Best financial sourse

Home prices are cheap. Affordability is at a record high. And the market is littered with distressed properties looking for a buyer.

But there is one big obstacle for many first-time house hunters looking to take advantage of the market: cash for down payments. The typical first-time buyer has only saved enough to cover 4% of the purchase price, according to the National Association of Realtors.

As part of the stimulus package, Congress created a refundable first-time homebuyers tax credit in hopes of helping on-the-fence buyers to take the home-purchase plunge. But buyers couldn’t collect the $8,000 credit until tax time, rather than at closing time - when it’s needed.

Now the U.S. Department of Housing and Urban Development is planning to change that. The agency is working on a plan that will allow Federal Housing Authority-approved lenders to provide buyers with the tax credit cash up front.

"We all want to enable FHA consumers to access the tax credit funds when they close on their home loans so that the cash can be used as a down payment," said Shaun Donovan, HUD secretary, in a speech last Tuesday before the National Association of Realtors.

States first

Donovan did not reveal many details, but the plan could be modeled after programs in Colorado, Missouri, New Jersey, Pennsylvania, Tennessee and Washington. To quickly infuse cash into their housing markets, these states created "bridge loans" that allow buyers to borrow against the $8,000 credit and then repay it with their tax refunds.

The first state to launch such a plan was Missouri, which rolled out its Missouri Housing Development Commission Tax Credit Advance Loan program on January 14 - a month before Congress approved the stimulus package. Since then, Missouri has approved applications by more than 300 borrowers and closed on 128 of them.

Lamar Cherry and his wife, Chrishanna, used the program to augment their down payment when they bought their home in Kansas City businesscards.

The couple purchased a four-bedroom, three-bath split-level home for $150,000, putting about 6% down. Much of that $9,000 came from the loan program, which they tapped so they wouldn’t have to drain their reserves.

"We had money saved up that we were going to use for the down payment," said Cherry. "Now we can use some of that to buy some things we need for the house."

At closing, the Cherrys, like all buyers in the program, signed for their first mortgage, plus a second mortgage issued by the state. The second note is good for 6% of the price of the home, up to $6,750; there is a $350 set-up fee, but no interest is charged if the debt is repaid by June 2010.

In Missouri, borrowers can only access $6,750 of the $8,000 credit for down payments. "We wanted them to have a cushion below that $8,000 in case other tax liabilities show up," said Greg Spurgeon, the single-family homeownership administrator for the Missouri Housing Development Commission.

If borrowers don’t pay off the note, it becomes a 10-year fixed-rate mortgage with an interest rate one-half percentage point above that of their first mortgages. For example, borrowers paying 6% on their first mortgages would be charged 6.5% on the second.

So far, Spurgeon said, a significant proportion of participating homebuyers have repaid their loans. He expects most of the others to do the same before the deadline.

Cherry has claimed the federal tax credit on his 2008 taxes, but he hasn’t gotten his refund yet. He definitely intends to repay the loan before the 2010 deadline because, he said, not doing so would add about $75 a month to his house payments. 

Source

Homebuilders’ confidence rose in May - the second consecutive month - boosted by first-time homebuyer tax credits and a more affordable housing market, according to a report released Monday.

The National Association of Home Builders/Wells Fargo said its monthly index rose two points to 16 after having jumped five points in April.

While 16 is still a low score - any number below 50 indicates that more builders view conditions as poor rather than good - it shows sentiment is improving.

Two out of the three components of the index rose in May: Current sales conditions jumped two points to 14, and sales expectations for the next six months rose three points to 27.

The gauge of prospective buyer traffic remained unchanged at 13.

‘Conditions of a lifetime’

"Builders are responding to what they perceive to be some of the best home-buying conditions of a lifetime," NAHB Chairman Joe Robson said in the release. A report earlier this month showed home prices fell 14% in the first quarter of 2009 paydayloans.

"You’re not likely to get a better deal in terms of mortgage rates than what’s available right now," added Robson, who is a home builder in Tulsa, Okla.

The report also cited encouragement from the Department of Housing and Urban Development’s recent announcement that it plans to allow home buyers to use the stimulus package’s $8,000 tax credit as downpayment cash.

