The States Where Underwater Mortgages Are Sinking Home Values

To better understand the current state of the American housing market — and better forecast its future — experts look at a number of economic and financial indicators. Different statistics, such as the size of the market of foreclosed homes, home prices and home inventories, touch on some of the reasons people default on their mortgages and banks end up writing off bad loans. But none is a better indicator than the percentage of mortgages that are underwater – where borrowers owe more on their mortgages than their homes are worth – and the major reason people default on mortgages.

Indeed, real estate research firm Corelogic recently released data on underwater mortgages, breaking down the information by state and major city. And according to the latest Corelogic data, “10.9 million, or 22.7 percent, of all residential properties with a mortgage were in negative equity at the end of the first quarter of 2011.”

• Read: The States Where Underwater Mortgages Are Sinking Home Values

Corelogic also posted numbers for mortgages that are within 5% of being underwater. These are valuable numbers in combination. Homes with mortgages that are nearly underwater can trigger problems when they are sold. Bank, legal, and closing costs alone can wipe out a 5% equity stake, particularly in the sale of inexpensive homes.

24/7 Wall St. analyzed this data to see which state has the greatest problems. We then added figures on home vacancy rates from the federal government, median home values, foreclosure rates, and state unemployment. Taken as a whole, these numbers create a clear picture of the broad real estate market in each state and the effects it has one the wider economy.

The underwater mortgage problem will probably deteriorate before it improves. Home inventory level is still at an extraordinary high. The Wall Street Journal reports that it would take 103 months to “sell off all the foreclosed homes in banks’ possession, plus all the homes likely to end up there over the next couple years, at the current rate of sales.” The size of that excess inventory, in addition to homes that are for sale under normal circumstance, should keep home prices low for several years. That leaves people with mortgages greater than the value of their homes trapped in a financial vice. And in the following ten states, people are feeling it the most.

10. Ohio
> Pct. Homes Underwater: 22%
> Total property Value: $314.3 billion
> Mortgage Debt Outstanding: $237.4 billion
> Median Home Value Drop From Peak: -11.7% (22nd largest decrease)
> May Foreclosure Rate: 1 out of every 608 homes

To date, 14.5% of Ohio residences are vacant. Worse still, more than 21% of mortgages in the state are currently underwater, while another 6.3% are nearly underwater. This is one of the largest portions of homeowners on the brink of negative equity. In Cleveland, the number of bank-owned foreclosed residences, one of the worst problem’s affecting city economies, is expected to peak in July at nearly three quarters of a million homes. Since 2007, the state’s median home price has dropped by nearly 12%. It now has the third-lowest median home value in the U.S. at just $113,730.

9. Virginia
> Pct. Homes Underwater: 23%
> Total Property Value: $414.1 billion
> Mortgage Debt Outstanding: $293.2 billion
> Median Home Value Drop From Peak: -18.3% (14th largest drop)
> May Foreclosure Rate: 1 out of every 766 homes

Twenty three percent of Virginia’s mortgaged homeowners owe more on their property than it is worth. Another 6% are on the verge of being underwater. Virginia’s foreclosure rate in may (1 out of every 766 homes) is better than the national average, but with the third-highest unemployment rate in the country the situation for homeowners could get worse.

8. Maryland
> Pct. Homes Underwater: 24%
> Total Property Value: $419.9 billion
> Mortgage Debt Outstanding: $294.2 billion
> Median Home Value Drop From Peak: -29.3% (6th largest drop)
> May Foreclosure Rate: 1 out of every 1,301 homes

Compared to most of the other states on this list, Maryland’s residents appear to be in good financial shape. The median income is the 2nd highest in the country, and the unemployment rate is the 13th lowest. The foreclosure rate, 1 out of every 1,301 homes, was one of the lowest in the country in May. However, nearly one in every four Maryland homes is underwater. The city of Baltimore, where some of the worst effects of the housing crisis were felt, is offering a $10,000 incentive for people to buy and renovate the city’s many vacant homes.

7. Idaho
> Pct. Homes Underwater: 24%
> Total Property Value: $48.4 billion
> Mortgage Debt Outstanding: $35.1 billion
> Median Home Value Drop From Peak: -20.8% (9th largest drop)
> May Foreclosure Rate: 1 out of every 460 homes

Like Maryland, nearly one in every four Idaho homes are underwater, although the state is in a very different situation economically. Idaho has the 22nd lowest median income in the country and 9.4% of the state’s working population is unemployed. The housing crisis clearly had a greater impact on the state, as well. Idaho’s median home value dropped more than 20% from its peak in the third quarter of 2007.

