Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.
"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.
Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said.
"The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," the analysts said. Prime jumbo loans make up 13 percent of the total market.
Deutsche's dire assessment comes amid a bolt of evidence in recent months that point to stabilization in the U.S. housing market after three years of price drops. This week, the National Association of Realtors said pending home sales rose for a fifth straight month in June. A widely watched index released in July showed home prices in May rose for the first time since 2006.
Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.
The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.
Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said,
Of option adjustable-rate mortgages -- which cut payments by allowing principal balances to rise -- 89 percent will be underwater in 2011, up from 77 percent, the report said.
Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia. Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.
"For many, the home has morphed from piggy bank to albatross," the analysts said.
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The story WAS on Yahoo's front page not 10 minutes ago, but seems to have been taken down now. It was posted via Reuter's... Who knows. With everything that's going on lately, nothing surprises me anymore--LOL!
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Serious people talking about housing continuing to get worse through 2011 is news. Pretty stark contrast to "the bottom is in" NAR spiel.
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That's not what we are seeing AT ALL in the DC area. Expensive homes with jumbo loans have by far the least amount of loss in value compared to low end homes. Around these parts the more affordable the house was during the boom the larger the loss in value - ratio wise - it has experienced. Real estate in the nicer areas in Fairfax County, Montgomery County, etc has held up pretty well. Most of the larger, nicer and more expensive homes have dropped at most 25% from peak and even then only in the very worst case scenarios. Most of my co-workers who live in SFH's in Fairfax are down 15% or so. The SFH home market also has really held up much better than the TH and condo market. The less well-to-do areas and the areas further out really took it on the chin. The low end has been absolutely decimated and has experienced losses upwards of 70% from peak in many areas.
Yep, the low end gets hit first. The upper end takes a while. Same in Seattle. The upper end is going to get whacked next, just wait. Same story everytime, lowend/condos/townhomes lead the charge and the highend luxury last to crack but make up for it.
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Too many doctors, lawyers, lobbyists and politicians with money who want to live in the nice areas that haven't been decimated by their idiotic liberal agendas. We will never see more than a 30% loss in value WORST CASE in the SFH market in the nicer areas of DC. Too much money and power around here for that. Hell, there are zipcodes in DC proper that have actually had GAINS in the past 3 years.
I lived in DC for 25 years. Everyone is upper middle class, the place is full of millions of spoiled, over-educated people who worry about losing their jobs far out of proportion than the real risk. Unemployment in metro DC is usually 3.0% or less, and that includes Anacostia.
DC is not special. House prices there will decline further.
Just you wait.
It is simply the last market in the bubble, of government spending of trillions.
I thought they meant a massive tsunami was coming and half the US will be underwater- like an Al Gore movie
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