Has the market hit bottom?

The uptick from April’s five-point jump was "no fluke," NAHB chief economist David Crowe wrote in the report. "This continued increase indicates that home builders feel we’re at or near the bottom of the market."

"Provided that builder access to production credit significantly improves," the market should continue to skew positive for home buyers and builders alike, he said. 

Source

When all else fails, the Treasury Department is now willing to cough up cash to get homeowners to move on and to get loan servicers to forgive mortgage debt.

The new initiatives are part of the government’s Making Home Affordable program.

Under the original program, unveiled earlier this year, homeowners could be eligible for loan adjustments or refinancings if they meet several criteria: the home must be their primary residence, for example, and the mortgage balance must be no more than $729,750.

Even then, however, mortgage help is not assured. The homeowners may still not be able to afford reduced monthly mortgage payments of 31% of income. And to protect the investors who own the mortgage, the value of a modified loan still has to be greater than the value of what would be recovered in foreclosure.

In these cases, lenders first consider a short sale, a deal in which the home is sold for less than the mortgage balance, and loan servicers may forgive the difference.

If that is unsuccessful, the final step is a "deed in lieu of foreclosure," when borrowers voluntarily forfeit the deed and the debt may be erased.

Under the new initiatives, for short sales and deeds in lieu, borrowers will get up to $1,500 to assist with relocation expenses. Treasury will also pay the servicers $1,000 to complete a short sale or deed in lieu.

A deed in lieu can be the least painful way of ending a mortgage default nightmare, according to Pamela Simmons, a real estate attorney in California.

"Borrowers often prefer to end it quickly and cleanly," she said. "They just want to get it over with." And it’s better than just walking away from a mortgage, a situation where the debt still looms.

A deed in lieu might also be better for the banks. Banks acquire the properties back from delinquent borrowers faster and more easily, saving them legal, financial and other costs associated with going through the entire foreclosure process.

Not every deed in lieu involves "cash for keys," but motivated lenders will often pay borrowers something, typically about $1,000, to vacate by a fixed date and to not vandalize the homes or strip it of fixtures bad credit pay day loans.

Who is this good for?

The borrowers who may benefit most from this program are the ones who would still not be able to repay their mortgages under any reasonable workouts.

These would include delinquent borrowers who are way underwater, owing much more on their mortgages than their homes are worth, people who have lost their jobs with little hope of finding another and ones who have gone through a divorce or another life-changing event.

In those cases, they may be better off cutting their housing expenses by switching to a rental and the cash-for-keys is one more good reason to do so.

Complications

But deed in lieu may not be simple, according to Lawrence Jacobson, a Los Angeles-based real estate attorney.

The least complicated scenario is a borrower with no other debt on the home. In that case, it’s just a matter of the lender taking its lumps and writing off the difference between what it’s owed and what the repossessed home realizes when resold.

If there’s a second mortgage, however, the lender will not allow a deed in lieu unless they get the full cooperation of the holder of the second mortgage.

"[Giving the deed back to the bank] is a transfer of title," said Jacobson, "and it’s subject to all encumbrances. Lenders will only consider deed in lieu if they’re the only [mortgage holder] or if the second lien-holder is willing to give up its interests. Everyone has to be a party to the transaction."

To help solve that issue, Treasury will also make incentive payments to second mortgage holders, up to $1,000, if they give up all claims. 

Source

If all goes according to David Checketts’ plan, the Kiel Opera House will be open for holiday shows before Christmas of 2010.

The Blues owner and his partners Friday unveiled a long-awaited proposal to revive the historic downtown concert hall, and to do it right away.

"Why wait?" Checketts said Friday.

His New York-based SCP Worldwide and McEagle Properties, of O’Fallon, Mo., hope to start work on the $74 million rehab project in August, allowing them to open for the holiday season of 2010.

They plan a full revamp and upgrade of the interior of the Kiel, which has sat empty since 1991, and say they’ll recreate as much as possible of its old glory.

"When you’re going to take a historical treasure and bring it back, you want to take a lot of attention to the integrity of the building," Checketts said. "We’ll bring it alive exactly like it was (when it opened in 1934), with improved sound and lighting."

