Nearly one in four U.S. borrowers owe more on their mortgage than their home is worth, a worrisome sign that the housing recovery could be threatened by a wave of defaults, the Wall Street Journal reported on Tuesday.
The newspaper said almost 10.7 million households, or 23 percent of mortgage holders, were underwater in the third quarter, and 5.3 million have mortgages that are 20 percent higher than the value of their home as prices have plummeted since the recession began.
The report cited a survey by First American CoreLogic, a Santa Ana, Calif.-based real estate information company, which said more than 520,000 of the borrowers have received a default notice.
The summer's trend of rising home prices faded at the end of the traditional home shopping season, two reports Tuesday showed.
The Standard & Poor's/Case-Shiller home price index of 20 major cities rose only 0.3 percent to 144.96 in September, but it was the fourth straight monthly increase. The seasonally adjusted index is now up more than 3 percent from its bottom in May, but still 30 percent below its peak in April 2006.
Another reading of home prices by the Federal Housing Finance Agency held steady from August to September.
Analysts expect prices to dip again this winter as foreclosures increase and economic growth remains modest. The government said Tuesday that the economy grew at a 2.8 percent rate last quarter — less than originally estimated. And forecasts for the next several months are no better. Unemployment, meanwhile, could rise from the current 10.2 percent to as high as 11 percent next year.
"As long as the unemployment rate stays elevated, you're going to see pressure on the pace of foreclosures, which are going to find their way back onto the market, depressing prices," said Dan Greenhaus, chief economic strategist with Miller Tabak & Co.
Home prices are a key ingredient to rebuilding the economy. Homeowners feel wealthier when their property appreciates in value and are more likely to spend money. Rising prices also help millions of homeowners who owe more to the bank than their homes are worth.
Spring and summer are typically the best times of the year for the housing market, because families prefer to move between school years. And this year's sales were aided by a tax credit for first-time buyers, which drove up sales nearly 30 percent between May and October.
In the winter months, fewer homeowners put their properties on the market. That means a bigger proportion of the sales will be foreclosures.
Last winter, sales of foreclosures and other distressed properties made up about half of all sales in February and March, compared with about a third over the summer, according to the National Association of Realtors.
With those low-priced properties dominating sales, Barclays Capital economist Michelle Meyer forecasts an 8 percent drop in prices before they hit bottom next spring, but said, "I don't expect another freefall."
Continuing economic woes will likely force many consumers to shorten their Christmas shopping lists. Consumer confidence in the economy improved slightly in November from October, but shoppers are still gloomy, the Conference Board reported Tuesday.
In the Case-Shiller report, home prices rose in 11 major cities, with the strongest gains in San Francisco and Minneapolis, according to the Case-Shiller report. That's a shift from the summer, when price gains were broad. In July, for example, prices were up in 17 cities.
Prices fell by the most in Las Vegas and Cleveland. Compared with a year earlier, the 20-city index was down about 9 percent, the smallest year over year decline since January 2008.
"With housing remaining an albatross around the economy's neck, nothing would perk things up more than some increases in home prices," wrote Joel Naroff, chief economist at Naroff Economic Advisors. "That seems to be happening."
The Commerce Department on Wednesday will release new home sales data for October. Economists expect a 2 percent increase from September to an annualized rate of 410,000, according to Thomson Reuters.
The Wall Street Journal, citing U.S. Census Bureau data, said that most U.S. homeowners still have some equity in their homes and almost 24 million of them own their homes outright.
The housing market has offered some confusing signals recently. U.S home construction dropped in October to its lowest since April, according to the Commerce Department. And a rising proportion of fixed-rate home loans made to people with good credit are sinking into foreclosure, the Mortgage Bankers Association said.
According to the analysis reported by the Wall Street Journal, homeowners in some areas are more deeply underwater than others, including Nevada, Arizona, Florida and California. The First American report said that almost 30 percent of borrowers in Nevada owe 50 percent or more on their mortgage than their home is worth.
The housing woes may be affecting the banking industry. The Federal Deposit Insurance Corp. said Tuesday that the number of banks on its "problem list" rose to 552 from 416 on June 30, the highest level in 16 years. Fifty banks failed in the third quarter, the largest number since the second quarter of 1990.
Souring loans hurt bank balance sheets, the FDIC said.