Many areas in the nation are in the grip of a serious real estate price erosion and that presents all sorts of problems. Homeowners have seen their built-up equity being eaten up by it and in other cases it results in foreclosures when borrowers can't refinance out of their unattractive existing home loans because they have no equity. It also is rapidly becoming a challenge to lenders who have recently issued mortgages with low down payments.
Let's take a look at an example. Las Vegas single-family home prices have lost about 30% in the last twelve months, therefore averaging around 2.5% a month. In June a home buyer took out an FHA loan with 3% down, the current minimum, and using simple math it's easy to say that now in September, three months later, the house has lost 7.5% of its value and is already upside down. FHA did collect a hefty upfront insurance premium and receives an annual fee as well, but in case the homeowner defaulted is it enough to cover the damage that would have accrued, let's say, during a 8-month period of ownership here in Southern Nevada? Not likely.
FHA has in the last year drastically increased its market share nationwide to about 30% largely due to its low down payment feature. The once famous subprime mortgage product has been beaten into extinction and FHA has gladly stepped into the void to claim some of its past glory. Yet, as home values continue to deteriorate in several key regions, it's putting itself in harm's way. If the downward trend soon comes to a halt and begins to climb, amen. It probably will come out of this correction cycle without major damage, but should the slide go on another several months, look out.
What about conventional home loan lenders? Perhaps they are in a slightly better position thanks to their requirement of higher down payments, but they, too, are walking on the edge. Using the same numbers from the above Las Vegas example and a 10% down payment, in six months the house would be upside down roughly 5%. Just like that.
Steady price erosion has to be taken very seriously.