Paying for it, though, remains a challenge.

SCP plans to fund the $74 million project with a mix of bonds, tax credits and private financing.

Members of the St. Louis Board of Aldermen introduced a bill Friday that would issue $29 million in bonds for the Kiel, to be repaid over 25 years with the 5 percent "amusement tax" the Blues pay on each ticket they sell. Last season, the team paid about $1.5 million in those taxes, said Jeff Rainford, a top aide to Mayor Francis Slay. That’s money that would go to the Kiel instead. But, he said, the city will get some of it back in increased sales tax revenue from the Kiel. The deal does not make the Kiel eligible for tax increment financing.

And Checketts’ group must pay off the balance of those bonds with their own funds if the team should move or not be able to pay them off in taxes.

The deal also relies on $28.6 million from several tax credit programs, including the state historic tax credit. Applications for those credits are under way, said SCP president Kenneth Munoz.

The rest of the money — about $16 million — will come from private sources, in the form of loans and cash from the partners.

A weak bond market has been blamed for delays in the Cardinals’ Ballpark Village project next to Busch Stadium, though Munoz said the smaller, single-use Kiel project should have an easier time getting financing payday loan. Still, he acknowledged that the tight credit climate poses some challenges.

"There are a few financial-world issues yet to be achieved," he said. "We’re working on it."

The next step comes Wednesday, when the plan goes before a subcommittee of the Board of Aldermen. It will need the board’s OK for the bonds, and for adjustments to the agreement between the city, which owns the Kiel, and SCP, which holds the lease on it and neighboring Scottrade Center.

Slay is "strongly supportive" of the plan, Rainford said, and thinks reviving the Kiel could give a big lift to downtown and the whole city.

"It’s a tough project at a tough time. But everyone believes in it because of the iconic nature of the building," Rainford said. "The Kiel Opera House is part of St. Louis’ heritage."

SCP is not the first group to study restoring the Kiel. A previous Blues ownership group that built what’s now Scottrade Center was supposed to renovate the Opera House as part of a deal with the city, but said escalating costs for fixing up the old building and lost income from a hockey lockout prevented completion of the project. Several other efforts have failed since. But SCP’s connections in the entertainment industry and experience renovating Manhattan’s Radio City Music Hall give supporters hope that this time they’ll succeed.

The other partner, Paul McKee’s McEagle Properties, is perhaps best known for the 1,200-acre planned community of WingHaven in O’Fallon. It’s also one of the companies linked to McKee that controls hundreds of vacant properties in the city expected to be part of a massive redevelopment project..

St. Louis resident Ed Golterman has been working to find someone to reopen the grand old hall for 11 years, and he called Friday’s news "an incredibly positive development."

"I’m just tickled pink," he said.

Source

Sony Corp. reported a second straight quarterly loss hurt by a firmer yen, sluggish sales and restructuring costs, and it projected another year of red ink during which it will close eight factories worldwide.

Consumer electronics makers around the world were battered last year as the global downturn dampened demand for TVs and mobile phones. Japanese companies such as Sony (SNE), Panasonic Corp and Sharp Corp suffered an additional blow as the yen’s strength made their products less price competitive overseas.

Sony is in the process of cutting 16,000 jobs and reducing its network of 57 manufacturing sites by 10% to survive the financial crisis. It said on Thursday it would close an additional five plants this year, including a flat-screen TV factory in Mexico.

Expecting losses at its electronics operations to widen and its games division to stay unprofitable, Sony forecast an operating loss of $1.15 billion for the financial year to March 2010.

That would be an improvement from the ¥227.78 billion loss it booked a year earlier and less than a consensus loss forecast of ¥132.9 billion in a poll of 20 analysts by Thomson Reuters.

Analysts expect the worldwide digital camera and mobile phone market to contract this year as the recession dampens replacement demand, capping Sony’s earnings recovery despite aggressive cost cuts.

"Cost-cutting and wringing profits out of the TV division are important, but that will only take you so far," said Nobuo Kurahashi, analyst at Mizuho Investors Securities.

