US Homeowners with No or Negative Equity

In this chart, Calculated Risk makes an estimate of the number of US homeowners with no or negative equity in their homes. At the end of 2008, according to CR, the figure is likely to be 15,433,000. If housing falls 30 percent from the peak, 20.5 million homeowners would be underwater; if it falls 35 percent from the peak, 23.4 million would have no or negative equity. How big the mortgage losses would be depends upon how many people walk away from their homes.

As Calculated Risk explains: "As of Q2 2008, prices had fallen almost 18% from the peak, and for the graph, I estimated that prices will decline about 22.5% from the peak by the end of 2008. (this seems conservative). This means about 15.4 million households will be underwater or already foreclosed on by the end of 2008.

The last two categories are based on various estimates for the price bottom (peak-to-trough). The 30% decline was suggested by Paul Krugman in December 2007: What it takes). The 35% decline is close to the "severe recession" case presented by JPMorgan last week.

Not every homeowner with negative equity will default, in fact many of these homeowners will only be underwater by a few percent. But if we estimate one half of homeowners with negative equity will eventually default, use a 50% loss severity, and a 35% price decline (23.6 million households with negative equity), and use the median house price from the Census Bureau of $216 thousand, we get $1.3 trillion in mortgage losses for lenders. I think this is probably high (probably fewer than 50% will default), but this does give a general idea of the potential losses.

If we use one third of homeowners, the mortgage losses with a 35% peak-to-trough price decline would be about $840 billion."