Underwater Nation: Are Home Prices Drowning?

We've been hearing the drill for a while now: Home prices are down, having dropped 2.6 percent nationwide during the last three months of 2010. Foreclosures keep coming as if they were on an assembly line.

In Phoenix, it is estimated that as many as 70 percent of homeowners are underwater on their loans. The story is not much better in Las Vegas, where it is cheaper to buy a home now than rent. Real estate is, of course, always a highly local story and some markets are treading water. But overall, more than one of out every four Americans -- or 30 percent -- is underwater on their homes. And the bad news is that is worse than last quarter, when 23.2 percent of homeowners owed more than their homes were worth.

Where is this going?

Higher foreclosure rates down the road, because if folks who pay mortgages in underwater homes

lose their job, it's over. They cannot sell without taking a huge pile of cash to the closing table, so their only out is a strategic foreclosure.

You may want to call in your Xanax prescription before reading this: A report by the real estate website Zillow found that in December, more than one-third of all homes were sold at a loss. "Reduced" is getting to be a normal part of the average for-sale sign. That trend has been on the uptick, thanks to the moratorium in foreclosures last fall caused by the "Robo-signing" fiasco. That was when some bank's foreclosure paperwork came under scrutiny for not following procedures, rushing and in some cases, pseudo-signing legal documents. The result was hundreds of foreclosures put on hold while courts figured out if the foreclosures were even legal.

That "robo-signing" also forced the number of underwater mortgages higher. With foreclosures no longer flushed out of the system, more homes stayed underwater rather than moving on to inevitable foreclosure.

The moratorium was temporary, and all those defaults clogging the foreclosure pipeline will likely gush out over the next few months, flooding the already-bloated market with more discounted homes, which then lowers values.

Which means, don't look for increase in your home value in the near future, especially in those underwater markets. Sellers, take note: if you've been hanging on for a ray of sunshine, likely you won't be seeing it yet this year. As for buyers, go shopping.

For more insight on mortgages and refinancing see these AOL Real Estate guides:

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