Negative Equity – U.S. vs. Canada

24% of U.S. mortgage holders had negative equity (owed more than their home was worth) at the end of last quarter.

That compares to just 1% in Canada.

Take a look at how U.S. defaults rise as negative equity increases. (Click to magnify)

Pre-Foreclosure-by-Equity It’s interesting how fast defaults start ramping up once U.S. borrowers owe 20% more than their home is worth.  At that point, many people start thinking there’s no coming back and simply walk away from their properties.

Sources: First American Core Logic, CAAMP

  1. American mortgages are generally non-recourse, meaning that the homeowner can effective drop the keys off to the banker and leave them saddled with the difference between what it’s worth and what was owed. The homeowner can limit their loss and move on.
    In Canada (not Alberta) most mortgages are recourse loans. The homeowner is still on the hook for the difference.
    … Al

  2. It seems to me that the two figures from from very different sources.
    CAAMP’s members are compensated by mortgage volumes, correct? They have no incentive to accurately identify underwater mortgages do they? It seems to me that the opposite is true.
    Whereas the First American Core Logic seem to market their services to a broad range of users, investers and portfolio managers. As such, they have no interest in mortgage origination but rather are incented by long term profitability.

  3. Hi Dave,
    CAAMP is a highly reputable organization and has no incentive to put out bad data.
    Moreover, their research was undertaken by a equally reputable 3rd party: Maritz.
    In addition, the study author, Will Dunning, is well respected and does not pen his name to bad research.
    You can be sure that 1% is a good estimate as of the time it was written.
    Cheers,
    Rob

  4. The large percentage of recent home purchases that are financed at 5% down are inherently underwater the momement they are penned. Closing costs exceed 5% in most cases.
    “But they appreciate 5% in the first months!”, they’ll say. That is until they don’t.
    Good post at edmontonhousingbust.com today. Worth a read for anyone wanting to avoid negative equity.

  5. For sake of accuracy, on a $100k purchase you have 1.5% for closing costs and 2.75%-3.15% for CMHC fees.
    So you’re not underwater when you put down 5%, but I agree you could be soon. It will be nothing like what happened in the US but it will be more than 1%.
    Pete

  6. Hi AE,
    Thanks for the note. Completely agree with the essence of your post, which is that negative equity is a distinct possibility for those putting down just 5%.
    People should have a long-term time horizon, reasonable debt ratios, and realistic/quantifiable expectations of rising income to entertain 95% financing (which, as you say, is actually closer to 100% effectively).
    Cheers,
    Rob

  7. I took a nice bath on a property in California. We seriously considered “giving” the house back to the bank before I did more research.
    This is from Forbes –
    “Is it financially smart to walk away? On the downside, anyone who decides to let the bank foreclose will take a significant credit hit. This has long-term consequences
    What is key is that some states allow mortgage firms to pursue other assets. For anyone who is considering walking away from a mortgage, it is important to check state laws–they could be walking away from much more than a house.”
    There could also be tax ramifications from what I’ve read elsewhere.
    It doesn’t seem that easy to get away Scott free like some people say.

  8. Putting only 5% does put you in negative equity immediately primarily because of the fees mentioned previously and the costs associated with accessing or liquidating the money required. In other words, it also costs to sell.
    Not selling, no problem? Not so fast, that means everyone in the US who didn’t want to sell and could make payments are just dandy. Well, didn’t quite turn out that way did it.

  9. >Chris
    If you don’t need to sell then real estate fees are irrelevant.
    You may lose money on paper but that is the real estate market. If you can’t handle risk then rent.

  10. Rob, you seem like a good sort, and I appreciate that I am your guest here. But the accuracy of my observation seems fair. The two studies were undertaken by different organizations with different mandates. All authors have a subjective perspective. If the two reports had been written by the American and Canadian mortgage brokers, then it is a more consistent comparison.
    ps. Will Dunning wrote this? Yikes. I don’t know a lot of names in the real estate busines, but even I know that Will Dunning’s stock in trade is “real estate economic —– for hire”.
    [Edited]

  11. Just because a number would be looked on favorably by a certain group doesn’t mean that they systematically falsify data, which seems to be your insinuation.
    Is there a lot of subjectivity involved in whether one has negative equity or not? Either the assessed value is worth more or less than what is owed on the property. Where subjectivity usually comes in is in interpretation of the numbers, but unless there are significant methodological differences, the numbers themselves should be pretty airtight.

