Stuck in a home you can’t sell for enough to get out from underneath the mortgage? You are not alone.
More homeowners in the Chicago area are trapped in underwater mortgages than in almost any other major metropolitan area in the country, according to two new studies released this week.
One report, released Thursday by housing research data firm CoreLogic, found Chicago slightly better off than Las Vegas and Miami. But a separate study released Wednesday by real estate website Zillow places Chicago homeowners in the worst position in the nation, with a larger portion of homes underwater than in either Las Vegas or Miami.
When homeowners are underwater, they have unpleasant choices. Their homes are worth less than they owe their lender. So if they decide to sell, they won’t make enough on the sale to repay the lender. Somehow they have to come up with extra cash to cover their debt, or they have to negotiate with their lender to have the debt forgiven in a process known as a short sale. And they have trouble buying a new house because they don’t have leftover money for the next down payment.
According to Zillow, which studied 35 major metropolitan areas, about 20.3 percent of Chicago area homeowners still have homes that aren’t worth as much as they need to repay, an improvement over 23.7 percent a year ago. CoreLogic, which studied the 10 largest metropolitan areas, says 16.7 percent of Chicago-area homeowners are underwater. That’s an improvement over 18.8 percent a year ago.
Nationally, Zillow finds 12.7 percent underwater, while CoreLogic figures it’s 8 percent. That’s a significant improvement since the worst period of the housing decline, when about a quarter of the nation’s homes had negative equity, said CoreLogic economist Frank Nothaft. Yet it’s still far worse than the historical norm. Typically, only about 2 to 3 percent of homes are underwater, he said.
About 4 million homeowners in the country had no equity in their property at the end of the first quarter. A year earlier, it was 5.1 million, according to CoreLogic.
Nothaft attributes the high rate of underwater homes in Chicago, Miami and Las Vegas to the flow of easy mortgage money before the crash. Easy borrowing led to speculation and excessive borrowing. Home prices plunged when the money stopped flowing.
In the U.S., underwater mortgages hit their worst point in early 2012, when 71 percent of homes in Las Vegas were underwater — the largest percentage in the nation, according to Zillow. Chicago’s worst point came at the same time, when 41 percent of homes were in the same predicament.
Until last quarter, Las Vegas continued to have the largest percentage of underwater homes in the country, Zillow said. But the problem eased for some Las Vegas homeowners as home prices in the area rose quickly recently, and made homes more valuable than the loans people owed on them, said Zillow economist Svenja Gudell.
That fix has been less prevalent in Chicago, where home prices have appreciated more slowly than in many areas of the country, she said.
While a housing recovery has helped cut the rate of underwater mortgages, Gudell said Chicago’s improvement has been slower than that of other large metropolitan areas because local job growth and pay growth have trailed national averages. The key driver of home prices is demand as people move into an area, she said.
“Demand is a big part,” added Geoff Smith, executive director of the Institute for Housing Studies at DePaul University. “The regional economy broadly speaking hasn’t recovered.”
According to the Case-Shiller home price index, median prices of Chicago-area homes climbed just 1.8 percent in March, compared with a year earlier. Nationally, prices climbed 5.3 percent during the same period. Prices in Las Vegas rose 6.8 percent.
Gudell also said one reason for Las Vegas’ rebound is the way the area deals with foreclosures. Lenders there do not need court approval to take back homes when borrowers are delinquent on their monthly payments, causing foreclosures to happen quickly. As lenders foreclose and resell to new buyers, the homes are freed of their underwater designation. In Chicago, the foreclosure process moves slower because a court must be involved.
The system in Chicago, however, allows people to stay in their homes even if they are having trouble with their mortgages, and it gives them more time to seek solutions to their problems, Smith said.
According to Zillow research, only 4.7 percent of homeowners in Chicago are delinquent on their mortgage payments, which means that even though their homes aren’t worth what they owe, they continue to make their payments. A Zillow map shows the hardest-hit areas of underwater housing.
The recovery from the housing crisis and underwater mortgages has been erratic on a local level, Smith said. For example, Palatine and Arlington Heights homes on average are down only about 15 percent from their pre-crash highs. So people who stay in the homes will have market forces repair the values and eventually give them equity again. That is not likely to be the case in communities such as South Chicago and Harvey, he said, where prices are still 50 percent below their peak.
With little demand for homes in that area, Smith said, “it is doubtful you’ll see a rebound” significant enough to help people out of their mortgage trap unless there is a major program to reduce the principal on loans. The areas that are especially troubled besides South Chicago and Harvey are Chicago Heights, Park Forest and Calumet City and the West Pullman, Englewood, Humboldt Park and Garfield Park neighborhoods in Chicago.
Yet areas that are adjacent to fast-appreciating areas can rebound well. As an example, Smith cites Humboldt Park next to Logan Square.
While homes are still underwater, he has found prices appreciating quickly in Bridgeport/Brighton Park and Austin/Belmont Cragin in Chicago.
In April, the Illinois Housing Development Authority secured an extra $151 million in federal money to help struggling homeowners. The additional “Hardest Hit” funds allocated to Illinois mean it has received a total of $715 million from the U.S. Treasury, more than any other state except California and Florida.
gmarksjarvis@tribpub.com
Twitter @gailmarksjarvis
