1 in 7 homes in Santa Clara County is 'underwater'

More Santa Clara County homeowners were dragged "underwater" in the third quarter, their home values plunging below what they owed on their mortgages.

Among those who purchased homes in the past five years in the county, 27 percent owed more mortgage debt than their homes were worth in the third quarter. That's up from 24 percent in the second quarter of this year, according to real estate valuation site Zillow.com, in a study to be released today.

Among all homeowners in the county, about one in seven — or 14 percent — were underwater, the company said.

The underwater phenomenon increases the chances that some owners, finding themselves with no equity to protect, will stop paying their mortgages and face foreclosure. Other owners under pressure to sell their homes quickly will be forced to do so at a loss. For the rest, who can keep paying the monthly mortgage bill, the effects of an underwater mortgage may be minor, if depressing. No owner enjoys losing equity, but many will be able to hold on until the day rising values replace some of what was lost.

Across Santa Clara County, the pain of negative equity is being felt much more severely in some neighborhoods than in others, the Zillow report showed.

In Cupertino, for example, only 1 percent of owners who purchased their homes since 2003 were underwater — also called "upside-down" — in the third quarter. In San Jose's
95122 ZIP code, 62 percent of recent buyers had negative equity. In Gilroy, 51 percent did.
That's bad news for many homeowners in the San Jose metropolitan area. But, said Stan Humphries, Zillow's vice president for data and analytics, "When you compare it to other major metro areas in California, it actually fares very well."

On a list of 163 metro areas nationwide, the San Jose metro ranked at No. 65 for the portion of all homeowners experiencing negative equity.

Many of the most afflicted areas were in California, with Stockton leading the pack. There, 46 percent of all homeowners were underwater on their mortgages, according to Zillow. Again, for Stockton owners who bought since 2003, the situation was much worse: 71 percent owed more than their home's market value.

To calculate which homes had negative equity, Zillow compared the original loan balances on homes nationwide to the company's estimates of the homes' values in the third quarter. The advertising-supported Seattle company provides free online estimates — which it calls "zestimates" — of the values of more than 80 million homes across the country.
In deriving its estimates of the portion of homeowners who are underwater, Zillow
makes two assumptions, Humphries said. One is that homeowners have not paid down the principal balance on their mortgages; the other is that homeowners have not refinanced to take additional equity out of their homes. The first assumption tends to overestimate those with negative equity, while the second one tends to underestimate the phenomenon, so the two balance each other out, Humphries said.

The portion of underwater homeowners in San Jose was in keeping with the national trend. Both locally and nationwide, about 14 percent of all homeowners had negative equity in their homes in the most recent quarter.

The third quarter marked the first time Zillow calculated the percentage of all homeowners underwater, so the company had no year-ago figure with which to compare the new findings.
Anne Ramstetter Wenzel, principal at economic research firm Econosystems in Menlo Park, said that at this stage of the housing downturn, having negative equity is a burden on individual homeowners, but is not yet a significant impact on the Silicon Valley economy. That could change if home values keep falling and job losses start to mount, she said.

"If things get really bad next year we might see more . . . people walking away because they owe more than their home is worth," she said. And if more homes land in foreclosure, that hinders any recovery of housing prices.

Wenzel said she's less worried about large-scale "walk-aways" in the valley than she is about the effect of mortgage rates and terms readjusting soon for the many valley residents who took out interest-only loans about five years ago.

Many will find themselves facing much higher monthly payments. Some won't be able to afford those, and may face foreclosure. But even those who can make the higher payments can have a negative impact on the local economy, she said.

"What that affects most is retail sales," she said. If homeowners must start paying hundreds of extra dollars each month on their mortgages, "the homeowner's not able to spend in other areas of the economy," she said.

Zillow's report found that the median estimated value of all types of homes — houses and condos, regardless of whether they have sold recently or not — in the San Jose metro area fell to $640,803 in the third quarter, down 14 percent from the third quarter of 2007. Values have not been so low since the third quarter of 2004, the company said.
Humphries noted that home values in Santa Clara County cities such as Cupertino and Mountain View finally began to slip in the third quarter, despite the fact that other parts of the county already have seen double-digit depreciation.

"Prior to this quarter we were thinking of those as oases," he said. "It's very evident just how much the San Jose metro region has been buoyed by the tech sector."

In Cupertino, Los Altos, Mountain View, Palo Alto and Sunnyvale, the company said, the median estimated value of all homes declined between 1 and 2 percent in the third quarter, compared with a year earlier. Monte Sereno was the only community in the county where values rose compared with third quarter 2007, rising 1.3 percent.


By Sue McAllister
Mercury News
Article Launched: 11/12/2008 12:01:00 AM PST