  12. Dave,
    First off, we try not to edit posts. But when slandering someone’s good name on this site, you need to bring more than just an opinion. If you want to comment negatively on someone’s reputation, it should be indisputably supported with easily verifiable facts.
    Secondly, as noted, CAAMP is a reputable organization and has no incentive to falsify data–regardless of mandate. People who analyze economic data are too intelligent to be misled by false statistics. Putting out garbage numbers in this business is reputational suicide.
    Based on everything we know, the 1% number in question is reasonable and based on quality data. I’m not sure what else to say.
    Of course, you can always give Maritz a call for more details on their study and methodology.
    Rob

  13. Wow, someone needs to learn how to use proper scaling: the first 25% of negative equity (from 100% to 125% LTV) covers half of the horizontal axis, while the next 25% (from 125% to 150%) is covered in one-tenth of the axis. This highly distorts the rise after 125% LTV into looking exponential when it’s really near-linear; if you look at, say, owner-occupied, the default rate goes from 2.5% (at 100% LTV) to 6% (at 125% LTV) to 10% (at 150% LTV), and it’s the same for investor-occupied (4% to 8% to 12%).
    So contrary to what the graph appears to show given a cursory look, default rates appear to rise linearly, meaning there’s no ramp up anywhere, at least according to this data (much of which has been destroyed due to the stupid scaling used).
    In fact, it’s pretty hard to accidentally design a scale like this, especially when the new scale shows something much more sensational than the boring old linear scale. But while this could have been the result of intentional distortion, unless they make the same conclusion about the ramp up at 120% LTV that you do (the report is behind a registration wall I don’t feel like penetrating), my guess is ignorance of basic statistical rules and/or graphical presentation of statistics, which does not instill confidence in the rest of the results from this report.
    Further, given the lack of statistical sense and how the data curves look in specific places (the owner-occupied curve in particular looks like its second derivative (rate-of-rate-of-change) changes around the median of each scale grading, which is also where the endpoints are, while most graphs put them at the endpoints of the horizontal axis), I wouldn’t be surprised if instead of actually having the data in 1% increments, the authors actually only have 10 (possibly 11) data points (per data series) and applied a best-fit curve to fill in the gaps. I don’t have any proof of this, and again don’t feel like going through the hassle of getting the report, but my statistical spidey sense is tingling.
    Regardless, given these egregious (and quite possibly manipulative) design choices, I have to question the soundness of the researchers and the report they produced.
    And while I enjoy reading this very well-done blog, as I implied above, your statements right below the graph you republish are actually contradicted by the graph itself. Rule #1 of interpreting statistical graphs: watch the scales! If someone is trying to sneak something past you, that’s the laziest way to do it, and it often works.

  14. In a capitalist society a paper lose is just as real as a monetary lose, just ask those in the US who dump properties because it makes no sense to keep them when underwater. If you think carrying paper loses around for a decade is peachy, go right ahead. Putting 5% down and carrying max amort will give you just that.
    Don’t you worry about me and what I do. I’m not at risk here.

  15. Rob,
    I don’t think there is anything wrong with the word propaganda – its just sophisticated advertising. But its your choice what to edit.
    Wrt to evidence? I’ll simply point out that on his own website, http://www.wdunning.com/about.html, he describes himself as “…one of the most respected housing analysts in Canada.”
    That isn’t a quote from another source. It is something he wrote about himself. Advertising admits that it is adverstising. Propaganda is advertising that masquerades as something else.
    But I certainly don’t begrudge the man earning a living, and I’m sure he’s a charming dinner companion.

  16. Hi Teslo,
    Thanks for the note. You make a great point about scales and intepreting data. I noticed this as well and made that statement in this context:
    * At 115%-120% LTV defaults do start accelerating
    * Coming across similar data in the past, I recall defaults rising faster than a straight line once LTV exceeds 20%.
    Most people seem to believe they can outrun a 10-20% property value decline given enough time. Once they start losing 25, 30, 35%, etc., it takes a different mental toll.
    Nonetheless, it would be interesting to pose your question about the scale to FACL, so I will.
    Cheers,
    Rob

  17. Kevin, I reckon that about 95% of the content in the MSM is propaganda (or palette cleanser in between propaganda items ie kitten stuck in tree, etc). Same thing for government press conferences, and for most of the “independent” reports out there from various think tanks, etc.
    Leaving aside my use of the word which upset Rob (for which I apologise)…
    I find it fascinating that people would view the P-word as derogatory, even as they consume it by the gigabyte! (…my opinion..)
    Interesting sidenote on the use of propaganda in cigarette marketing to women via the 1920s suffrage movement
    http://www.medscape.com/viewarticle/501586_3
    This was back in the infancy of modern propaganda. Fast forward a century later, and I think that even Noam Chomsky’s 1988 Manufacturing Consent seems positively quaint these days.
    The only reliable place for news and information is the internet, but even then, there are very few non-affiliated sources out there. Mostly blogs and discussion boards. But then there is a lot of white noise to filter through.

  18. Chris the fact is, most people DON’T dump their properties after a paper ‘lose’ (sic).
    Are you saying people shouldn’t buy because they might experience a paper loss? I guess we should all keep our money in 2% GICs and never buy mutual funds either.
    By the way, how do you know property values will stay underwater 10 years? No one knows what prices will do. Housing bears (like a former MP we all know) all did a little dance when prices dropped 14% in January 2009. They are still wiping egg off their faces today with prices up 22%.
    No one knows what the future will bring.

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