When you owe more than home is worth: 25% who bought in Tucson since 2003 are 'underwater'

Nov 16, 2008 (The Arizona Daily Star - McClatchy-Tribune Information Services via COMTEX) -- C | Quote | Chart | News | PowerRating -- One in four Tucson homeowners who bought during the last five years now owe more on their mortgages than their homes are worth, a troubling sign for the Old Pueblo's declining housing market and broader economy.

A large chunk of those homeowners who are "underwater" on their mortgages bought between 2005 and 2007, says a third-quarter report by Seattle-based Zillow.com, which tracks real estate data.

Tucsonan Mikka Cady, for example, says she probably owes $177,000 and change on the Southwest Side home she bought last year, but added that someone "would be insane" to pay that much for it today.

In the last year 28 percent of Tucson homes sold at a loss, about 20 percent of transactions involved homes in some state of foreclosure and roughly 83 percent of Tucson's homes have lost value, the Zillow.com report also shows.

The numbers compare similarly with national housing figures, and they could point to stormy weather in Tucson's broader economy, analysts and economists say.

Having so many people underwater has potential for more foreclosures and properties being sold for losses, further driving down values. Meanwhile, a lack of equity could dampen spending at a time when consumer confidence is at a historic low.

"I don't think we are at the bottom yet," said University of Arizona economist Marshall Vest. "I think there is still downward pressure, and it will be -- it could easily be -- the end of next year before we really see the bottom of the prices start back up."

Depending on a homeowner's personal situation, being underwater could mean nothing more than staying put for a few years until values return, or it could be a sign of personal financial distress.

"If the homeowner has no plans to move and has considerable savings, then these are losses on paper that aren't going to be realized any time soon," said Amy Bohutinsky, spokeswoman for Zillow.com. "Where this gets dangerous or scary is for homeowners who no longer can make their mortgage payments, or lose their jobs."

Many in Tucson's real estate market approached Zillow.com's housing numbers with measured skepticism, saying the fundamentals of Tucson's housing market are strong. They note that values are up compared with five or 10 years ago, and that most people who bought their homes by 2003 or earlier have equity.

Prices and values can vary from one neighborhood to another, and Zillow doesn't take into account unique characteristics such as whether homes are custom-built or a neighborhood is gated, Long Realty Chief Executive Officer Rosey Koberlein said.

Rather than jumping to conclusions about the numbers, homeowners concerned about values or considering a sale "need to speak to a real estate professional that can guide them through this process," Koberlein said.

Zillow's Bohutinsky said the numbers are probably conservative. Zillow.com collects sale information for every residence in major markets as well as housing characteristics to find comparable homes. But the firm is only comparing original loans with current prices.

"It only takes into account the original mortgage," Bohutinsky said. "It doesn't even take into account if they borrowed against their homes later on."

Declining values

Home values across the greater Tucson metro area have declined 9.5 percent compared with this time last year. That's a little better than the national average of 9.7 percent, says Zillow.com.

But there are many neighborhoods across Tucson that have seen dramatic drops in values. Starr Pass, on the far West Side, has seen year-over-year values drop 14.7 percent. Lakeside Park on the far Southeast Side has seen values drop 16 percent.

Those declines are steep, but no neighborhood has been hit harder, year-over-year, than Midvale Park on the city's Southwest Side.

Compared with this time last year, home values in Midvale Park are down 19.5 percent.

The sharp drop has left Joe Miller, president of Midvale Park's neighborhood association, feeling uneasy about his home's falling value. But Miller, who has been in the neighborhood for 13 years, said he's not concerned about that right now.

"The value is going to be there, and I don't plan on selling any time soon," he said. "So, it's not a huge problem for me."

In a sign of the times, bank-owned properties dot Midvale Park, a neighborhood known for starter homes for young families. But Miller described the foreclosures as a good thing, a weeding-out, of sorts, of weak homeowners.

During the big housing run-up, Miller said, his neighborhood was marketed to people who shouldn't have bought homes, and there was quite a bit of flipping of properties for a quick profit. The spike in foreclosures and drop in values have brought stability to the neighborhood, as many families that could afford to stay now have to wait for values to rise, and those who couldn't afford it have left.

"In our neighborhood, some of the people were really targeted, as far as the bad loans," he said. "I think in our area there were probably a little more unethical sales than in many places."

Drowning in debt

Underwater homes bought in the last five years are spread across the city, but the highest number are on the South Side.

Veronica Contreras, 26, bought her home south of Reid Park near Barraza-Aviation Parkway at the height of the housing bubble for $132,000 with only about $2,000 down. She owes about $127,000 -- far more than the 750-square-foot home is now worth.

To make matters worse, her first mortgage is an interest-only loan -- meaning she's been paying only the interest -- and the rate, which is adjustable, is at 9 percent. She has a second, smaller mortgage for about 5 percent of her loan that has an interest rate of 13 percent.

In many ways Contreras is a poster child for the housing crisis. She bought her two-bedroom home at the peak of the run-up, thinking she could sell the house for a profit after a few years.

"We bought the house before everything got super-bad, thinking we were doing a good investment," she said. "If we do sell it, we are going to have to pay to sell it, and we don't have the money to pay to sell the house."

Contreras is trying to work out a new deal with Citigroup, one of her lenders, but it's proved tricky because she is current on her payments. To stay current, Contreras works two jobs, at a credit union and a restaurant.

There have been times she has thought about simply falling behind on her payments to get a better shot at working out new terms on a loan, but she said she doesn't want to take a hit to her credit.

Mikka Cady, 49, has found herself in an even tighter spot.

Cady bought her three-bedroom home near South 12th Avenue and West Bilby Road in January 2007. She thought the market had bottomed out and saw a chance at the American dream.

She liked the neighborhood, close to her mom's home, and she was sick of renting.

She put no money down on the $179,000 home. Now she says she could probably sell the home for $145,000, and she's worried about losing it.

"It is so stressful," she said. "And everybody you ask for help, they say, 'No.' "

The math doesn't work in Cady's favor. Her payments are about $1,400 a month, she said, but she makes about $2,000 a month before taxes. She had a second job when she bought the home, but no longer has that other job. She has a roommate, who helps pay the bills, but the lease is up in January.

Ripple effects

When told about Contreras' situation, Koberlein, of Long Realty, said steps need to be taken to keep Contreras and others in their homes until the housing market rebounds.

"Society needs her to be a homeowner," Koberlein said. "Because what will happen is, if she has to let go of her house, then all of a sudden she pushes the neighborhood down."

Koberlein said the solution may be as simple as changing the terms of loans like Contreras' to 40-year fixed rates, or at least lowering interest rates on 30-year loans just to keep people in homes until values work their way back up and they are able to sell for something other than a loss.

More broadly, Koberlein said, there needs to be some kind of bailout for homeowners and stimulus for buyers.

"I personally believe that we are at the bottom, and I think we have been bumping along this bottom here for the last few months," she said, adding that inventory is gradually going down and median sale prices have hovered around $186,000 the last few months. "The future, I think, is dependent on what government does to put a safety net on this slippery slope that's going on here for people who are facing foreclosures."

Declining Values

Values in Southern Arizona have fallen sharply compared with this time last year, but they still are up compared with five years ago.

Year-over- 5-year Region year change change

Green Valley -11.4% 7.2%

Marana -11.6% 6.6%

Oro Valley -7.1% 7.0%

Sahuarita -12.5% 2.6%

Tucson -9.5% 5.8%

Vail -11.5% 5.8%

--Contact reporter Josh Brodesky at 573-4178 or jbrodesky@azstarnet.com.

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