Where, when is the LTV Tipping Point?

Inquiring minds are enjoying an article sent into SurvivingCalifornia.com by Jim, a Newport Beach, CA, mortgage broker. The article, “The LTV tipping point“, is well written and explains where the market is. The statistics defining the problem are immense:

The negative equity threshold and the point of no return

Nearly 2,500,000 California homeowners have a negative equity condition which imprisons them in houses that are black-hole assets. Each month of continued ownership sucks up sums of money in multiples of what the home would rent for – the home’s sole current value to the homeowner. Thus, a disconnect has developed between the primary use of the home to shelter the family and the secondary consideration as the family’s largest financial asset – due solely to the cyclical reversal of fortune for homeowners who bought or refinanced after 2002.

As upwards of 30% of California homeowners are now consumed by the negative equity trend which inverted the value of their home, the number of people choosing to walk away from their underwater properties is on the rise. Those rational homeowners who choose to walk away or strategically default (voluntarily defaulting on their home loan when they have the means to pay) account for nearly one out of every four defaults today in California and one in five nationally.

In it, writer Connor Wallmark explains where the actual point of inflection is currently:

This question is aggressively addressed in the May 2010 Federal Reserve Board (the Fed) study “The Depth of Negative Equity and Mortgage Default Decisions” written by Neil Bhutta, et al. The Fed’s study of homeowners in the four sand states (California, Nevada, Arizona and Florida) concludes that a loan-to-value (LTV) ratio of 162% is currently the magic “median” tipping point at which half the homeowners in their sample concluded the financial benefits of defaulting outweighed the adverse consequences of continuing to pay on their mortgage.

The homeowners in the study made no down payment and financed 100% of their purchase, making them acutely vulnerable to the slightest future decline in property values. Close to 80% of these homeowners defaulted during the period of 2006 through 2009.

Two widely recognized hypotheses explain why homeowners default. Under the strategic default theory, homeowners default purely as the result of their home’s negative equity, independent of any other factors.

Again, over the next 15 months or so, there will be a lot of hurt coming to the surface of the housing market. Be forewarned.

The entire article is well worth the time to read.