Bay Area homeowners owe more than home's worth THE ECONOMY IN TURMOIL 1 in 5 Bay Area owners owes more than the market value

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Twenty percent of Bay Area homeowners owe more on their mortgages than their homes are worth, according to a study being released today. This dubious distinction has entered the American lexicon as an all-too-familiar term - being underwater.

As home values continue to plunge, the real estate valuation service Zillow.com said that 20.76 percent of all homes in the nine-county Bay Area are underwater. The rate is much higher than the national average of 1 in 7 homes, or 14.3 percent. That's because the Bay Area - like most of California - was a classic bubble market, where buyers in recent years paid overinflated prices for homes that now are rapidly losing value in the market downturn.

Having negative equity, as the phenomenon also is called, can increase the likelihood of a home falling into foreclosure and limits a homeowner's mobility and financial reserves. It also motivates people to spend less because they feel less wealthy. But it does not necessarily spell doom - unless it is accompanied by another financial problem, such as loss of a job or a mortgage payment that resets higher.

"Negative equity is essentially unrealized loss for a lot of homeowners," said Stan Humphries, vice president of data and analytics for Zillow in Seattle. "Unless you plan to buy, sell or refinance, it is more of an academic issue. But for people who do need to make financial decisions related to the equity in their homes, negative equity significantly constrains their choices. When there is any major financial stress to a household - death, divorce, job loss - it is much harder to rebound because it is harder to refinance, sell or get out from under the mortgage. (Being underwater) is highly correlated with foreclosure because it eliminates a variety of avenues people have for addressing financial stress."

Locally, the underwater rate ranged from 7.31 percent in San Francisco to 38.63 percent in Solano County. Nationwide, 16 of the 25 metropolitan areas with the greatest share of "upside-down" homes - another term for the problem - are in California, Zillow said.

Dale Hirschkorn, a medical researcher in San Francisco, is among the almost 400,000 Bay Area homeowners with negative equity. He and his partner, Tom Joseph, owe about $610,000 on their bungalow in Oakland's Maxwell Park neighborhood; the home now is worth about $100,000 less. In their 94619 ZIP code, 23.8 percent of the homes are underwater, according to Zillow.

"There is less of a safety blanket," he said. "If a tree fell on the house, we'd have trouble finding the cash to repair it."

Hirschkorn, 61, had planned to retire next year, until the combination of his swooning equity and the stock market collapse that wiped out some of his retirement accounts. Now, he'll wait until he's 65 - but some other plans may be on hold, too.

"When we retired, we wanted to run a bed & breakfast, maybe in San Luis Obispo," he said. "We were counting on the equity in the house to give us the down payment. Now that dream is on the very back burner."

Humphries said Zillow's estimates are "definitely conservative" because they looked only at original purchase mortgages compared with a home's current value. These estimates did not consider cash-out refinances, which have become commonplace and would have made the underwater percentages higher.

"Particularly in the past few years, there has been a tendency for people to use their homes as an ATM, pulling out money in a refinancing," he said. "For homeowners who did that, the amount of equity in their homes is even less than we calculated."

First American CoreLogic, a research firm for the real estate and mortgage market, did a separate survey of negative equity last month that did take refinances into account. It found that 7.5 million homes, representing 18 percent of all U.S. homes with mortgages, are underwater. An additional 2.1 million are close to being upside down.

About 30 percent of all U.S. homes are owned outright, and those were not taken into account in the First American statistics. The Zillow figure of 1 in 7 homes nationally, or 14.3 percent, being underwater, represents a percentage of all homes, including those that do not have a mortgage.

Mark Fleming, chief economist for First American in Washington, said that being underwater combined with an inability to pay one's mortgage - either through personal circumstances such as job loss or through higher payments when a mortgage resets - is a recipe for foreclosure. As the economic crisis causes more people to lose their jobs and the share of underwater homes rises, so does the likelihood of more foreclosures.

There are a variety of other consequences at both the micro- and macroeconomic levels.

"The last recession in 2001-02 coincided with an upswing in housing market values so one could use home equity as a source of money to get them through, to smooth over volatility in their income stream," Fleming said. "That ability to use home equity as a source of income in times of economic stress now is removed" for many people.

Then there is the wealth effect. "If people feel poor, behavioral changes occur, such as less willingness to spend, less eating out, less buying of goods and services," he said. "We see these ripple effects happening around the country."

Another consequence is that it is much harder to pull up roots and relocate when a home is underwater. "Individuals' mobility will be hampered due to their inability to sell their houses," Fleming said. "That makes the labor market more 'sticky' because people won't be able to move as easily for jobs out of their home areas."

Zillow also looked at all homes that changed hands in the past 12 months to see how many were sold at a loss. It found that 46.68 of all Bay Area homes were sold for less than the last recorded transaction. The number ranges from 17.2 percent being sold at a loss in San Francisco to 62 percent in Solano County. A significant number of the homes sold at a loss were foreclosures, but they also include short sales - homes sold for less than is owed on the mortgage - and homes where the homeowner had a lot of equity because they had made a big down payment, for instance.