking the situation even more dire is, at best, self-serving.
Ben Warwick (ben@qesinvest.com) is chief investment officer of Quantitative Equity Strategies LLC in Denver, and Memphis-based Sovereign Wealth Management, Inc.
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