Underwater Mortgages Continue to Trouble Housing Market

From 4% in 2006 to more than 23% in the first quarter of the current year, the steep increase in the number of ‘underwater’ mortgages has underscored the slowdown in the housing market.

After years of easy mortgage loans and soft terms of repayment led to thousands of Americans opting for these loans to buy homes, the downturn brought with it a dramatic decline in the market. A huge percentage of the borrowers who had taken advantage of easy terms ended up unable to pay back the loans and were forced to foreclose on their homes.

Even now, although other sectors of the economy are showing definite signs of improvement, the housing sector is yet to find its feet. It continues to reel under the poor decision made by the Federal Reserve in keeping interest rates unsustainably low.

A recent study by Zillow, the real estate website shows that ‘underwater’ mortgages are far from being a thing of the past. Home values have declined on one side and the number of ‘underwater’ home owners, whose home value is less than the dues owed on the mortgage, is on the rise. Single family homes which are underwater touched 23.3% of the total, up from 21.4% in the fourth quarter of the last year. The increase has been consistent over a period of 13 quarters, signifying deep rooted problems in the housing segment.

According to the website, about one in every four mortgages is underwater now. Unless there is a quick turnaround in this state of affairs, the future prospects for the housing sector do not look heartening.

The news is discouraging, especially considering the special programs implemented by the Obama government since mid 2009 to boost the sector. The Making Homes Affordable scheme was launched in a bid to stop the steep decline in these markets. In spite of significant tax breaks to new home buyers and an extension of the benefit to repeat buyers, the government seems to have made only moderate impact.

Analysts are beginning to think that the tax credit scheme only brought forward purchases by buyers who were already in the market for new homes. New demand was not really created because of the incentives, they feel.

It is yet to become clear how the housing market will evolve in the near future. In the meantime, neither lenders nor borrowers are happy about the way things are going.

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