The Root Causes of the Underwater Homeowner

The Wall Street Journal is reporting today that, as of the end of 2008, a disturbing 20% of all U.S. homes that have a mortgage on them were "underwater." That means that when the New Year's Eve Ball dropped in Times Square, there were more than 8.3 million homeowners throughout the country that owe more on their mortgage than their home is worth.

Experts agree that this 8.3 million figure has climbed since that time.

But how did we get here? Declining home values have received much play in the media as the reason why so many are underwater, but declining home prices only tell half of the story. Considering that a mortgage is simply a home's sales price minus its down payment, we can accurately state that mortgages are more likely to become underwater whenever a smaller down payment exists.

A 2008 report from the National Association of Realtors provides us with critically important statistics about down payment amounts (click on the above image for complete information). According to the National Association of Realtors:

• The median down payment amount for all home buyers is ONLY 9 percent;
• The median down payment amount for first time home buyers is ONLY 4 percent;
• 29% of all home buyers put 0% down to buy their home; and
  
• 34% of first-time home buyers put 0% down to buy their home.

Such low down payment amounts, coupled with decreasing home prices, are the reasons why there is such a large percentage of home owners who are underwater. These folks obviously made a bad decision to leverage themselves so greatly, but a fundamental question is, "Who was advising them to buy homes that they couldn’t afford?"

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