Canada's Housing Bubble

Feb 14, 2011 Eric Pryne Seattle Times

The owners of one-third of the houses with mortgages in the Seattle metro area now owe more than their homes are worth, Zillow.com estimates.

That's up from less than 23 per cent a year ago, the online real-estate database and marketplace said in an analysis released Wednesday.

At the end of 2010, 34.3 per cent of all single-family homeowners with mortgages in King, Snohomish and Pierce counties were "underwater" on their homes, Seattle-based Zillow said. That was higher than the national figure, 27 per cent.

This region's rate of increase over the past year — and especially over the last quarter — also topped the national increase.

"Negative equity" is rising faster now in the Seattle area largely "because of where we are in the housing cycle," said Stan Humphries, Zillow's chief economist.

Home values in this market kept rising for a year after values began falling in most of the rest of the country, Humphries said. Now Seattle is seeing steeper drops — leaving more homeowners upside down — as price declines in many other metropolitan areas are moderating.

"We're kind of where L.A. was in early 2009," Humphries said.

Negative equity can have a significant impact on both the housing market and the broader economy, especially if the gap between the home's value and the loan balance is large, said Glenn Crellin, director of the Washington Center for Real Estate Research at Washington State University.

It increases the likelihood that owners will default — even if they still can manage the payments, he said.

After that, they probably wouldn't be able to buy another house anytime soon, he added, "and that would hold the housing market back."

A "strategic default" — choosing to default on a mortgage — also damages owners' ability to obtain credit for other purchases, further curtailing economic activity, Crellin said.

Underwater homeowners who don't default also may behave in ways that harm the economy, some researchers suggest. They may be less likely to move — even for a better job — and less inclined to spend money on home improvements.

Zillow determines whether a house is underwater by comparing publicly available loan information with the company's proprietary estimate of the home's value. Those estimates, too, are extrapolated from public records.

While the percentage of houses with negative equity in the Seattle area is climbing, it still doesn't compare with Sun Belt markets that have become poster children for the housing bust.

About 82 per cent of all houses in Las Vegas, 70 per cent in Phoenix and 62 per cent in Orlando, Fla., are underwater, Zillow estimates.