"What I really want to know is how Sony is going to compete after the economy recovers."

Kurahashi said Sony’s focus on portable devices with network capability wasn’t yielding results, while rivals such as Sanyo Electric Co appear to be securing a brighter future by latching on to solar panels and organic displays poor credit personal loans.

In January-March, Sony’s operating loss came in at ¥294.31 billion, a huge reversal from its profit of ¥6.18 billion a year ago. Sales fell 22% to ¥1.524 trillion.

Sony saw sales at its cellphone joint venture with Ericsson tumble, while costs to shed jobs and close plants also weighed on the company, which vies with Panasonic for the title of the world’s largest consumer electronics maker.

Sony, which competes with Samsung Electronics Co in LCD TVs and Canon Inc. (CAJ) in digital cameras, said it aims to sell 15 million LCD TVs this financial year, down slightly from 15.2 million last year.

It aims to boost sales of its PlayStation 3 game console by nearly 30% to 13 million units.

"Their outlook gave me the impression that their business is heading for a gradual recovery. But it would all depend on whether they will be able to start making popular products because right now they have no ‘No. 1′ product," said Fujio Ando, senior managing director at Chibagin Asset Management.

"I see Sony’s branding power weakening."

Shares in Sony closed down 6.8% at ¥2,400 ahead of the earnings announcement, underperforming the Tokyo stock market’s electrical machinery index, which fell 4.1%.

The stock has gained 34% this year through Wednesday, while the subindex was up 22%. 

Source

Memorial Day travel is expected to rebound this year, thanks to a decline from 2008’s record gas prices and discounts on hotels, the motorist group AAA said Tuesday.

A total of 32.4 million Americans will travel at least 50 miles from home to mark the holiday weekend, AAA said. That’s an increase of 1.5% from last year, when soaring gas prices cut the number to 31.9 million.

"The good news is sharply lower gasoline prices and plentiful travel bargains have Americans feeling better about taking a road trip this summer," said Robert Darbelnet, AAA president and chief executive, in a statement.

Retail gas prices now average $2.248 a gallon nationwide, according to a daily survey of gas stations conducted for AAA. That’s down 39.5% from a year ago, and well below the all-time high of $4.114 a gallon hit last July.

While gas prices have increased 20 cents over the last 14 days, raising some concerns about holiday travel, AAA said it does not expect the price of gas to average more than $2.50 per gallon this summer.

"The combination of a weak economy and reduced level of demand is putting a ceiling on the price of gas this summer that we did not see last year," said Troy Green, AAA spokesman.

The number of Americans planning to travel by car is expected to rise to 2.6% to 27 million, accounting for majority of those taking a trip, AAA said. Another 3.3 million will travel by rail, buses or watercraft.

Airline travel, however, is expected to fall 1% to approximately 2.1 million Americans, despite a projected 4% decline in airfares.

Hotel rates are expected to be between 7% and 12% lower than last year, with travelers spending an average of $104 to $142 per night, according to AAA low cost car insurance. Car rental rates are forecast to drop, with consumers paying an average of $43 per day compared to $45 a year ago.

Green acknowledged that many households face financial hardships, but he said the "mental health" benefits of travel still hold strong appeal and that Americans are willing to take shorter, low frills trips to save money.

"People will do what they have to do in order to travel," he said.

In addition to low gas prices, AAA says there is "pent up demand" for travel this summer, since many Americans had put off plans to travel during previous holidays.

"People have been waiting to travel and now they’re ready to do it," said AAA spokeswoman Heather Hunter.

Construction ahead: Looking ahead, Green said there’s a chance motorists will see increased road work activity this summer due to government spending on infrastructure projects aimed at boosting the economy.

"This summer will probably be busier than normal summers," Green said. But he added that state and local governments will try to limit construction to off peak hours.

"State departments of transportation will do their best to create an environment where travelers won’t be subject to lengthy delays," he said.  

Source

Want further proof that risk is no longer a four-letter word? Just take a look at what’s going on in the bond market.

Since the Federal Reserve announced in mid-March that it would begin buying long-term Treasurys in order to keep their rate down, Treasury bonds and notes have fallen sharply, pushing yields on these securities much higher. (Bond prices and yields move in opposite directions.)

