About Underwater Mortgages
There are about 130 million houses in USA with a population of about 313.9 million in USA during 2012. During the second quarter of 2012, there were about 44.14 million homes in USA with a mortgage. Out of which 29% that is 12.8 million homes were in underwater. The median home prices are about $200,000.
By Second Quarter of 2012, the homes with underwater mortgages valuation is: 12.8 million * $200,000. This leads to the total value of about 2.56 Trillion. Assuming that the underwater property has gone down by 40%, then the loss would be 1.02 Trillion. It means that all underwater mortgage borrower walks away from their home, all the lenders collectively have to take a hit of about $1.02 Trillion loss.
As of first quarter of 2014, there were about 53.53 million homes with mortgages. Out of which 17% that is 9.1 million homes are in underwater. Currently, the homes with underwater mortgages valuation is: 9.1 million * $230,000 = $2.09 Trillion. Assuming that the underwater property is still down by 20%, then the loss would be $418 billion. Now the numbers are looking very good. If the home prices can move up by additional 10% from the current level, then it will take out another couple of millions of homeowners from underwater.
Until when the Fed completely done with tapering, meaning that when Fed will not buy any bonds any more, the home prices will continue to move up. By that time, even the remaining homeowners with underwater mortages are doing foreclosures, US banks can withstand with their strong balance sheet. Finally we can have a relief that the real estate problem in USA will get resolved within the next 6 to 12 months.
But it will create a new problem with credit bubble. Since the interest rate have been artificially kept low for the last over 4 years, it would have triggered a huge credit bubble. When the Fed starts rising the interest rate, this credit bubble will burst that can lead to another major economic problem.
Data Sources: http://www.census.gov/