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Getting to Know Underwater Homeowners

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According to the second quarter 2012 Zillow Negative Equity Report, 30.9 percent of homeowners are underwater, owing a combined $1.15 trillion more than their homes are worth. The extent and magnitude of negative equity, however, varies widely by the age of the borrower and when a home was purchased.

Looking at our sample of borrowers, we see that negative equity is most common in younger age brackets with 39 percent of borrowers age 20 to 24, 48 percent of borrowers age 25 to 29, and 51 percent of borrowers age 30 to 34, underwater on their mortgages. All told, 48 percent of borrowers under the age of 40 are underwater on their mortgages. However, while the rate of negative equity is higher in younger age brackets, the delinquency rate is noticeably lower.

Among those underwater, delinquency (measured as a borrower who is 90 days or more past due on a mortgage payment) is most common in the oldest and middle age brackets with 10.6% of underwater borrowers over the age of 85 delinquent on their mortgage payments and similar percentages of borrowers in both the 40 to 44 and 45 to 49 age brackets delinquent on their mortgages. An explanation for this divergence might lie in the fact that while younger borrowers are more commonly underwater, they are underwater by less than those in older age cohorts. This can be seen by comparing the median loan-to-value ratio of underwater borrowers by age, which is lower in the younger age brackets (see Figure 1).

As one might expect, the transaction years in which negative equity and delinquency are most common are the years in which the housing market was at its peak. Negative equity is most common among homeowners who purchased their homes in 2006 and 2007, with about 53 percent of borrowers who purchased homes in those years underwater. Delinquency is also most common among those who purchased their homes during the height of the bubble, 2005 through 2007, with a precipitous fall in delinquency in subsequent years.

The median loan-to-value ratio among underwater borrowers gradually rises by transaction year, peaking at 133 percent for those who purchased their homes in 2005, before falling slightly for those who purchased homes in 2006 and 2007 and falling rapidly in subsequent years. This suggests that while negative equity and delinquency are most common among peak-bubble purchasers, these borrowers are not significantly more underwater than purchasers in earlier years.

The substantial drop in delinquency rate and loan-to-value ratio for borrowers who purchased homes in the years after 2007 is likely a product of the tightened lending standards implemented in the post-bubble housing market. This can also be seen by comparing borrowers who purchased homes in 2004 to those who purchased homes in 2010. While the rate of negative equity is comparable between the two sets of borrowers, the delinquency rate and loan-to-value ratios are substantially lower for borrowers who purchased homes in 2010 (see Figure 2).

Looking across the whole sample also reveals something interesting about the nature of negative equity and delinquency, namely that delinquency is relatively abnormal among underwater borrowers. Foote et.al (2009) argue that negative equity is merely a necessary but not a sufficient condition for default. They estimated the predicted incidence of default among a set of underwater borrowers in Massachusetts at less than 10 percent. Our sample mirrors this estimate, with only 9.2 percent of underwater borrowers 90 days or more past due on their mortgage payments. However, delinquency is substantially more common among those more deeply underwater than those in less negative equity: only 5.5 percent of mortgage holders between 0 and 20 percent underwater are delinquent on payments, as compared to 16 percent of mortgage holders who are greater than 100 percent underwater (see Figure 3).

About Zillow's Negative Equity data:

Zillow's Negative Equity data incorporates mortgage data from TransUnion, a global leader in credit and information management, to calculate various statistics. The report includes, but is not limited to, negative equity, loan-to-value ratios, and delinquency rates. To calculate negative equity, the estimated value of a home is matched to all outstanding mortgage debt and lines of credit associated with the home, including home equity lines of credit and home equity loans. All personally identifying information ("PII") is removed from the data by TransUnion before delivery to Zillow. Overall, the data cover over 800 metros, 2,100 counties, and 22,200 ZIP codes across the nation.