The yield on the benchmark U.S. 10-Year Treasury note is now about 3.2%, after hitting a year-to-date high of 3.29% on Friday. On March 18, the day the Fed unveiled its Treasury purchase plan, the 10-year yield was about 2.5%.

So what does this mean?

On the plus side, a period where both stocks and bond yields are on the rise is somewhat encouraging. That’s because higher bond rates are typically a sign of an improving economy — an environment where investors feel more comfortable with riskier investments that offer greater potential rewards.

If more investors buy into the notion that the economy is getting better, long-term yields could climb further since money managers may be willing to sell bonds and buy more stocks.

But there’s a downside to higher yields. Many types of loans, including mortgages, have rates that are closely tied to yields on long-term Treasurys.

Given the fragile state of the economy right now, a further spike in bond yields could jeopardize the recovery by making it more expensive for borrowers to get new loans and homeowners to refinance mortgages. It’s for that reason that the Fed decided to buy $300 billion in long-term Treasurys back in mid-March.

"There was a huge amount of refinancing in the past few months. That was a nice boost but chances are definitely fading away quite quickly," said Benji Bailey, a fixed income investment manager with the MMA Praxis Intermediate Income fund.

With all that in mind, where are long-term rates likely to head next? It’s almost impossible to say for sure. But many bond investors expect a bumpy ride.

James Barnes, a fixed Income portfolio manager with National Penn Investors Trust Company in Reading, Pa., said the Fed has to keep a close eye on where yields are now.

If they climb back above 3.25%, it could force the Fed to take action drive down rates again since the central bank will not want them to get out of control.

"The economy may continue to improve and force yields higher. But mortgage rates could go up and that will tie the Fed’s hands," Barnes said. "Once rates start going up, they could explode up."

Adding to the pressure on the Fed is the fact that the Treasury Department is issuing a large quantity of new bonds and notes in order to finance the government’s massive deficit.

So even though the Fed is attempting to keep rates low by creating demand for Treasurys, it may not be enough to counteract the excess supply on the market faxless payday loans.

"The Fed’s purchases pale in comparison with the amount that Treasury is raising lately. That’s a big factor behind the rise in yields," said John Canavan, an analyst with Stone & McCarthy, a Princeton-based fixed income and economic research firm. "I am not sure the Fed can make purchases large enough to fully offset what Teasury is issuing. It would be a losing battle."

Bailey added that it’s not clear if foreign investors, which were big buyers of Treasurys during the worst of the credit crisis, will continue to be as voracious if the stock market continues to improve. That could also drive rates higher.

"Before mid-March, people were afraid and wanted the safety of Treasurys. That’s been less of an issue as the stock market has done well," he said. "But people now are looking at the fact that the U.S. will have to issue a lot of Treasurys, and it’s uncertain if foreign buyers are going to take in this supply."

Still, Canavan said people should not be overly concerned if yields continue to head higher. He argues that as investors begin to realize that the economy may not be in as bad shape as they feared a few months ago, rates should move up.

"Even if long-term rates get back to 3.5%, that’s historically still very low," he said. "This is sign that markets are trading at some semblance of normalcy. I don’t expect an ugly trend where rates get out of hand."

However, not everyone is convinced that rates will march that much higher anytime soon.

Barnes said there is the potential for another bond rally that could push yields back toward 2.5% as some investors start to doubt whether the recovery is for real.

Matthew Smith, chief investment officer with Smith Affiliated Capital, a fixed-income money management firm in New York, agreed. He said that just because economic numbers are "less worse" does not mean that it’s time to celebrate.

"There is a huge disconnect in terms of what Wall Street perceives as a rosy economy. The numbers don’t translate to Main Street just yet," Smith said. "[Fed chairman Ben] Bernanke is telling us there are green shoots. They look rather yellow to me."

Smith said that because consumers still have relatively high debt loads, he’s not convinced that any recovery will be as strong as people now expect it to be

"I don’t think you can hang your hat on yields going much higher. You could look at what’s going on as happy days are here again but this is more of a buying point for Treasurys, not a selling point," he said. 

