Pwned. A term originally coined by mistake when the word “owned” was misspelled by a video game programmer. The word has come to symbolize domination of one party over another, and it’s a particularly appropriate term for loanowners who bought a house hoping to “own” it, and instead they find themselves being “pwned” by the house. I first wrote about this phenomenon in 2008:
Generation Y began buying starter homes in earnest during the Great Housing Bubble. Generation X is just now coming into their prime earning years, and many of them bought move-up homes at inflated bubble prices. The Baby Boomers took their equity and bought multiple properties during the bubble. They all have one thing in common: they are all part of Generation Pwned. … Unfortunately, I know several families who this describes. All are overburdened with debt, and they were counting on increasing income and increasing home prices to finance their lifestyles and their family’s future. It isn’t going to turn out well for them.
Even if these people get a workout that allows them to stay in their homes, the terms of the workout are not going to leave them much to live on. Any workouts are going to have the highest possible DTI the government thinks you can handle (currently 38%,) [later reduced to 31%]… . Most would be better off walking away. Anyone paying 38% of their gross income (that is gross, not net) to their housing costs, plus trying to finance car payments and credit card debt is going to find it very difficult. This is not going to be a short-term condition. Rapid house price appreciation leading to a HELOC dependent lifestyle is not going to happen any time soon — if ever. Many of us have had to tighten our belts during the recession, but these people will not see any improvement in their finances when conditions improve. They are truly pwned.
Those that participated in the housing bubble (bought late or borrowed much) will end up breaking down into two groups: those that are pwned, and those that lost their houses. The pwned group is facing a life of indentured servitude to massive debt obligations and little or no hope of financial recovery. Those that lost their houses will have to deal with bad credit and feelings of failure. I can’t decide which group I would rather be in. Neither alternative is very enticing. I am very thankful I was one who did not participate.
Four years later, the reality of being pwned is setting in on the under-40 generation.
NEW YORK (CNNMoney) — … The percentage of borrowers who owed more on their homes than they were worth fell to 30.9% during the second quarter, down from 31.4% three months earlier, according to Zillow. Of the 15 million borrowers who were underwater during the quarter, a disproportionately large number are under the age of 40, said Zillow chief economist, Stan Humphries.
Nearly half, or 48%, of all mortgage borrowers under age 40 are underwater, about twice the rate of borrowers who are older. And that has created a sort of gridlock that could hinder the housing market’s recovery, he said.
An entire generation trapped in their starter homes. This is creating a huge imbalance as the demand for below median homes affordable to first-time buyers is in great demand, but the supply is very low, partly because the generation that should be vacating these properties is trapped there instead.
“We hear about tight inventory in many markets, and it’s clear where this is coming from,” he said. “Negative equity is trapping young people in their homes, preventing them from selling. These homes are like the very starter homes potential first-time homebuyers are seeking.”
Also, hedge funds are buying below median starter homes at auction and holding them as rentals. Since lenders have drastically slowed the rate at which they take on REO, very little foreclosure supply is hitting the MLS as resales.
Underwater homeowners who want to sell their home … will either have pay off their mortgage in full at closing — requiring lots of cash on hand — or undergo a short sale.
Short sales, however, entail getting the bank to forgive the difference between the amount the home is sold for and the amount owed on the loan. If the bank won’t approve it, the sale can’t go through. Even when the bank allows a short sale, the borrower takes a big hit on their credit score — a consequence many are reluctant to take.
That’s the trap. It forces overextended borrowers to hang on when what they really need is debt relief. Many have already strategically defaulted, and many more are considering it. Only rising prices which gives the distant hope of equity will prevent most of these borrowers from giving up and walking away.
Still, many homeowners just don’t want to absorb the loss, said Humphries. They hang onto their homes, hoping prices will rebound enough to put them above water again. That’s been evident in many cities in Florida and California, where underwater borrowers are common and very few homes are for sale.
It’s more than simply being unwilling to sell at a loss. Many of these loanowers are committed squatters who noticed it’s better for them financially to wait and pay nothing rather than sell and have to move and pay rent.
The impact on the underwater generation: All of this could carry long-term ramifications, for both the economy and these under-40 borrowers, said Mark Zandi, chief economist of Moody’s Analytics.
Most of the young homeowners who are underwater bought at the height of the housing market. Now, as they approach middle age, they have nothing to show for their investments.
Houses shouldn’t be viewed as an investment. That’s part of the problem.
An entire generation that made no money on housing means those people who would ordiinarily be selling their house and porting that equity into a larger, more expensive property are not making those move ups. A lack of equity and a lack of personal savings means the move-up market is dead. The only thing supporting prices in these markets is a steadfast commitment from lenders not to foreclose and resell the properties. But how long will that last? What change in government rules or banking policy might spark them to liquidate? By far the riskiest segment of the housing market are those properties priced more than 20% above the conforming limit.
