Underwater Homeowners will have negative impact on Rental Homes

According to a report from Deutche Bank homeowners who are underwater on their mortgage will continue to rise through 2011. If predictions are correct, this will have a neagtive impact on rental home rates. Great for tenants, bad for owners. There is a direction correlation between rental rates and home prices and further price declines should push rental rates down through 2011.

Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends, Deutsche Bank AG said. The percentage of “underwater” loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in a report today.

As of March 31, the share of homes mortgaged for more than their value was 26 percent, or about 14 million properties, according to Deutsche Bank. If this deteriorates further it will hurt cosnumer spending and increase default rates by borrowers who face unemployment, divorce, disability or other financial challenges. Markets that saw the fastest appreciation, states like California, Florida, Arizona, and Nevada will have the lions share of borrowers owing more than 125 percent of their property’s value, this is expected to increase to 28 percent from 13 percent, according to Weaver and Shen.

The next shoe to drop, or loan to have a major impact will be the infamous, Pay Option ARM, a loan our firm has harped against for years. According to a 2006 Business Week Article 3 out of 4 loans originated in 2004/2005/2006 in California were these types of loans. While they make up a small percentage of the overall market, the impact they will have could be huge. Most homeowners with these types of loans are still able to make thier monthly payments since they are relatively low. Once they start to reset, it’s not higher rates that will hurt, it’s the fact homeowners simply can’t afford the payment however it is structured.

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