Upside Down and Unemployed

The bad economic news just keeps coming...

An Epidemic of Negative Equity
The real estate bust has engendered a new catch phrase: upside down. To be upside down is to owe more on your mortgage than your house is worth—to have negative equity. The value of your home is always supposed to be higher than the amount of your mortgage, but as real estate prices have dropped, many people—particularly those who had little equity to begin with—have found themselves upside down.

This week we learned that 10 percent of homeowners now have zero equity or are upside down. Long before the foreclosure crisis began and before the label upside down had been introduced, this particular form of financial checkmate was anticipated in “The New Road To Serfdom: An Illustrated Guide to the Coming Housing Collapse,” a May 2006 Harper’s piece by Michael Hudson. [The article is here, but only Harper’s subscribers will be able get at it.] Of course, the worry is that any economic bump—and there appears to be no shortage of them—will bring disaster to the upside downers, and without any equity to lose, many homeowners will be tempted to cut their losses by walking away from their mortgages.

More People Out of Work
Speaking of economic bumps, Friday we heard that the nation lost 63,000 jobs in February, the second drop in jobs in as many months and a much larger drop than had been expected. The unemployment rate actually fell, from 4.9 to 4.8 percent, but that was a statistical anomaly. The unemployment figures only include those who are actively looking for work. They do not include people who would like to work but have lost hope and given up looking. This last group also increased in February, so joblessness overall is on the rise. If you put these two news items together—more homeowners without equity and increased joblessness—it seems likely that, at least for the near future, foreclosures and bankruptcy will continue to rise.