Housing has never been more affordable, and yet home ownership is still falling and more Americans are renting. The supply of homes for sale is down 24 percent from a year ago, according to the National Association of Realtors, but that still doesn’t explain why so few buyers are jumping in. The answer lies in the immobile move-up buyer.
The NAr is keen to tout sales increases over the previous year, not matter how small. What the NAr fails to point out is how low sales volumes are compared to a historically healthy level. Sales continue to languish well below historic norms due to the absence of move-up buyers.
“At current mortgage interest rates, the monthly cost of the typical new mortgage – at about 12 percent of median income – is not much more than half normal levels,” notes Paul Diggle of Capital Economics. “In other words, housing is very affordable.”
He’s right. One of the most surprising results that came from my recent incorporation of long-term affordability data into my monthly reports is how well the beach communities scored. They are still inflated, but they are far less inflated that they ever have been.
Still, while mortgage refinances soar to a two-year high, weekly numbers from the Mortgage Bankers Association show that applications to purchase a home are down by 6 percent over the past year.
I know I have posted this chart a number of times, but it’s worth repeating that demand is still weak despite the anecdotes of buyer frenzies. The appearance of strong demand is an illusion created by very low supply.
“Investors and first-timers have come in and out of the market throughout history at various times for various reason, but underpinning housing has always been move-up/across/down buyers,” says Hanson. “Half of the repeat buyers have died. They are down for the count due to negative equity, “effective” negative equity, low quality credit, or legacy 2nd liens they can’t extinguish. This is a huge problem for anybody betting on ‘escape velocity’ or a ‘durable recovery’ in housing.”
The best deals going forward will be on those properties between 20% and 40% above the conforming limit. There are very few potential buyers with the cash and the credit to complete those transactions, and banks are allowing a great deal of squatting at those price points. When this debris is finally cleared out, nicer and nicer properties will sell in this range. For those who can afford what would be traditionally considered a move-up property over the next three to five years, the buyer competition will be low, and the supply will be large.
Perhaps he should have taken more?
The former owner of today’s featured property wasn’t a habitual Ponzi. He did increase his mortgage somewhat over his term of ownership, but relative to the increase in value, he didn’t raid the piggy bank like he could have. He still lost the house, but since he didn’t max out his refinancing, he didn’t get to enjoy the HELOC abuse lifestyle like so many of his brethren.
- This property was purchased on 2/7/2001 for $243,000. The owner used a $239,245 first mortgage and a $3,755 down payment.
- He refinanced three times in 2002, but he didn’t increase his mortgage balance.
- On 12/21/2006 he refinanced with a new $334,000 first mortgage. $90,000 is not chump change, but he probably could have extracted $300,000 if he wanted.
Despite his attempts at prudence, the mortgage proved too much for him, and the house was foreclosed on in mid 2011. He got to squat for about a year and a half, and the bank sat on this property for a year itself before finally putting it for sale last week.
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Proprietary OC Housing News home purchase analysis
$330,900 …….. Asking Price
$243,000 ………. Purchase Price
2/7/2001 ………. Purchase Date
$87,900 ………. Gross Gain (Loss)
($19,440) ………… Commissions and Costs at 8%
$68,460 ………. Net Gain (Loss)
36.2% ………. Gross Percent Change
28.2% ………. Net Percent Change
2.6% ………… Annual Appreciation
Cost of Home Ownership
$330,900 …….. Asking Price
$11,582 ………… 3.5% Down FHA Financing
3.66% …………. Mortgage Interest Rate
30 ……………… Number of Years
$319,319 …….. Mortgage
$83,794 ………. Income Requirement
$1,463 ………… Monthly Mortgage Payment
$287 ………… Property Tax at 1.04%
$0 ………… Mello Roos & Special Taxes
$83 ………… Homeowners Insurance at 0.3%
$333 ………… Private Mortgage Insurance
$0 ………… Homeowners Association Fees
$2,165 ………. Monthly Cash Outlays
($221) ………. Tax Savings
($489) ………. Equity Hidden in Payment
$14 ………….. Lost Income to Down Payment
$103 ………….. Maintenance and Replacement Reserves
$1,572 ………. Monthly Cost of Ownership
Cash Acquisition Demands
$4,809 ………… Furnishing and Move In at 1% + $1,500
$4,809 ………… Closing Costs at 1% + $1,500
$3,193 ………… Interest Points
$11,582 ………… Down Payment
$24,393 ………. Total Cash Costs
$24,000 ………. Emergency Cash Reserves
$48,393 ………. Total Savings Needed
The property above is available for sale on the MLS.Contact us for a comparative market analysis, a cost of ownership analysis, or information on how you can make an offer today!
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