Homeowners Still Suffering: Latest Sales Reveal More Losses

Foreclosures and short sales get all the attention, but one of the groups suffering most in the housing bust are those who sell their homes for less -- and continue to pay off their mortgages.
Foreclosures and short sales get all the attention, but one of the groups suffering most in the housing bust are those who sell their homes for less -- and continue to pay off their mortgages.

The best thing you can say about the housing market is that it's becoming less bad. Prices continue to slip in most markets, but the declines appear to have hit a plateau.

Still, overall, the picture remains bleak: 1.6 million homeowners face foreclosure, one quarter of home mortgages are under water and mortgages 90 or more days past due rose to 4.7% of all mortgages at the end of 2009. Among prime mortgages, which are generally considered to have a lower risk of default, seriously delinquent mortgages soared 16.5% in the fourth quarter. "Short sales," in which the house is sold for less than the outstanding mortgage, are also on the rise.

But at least one group of suffering homeowners is left out of those numbers: those who are selling their homes for less than they paid, but who are still paying off their mortgages. This is a highly painful scenario, because unlike in short sales -- when homeowners lose their down payments and any cash they plunked down on improvements, but their mortgage lenders agree to accept less than the full amount of the mortgage -- these homeowners are taking the full equity loss on their own.

Selling at a Loss

To get a sense of the homes that have recently sold at a loss, I scanned sales in the San Francisco Bay Area, one of the hottest markets during the housing bubble and a region which has seen significant declines in home values in the past three years.

Here's a semi-random sampling of recent sales in Castro Valley, an established, well-regarded suburban area in the region:

  • A 775-square-foot home, built in 1924, was last bought for $608,000 in June 2005. In March 2010, it sold for $510,000, resulting in a nominal loss of about $100,000. Because real estate commissions and escrow closing costs are generally split by buyer and seller, the actual loss may be higher. (Details about who paid those costs are not available in these public records.)

  • A 2,240-square-foot home, built in 1998 and last purchased for $765,000 in February 2006, in March 2010 sold for $585,000 at a loss of $180,000.

  • A 1,302-square-foot home, built in 1967, was last bought for $349,000 in April 2002. It sold for $335,000 in March 2010 at a loss of $15,000.

  • A 2,877-square-foot home, built in 1993, was last purchased for $770,000 in May 2005. In March 2010, it sold for $655,000 at a loss of $115,000.

Hidden Pain

The financial details of these sales are private, of course, but in at least some cases, the owners likely made a substantial cash down payment to purchase the home. Part of these losses would come out of that down payment.

While various firms and agencies report foreclosures, delinquent loans and "distressed sales," which include short sales and sales of homes owned by lenders after foreclosure proceedings, precious little data exists for homes sold at losses when those losses were borne entirely by the homeowners.

But judging by the selection of recent sales I scanned, it seems that just about every home which was bought in the peak bubble years of 2005, 2006 and 2007 has sold for considerably less than its previous purchase price.

Long-Time Owners Make Money

On a brighter note, not all recent sales resulted in losses to the sellers. A 2,150-square-foot home, built in 1973, which last sold for $494,000 in October 2000, brought in $619,000 in March 2010, netting the seller a hefty $125,000 gain (minus selling expenses).

Those who bought even earlier also did well. A 1,218-square-foot home, built in 1960, which was last bought for $237,000 in December 1997, raked in $395,000 in February 2010. That house brought its seller a gain of $158,000, or about a 66% return on the original purchase price.

Although I didn't scan every recent sale listed, the sampling I reviewed included more sales resulting in losses than in gains. Unsurprisingly, it turns out the key to making money on a home sale is buying the home before 2002. Those who bought before 2000 registered a net gain, those who bought around 2002 and 2003 more or less broke even and those who bought between 2004 and 2007 generally lost money in the recent sales.

Long-Lasting Implications for the U.S.

Of course, the gains and losses aren't nearly as cut and dried as a simple comparison of selling prices might make it seem. For example, the tax benefits to home ownership help mitigate losses, and the gains amount to less once inflation is taken into account. According to the U.S. Bureau of Labor Statistics, it takes $125 in current dollars to buy what $100 bought in 2000.

Nonetheless, the widespread losses for homeowners who bought during the boom represent a serious destruction of wealth, which has long-lasting repercussions for those households which suffered the decline. They may be less willing or able to buy a home in the future, or they may trim consumer spending for an extended period of time to rebuild their cash savings.

And that spreads the financial pain beyond just those families to the greater economy. As those losses affect those households' decisions on discretionary spending, savings and future home purchases, so too will they dampen the nation's overall consumer spending and future home sales.