Source

Will a recession force Nestl

State officials nationwide are wrestling with yet another round of budget shortfalls, this time due to plummeting April income tax revenues.

The latest gaps are proving more of a challenge. Most states close their fiscal years at the end of June, so they have limited ways to balance their budgets at this point. Unlike the federal government, states can’t run a deficit.

Most are looking to tap rainy day funds or use federal stimulus money to shore up their finances, since spending cuts or fee hikes won’t bring in the bucks in time. The problem is that many states were counting on those funds to balance their fiscal year 2010 budgets.

"There’s just no simple way to deal with this," said Sue Urahn, managing director of the Pew Center on the States, a policy group. "They are trying to cobble together things from several places, but at some point they run out of fingers to plug the dike."

Over the past two years, as the economy has weakened, states found their tax revenues were coming in below estimates. These shortfalls led to a cumulative budget gap exceeding $100 billion for fiscal year 2009, according to the National Conference of State Legislatures. As a result, states have had to slash spending on social programs and education, lay off or furlough state workers and raise fees and taxes — some multiple times over the past year.

Federal stimulus money has helped soften some of the cuts, experts said. But the revenue shortfalls continue to widen.

The latest blow came from the April 15 income tax returns, which states are tallying now. The weak stock market has decimated capital gains tax revenue, upon which many states depend, experts said.

Already, several states have found revenues coming in well below estimates, prompting officials to scramble to close gaps. Massachusetts and Ohio, for instance, are facing new gaps that could exceed $900 million each. New Jersey is looking at a $500 million shortfall after a government report predicted revenues will come in $1.2 billion below projections, in large part because of sagging income tax revenue. In other states, officials will huddle in coming days and issue new budget estimates.

"This is exactly the point when states are on the tenterhooks," said Donald Boyd, senior fellow at the Nelson A. Rockefeller Institute of Government, a public policy group. "This can be overwhelming."

States’ shortfalls

In Massachusetts, April tax revenue came in $953 million, or 35%, less than a year ago. Officials had anticipated that revenue would fall, but it came in $456 million below their most recent estimate, made on April 15. The bulk of the shortfall came from a $905 million drop in income taxes.

The state, which has already dealt with a $3 billion budget gap since the start of the fiscal year, now has to come up with nearly $1 billion before June 30. It will likely have to turn to its $1.3 billion rainy day fund and draw from its nearly $1 billion federal stimulus allotment designed to maintain state support of education and public services.

"We’ve reached the cliff much faster than anyone expected," said Cyndi Roy, budget spokeswoman for Gov cashadvance. Deval Patrick. "We don’t have anywhere else to cut."

The governor should provide more details on shoring up the budget by week’s end, Roy said. Patrick will also have to lower revenue estimates for his 2010 budget and make more spending cuts.

Ohio, meanwhile, saw income tax revenue come in 22% below projections. Through April, income tax receipts are $397 million below the current estimate for fiscal 2009. It’s the worst drop in the state’s history.

This means the state is facing a budget shortfall that could exceed $900 million, according to Gov. Ted Strickland’s office. He’s already cut nearly $2 billion from the state’s biennial budget, which runs from July 1, 2007 through June 30, 2009. And last month, he ordered additional restrictions, limiting spending on contracting, supplies and services to critical needs only.

Still, it’s not enough.

"Even though we have reduced state government spending by nearly $2 billion this biennium, we are now faced with even steeper revenue shortages," Strickland said Tuesday in a statement.

Ohio will likely have to tap into its $948 million rainy day fund to carry it through the rest of the fiscal year, which ends June 30.

More cuts in Michigan

Unlike its 46 peers whose fiscal years end on June 30, Michigan has until the end of September to balance its budget. But the tax shortfalls have been no kinder to the Wolverine State.

The state revised its revenue estimates downward in January, but the numbers are coming in "way below" those figures, said Liz Boyd, spokeswoman for Gov. Jennifer Granholm. State general fund revenues are projected to decline 21% from fiscal 2008, by far the largest one-year decline in at least 50 years. New estimates will be released mid-month.