6. Georgia
> Pct. Homes Underwater: 30%
> Total Property Value: $309.7 billion
> Mortgage Debt Outstanding: $250.2 billion
> Median Home Value Drop From Peak: -19.4% (10th largest drop)
> May Foreclosure Rate: 1 out of every 387 homes

The homeowners of Georgia are arguably in the worst shape in the southern U.S. The foreclosure rate in May – one home out of every 357 – was the second highest in the country east of Arizona. Georgia has the 9th highest unemployment rate in the country, the eighth highest vacancy rate, and nearly one out of three mortgaged homes are in a state of negative equity.

5. California
> Pct. Homes Underwater: 31%
> Total Property Value: $2.8 trillion
> Mortgage Debt Outstanding: $1.9 trillion
> Median Home Value Drop From Peak: -32.7% (4th largest drop)
> May Foreclosure Rate: 1 out of every 259 homes

No state comes close to the $1.9 trillion of mortgage debt that California has. The reason for this is primarily that it has the largest overall property value in the country, as well as the second-highest median home value of $330,037.  According to the Financial Crimes Enforcement Network (part of the Treasury Department), reports of mortgage fraud increased more than 31% in the first quarter of 2011. And most of these filings are from the period leading up to the financial crisis. Currently, no state has more reports of mortgage fraud than California. It appears the state’s housing situation can only get worse as the unemployment rate of 11.7% is the second highest in the country. California’s vacancy rate, meanwhile, is the sixth lowest.

4. Michigan
> Pct. Homes Underwater: 36%
> Total Property Value: $196.3 billion
> Mortgage Debt Outstanding: $165.3 billion
> Median Home Value Drop From Peak: -33.3% (5th largest decrease)
> May Foreclosure Rate: 1 out of every 311 homes

Michigan’s economy and housing market was already in bad shape leading up to the recession, and things have only gotten worse. The state’s unemployment has been the highest in the country for more than a year, despite the state experiencing a net loss in population between 2000 and 2010 – the only state in the country to boast this statistic. Michigan home value began to decline before the recession hit, after peaking in 2005. Since that time, home prices have dropped by 33%. The state has the fourth highest foreclosure rate in the country, and the highest east of the Mississippi.

3. Florida
> Pct. Homes Underwater: 46%
> Total Property Value: $814.3 billion
> Mortgage Debt Outstanding: $723.3 billion
> Median Home Value Drop From Peak: -42.1% (2nd largest drop)
> May Foreclosure Rate: 1 out of every 461 homes

No state has a larger gross vacancy rate than Florida at more than 20%. When the housing market flourished, the state geared up for the impending retirement of millions of baby boomers by constructing tens of thousands of new homes. When the market collapsed, real estate investments in the state were hit hard. Florida’s home value has plummeted by more than 40% — the second largest drop in the country, and nearly one in two mortgaged homes was underwater.

2. Arizona
> Pct. Homes Underwater: 50%
> Total Property Value: $249.3 billion
> Mortgage Debt Outstanding: $233.4 billion
> Median Home Value Drop From Peak: -42% (3rd largest drop)
> May Foreclosure Rate: 1 out of every 210 homes

Arizona is the true horror story of the housing crisis is the Southwestern U.S. Through the first half of the decade, states like Nevada, Utah and Arizona were experiencing record growth in population, business and, as a result, new construction. Conditions began to go very much the other way in 2008, and the states that once led in property value growth and employment, like Arizona, fell through the floor. In the third quarter of 2006, Arizona had median home value of $254,655. By the second quarter of 2010, that value had dropped by more than $100,000. Half of all mortgaged homes are underwater.

1. Nevada
> Pct. Homes Underwater: 63%
> Total Property Value: $100.7 billion
> Mortgage Debt Outstanding: $115.5 billion
> Median Home Value Drop From Peak: -50.3% (the largest drop)
> May Foreclosure Rate: 1 out of every 103 homes

No state has suffered more, in every aspect, from the effects of the recession. Like Arizona, Nevada’s property value has plummeted since the middle of the decade, losing more than $150,000 on average (more than 50%) in just five years. Nevada is also the only state in the country in which total homeowner debt is actually higher than the total property value of owned homes – nearly 2 in 3 mortgaged homes is underwater. In May alone, nearly 1% of every owned home in the state was foreclosed, the highest rate in the country.

-Michael B. Sauter, Douglas A. McIntyre