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Under Water Homeowners Slow Consumer Spending

Although millions of Americans are paying their under water mortgages on time – sometimes with difficulty — it still could prove to be a source of trouble.  Because home prices are stagnant, many owners are using their hard-earned dollars to pay the mortgage and less on consumer spending.  In the long term, that is not encouraging news for economic growth.  With an estimated 15 million American homeowners under water, approximately 7.8 million owe at least 25 percent more than their homes were worth in the 1st quarter of 2010, according to Moody’s Analytics.

“At the root it’s ‘the’ problem,” said Mark Zandi, Moody’s chief economist. “If you’re going to put your finger on the one thing that’s gotten us into this fiasco, it’s the fact that millions of homeowners are under water on their homes.”  Consumer spending is slumping as homeowners find they can no longer take equity out of their homes to fund big-ticket purchases. In a sluggish economy, it’s not difficult to push an under water mortgage into default.  “When you’re under water and you have some kind of hit to your income or some kind of unintended expense, that’s when you default.  And so now we’ve got this noxious mix of millions of people under water and unemployment,” Zandi said.

Because under water homeowners owe so much, they can’t refinance or get home equity loans that could be used to finance major remodeling projects.  A case in point is Heather Hines and her husband, Santa Rosa, CA, residents who owe $415,000 on the house they purchased for $430,000 in 2004.  The county recently appraised the house at $246,000, a lower figure than just one year ago.  Although the Hines’ house needs a new roof, they have put off replacing it because their mortgage payments eat up too much of their income.  “It’s hard to think of making that investment when you’re hundreds of thousands under water,” she said.  “It just feels hopeless.  What are we supposed to do?  It feels like we’re never going to see any equity in our home.”

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