This forced the governor to announce Tuesday a $350 million spending cut, including a 4% across-the-board reduction.

"Michigan government can no longer afford to be all things to all people," Granholm said in a statement. "We expect to have to make more cuts like these in the future, which are the very type of wrenching cuts we have worked so hard to avoid in the past."

The pain will be widespread. Adults on Medicaid are losing dental and vision coverage. New state trooper graduates are losing their jobs, and local communities are losing 1/3 of their remaining state revenue-sharing funds.

At least one expert on states’ budgets, however, sees some hope in the coming year. While most will continue to face revenue declines, states aren’t as likely to have to revise their estimates downward every few months like they did this year as the national economy collapsed, said Sujit CanagaRetna, senior fiscal analyst at the Council of State Governments, a research group.

"Fiscal year 2010 will not be as severe or dire as fiscal year 2009, but we’ll still see shortfalls," he said. 

Source

More than 20% of American homeowners owe more on their mortgage debt than they can sell their homes for, according to an industry report released Wednesday.

The real estate Web site Zillow.com reported that 21.8% of all U.S. homes, representing more than 20 million residences, were in a "negative equity" or "underwater" position after prices dropped more than 14% nationally in the year ended March 31.

"A combination of falling prices and low down payments has left many borrowers underwater," said Stan Humphries, Zillow’s vice president in charge of data and analytics. "In some markets, more than half of all homes are in negative equity."

Those markets include Las Vegas, where a whopping 67.2% of homeowners would have to bring cash to the table if they sold their homes. Other markets are Stockton, Calif., where 51.1% of homes are underwater, and Modesto, Calif., where 50.8% of homes are in that position.

"That’s really important, because homeowners in negative equity have fewer options if they take financial shocks such as divorce, job loss or medical bills, making foreclosure more likely," said Humphries.

Zillow.com based its estimate of negative equity using its own home price estimates. It obtains these by collecting sales records and applying the price trends it finds to other homes in the community. It then compares its home price estimates to the initial loan balances to determine if borrowers have fallen underwater.

The analysis is based on the mortgage balance at the time of purchase and the price changes that have occurred since. It does not take into account that some homeowners may have paid down principal along the way.

Humphries believes it’s a conservative approach because the trend has been for people to strip value from their homes in the form of home equity loans and lines of credit, than to add value by paying down their mortgages.

"I think our number is either right on or negative equity may be even a little worse," he said.

Some dispute: Not all industry insiders back these findings.

"Zillow’s negative equity estimates strike me as a little high," said Richard DeKaser, a real sate analyst and founder of Woodley Park Research in Washington D credit scores.C. He pointed out that other estimates of negative equity from Moody’s Economy.com, for example, and First American (FAF, Fortune 500) CoreLogic, have not been that elevated.

The last CoreLogic report was for data through the end of 2008 and it estimated that 8.3 million homes were underwater.

Moody’s Economy.com chief economist Mark Zandi estimated that 14.8 million were underwater at the end of March.

Foreclosure risk: Underwater homeowners are much more likely to lose their homes to foreclosure than borrowers with value remaining. That negative equity contributes to foreclosures is supported by Zillow’s statistics on foreclosure sales.

In Los Angeles, 20.3% of owners are underwater and foreclosures accounted for 34% of all sales. In the New York metropolitan area, by contrast, only 7.8% of homeowners are underwater and a mere 4.5% of all home sales during the past 12 months were foreclosures.

Negative equity makes it harder for housing markets to revive.

"It puts increased downward pressure on housing prices as defaults increase and add supply to markets," said DeKaser.

It also makes homes more difficult to sell. Underwater owners either have to bring cash to the table in order to pay off the balances of their debts not covered by the sale prices of their homes, or they have to get their lenders to agree to "short sales," for less than what they owe, and have their lenders forgive the unpaid debts.

The problem may be easing a bit. Zillow did report that price drops seem to be moderating in some hard-hit cites, indicating that they might be approaching a bottom, according to Humphries.

"Places like Modesto, Calif. have recorded a couple of quarters of flat or diminishing year-over-year declines," he said. "That’s what constitutes the good news in this report." 

Source