Underwater America



THE GREAT RECESSION—the worst economic crisis since the Great Depression—formally ended in June 2009, but the recovery has been extremely slow. Unemployment rates remained above 8 percent from February 2009 through August 2012, and did not drop below 7 percent until December 2013. Moreover, the number of people unemployed six months or longer has remained unprecedentedly high. Home prices did not bottom out until early 2012. Mortgage delinquencies and foreclosures did not start to diminish until 2012. 

Now, foreclosures and mortgage delinquencies are down compared to the worst months of the crisis. Nationally, unemployment has dropped. But many places throughout the country have seen little improvement. Residents in those places are still living in recession conditions. 

In fact, the overall “post-recession” narrative is misleading. Foreclosures and mortgage delinquencies may be down since the peak in 2009, but they have yet to return to pre-crisis levels (Orton 2013). For millions of families who have lost their homes to foreclosure, are currently behind on their mortgage payments, or remain underwater, the nightmare persists. 

Many journalists and pundits tout the fact that housing prices are once again rising as evidence that the housing market is recovering. “Rising home prices rescue underwater homeowners,” proclaimed a headline in USA Today. (Schmit 2013). “The strength of the housing recovery is benefiting the distressed portion of the market, clearing it up more quickly,” claimed an article in Bloomberg (Gopal 2013). An op-ed column in the Los Angeles Times recommended “A free-market fix to the nation’s housing hangover,” (Gelinas 2011). These are all housing versions of the cliché that “a rising tide lifts all boats.”

 This report documents that this celebration is premature and misleading. Many boats are not rising. They are UNDERWATER. They are more likely to drown than to be rescued by a rising tide. The so-called “recovery” has bypassed many parts of the country. In those places, housing prices are still dangerously below where they were when the housing bubble burst in 2007. 

There are still many metropolitan areas, cities, and communities where a significant portion of homeowners owe more on their mortgages than their homes are worth. Not surprisingly, many of these places—which we call “HOT SPOTS”—have a significant proportion of African American and Latino families, since banks and other mortgage lenders had targeted communities of color with high-risk predatory loans during the peak years of the housing bubble. This report identifies the nation’s most troubled hot spots in order to draw attention to a serious problem that will not be fixed by waiting for market forces to save families from drowning. 

This report examines the 15 metropolitan areas, 100 cities, and 395 ZIP codes with the worst “underwater” housing problem. These are the hot spots where housing prices have fallen the most, where the highest proportion of homeowners has “negative equity,” and where entire communities are at risk, fiscally and socially, because of these conditions. It is in these areas that public officials must act boldly before the disaster gets any worse.


“Underwater” homes are those where the homeowners have negative equity, which means they owe more on their mortgages than the market value of their homes. Underwater homeowners are 150 percent to 200 percent more likely to default on their mortgages than those with positive equity in their homes (Ocwen Financial 2011). 

According to Zillow, more than 9.8 million American households, representing 19.4 percent of all mortgaged homes, were still underwater on their mortgages as of December 31, 2013 (Gudell 2014). Zillow looks at current outstanding loan amounts for individual owner-occupied homes and compares them to those homes’ current estimated values.1

Depressed home prices combined with the most severe recession since the 1930s caused millions of families to lose their homes, and millions more are still at risk of foreclosure because they owe far more on their mortgages than what their homes are worth. Furthermore, many of these homeowners are locked into predatory “adjustable rate” loans with interest rates that will jump up, putting them at even greater risk of eventually defaulting on their mortgages.

 From September 2008 through the end of 2013, approximately 4.9 million families lost their homes to foreclosure. Between 2010 and 2013, another 1.3 million families lost their homes to short sales. American households lost an estimated $7 trillion in household wealth between 2006 and 2011 as a result of the housing crisis (Federal Reserve 2012). In 2012 the national homeownership rate fell for the eighth year in a row (Joint Center for Housing Studies 2013: 3). 

In 2011, 31 percent of all homeowners (23.6 million owner households) were cost-burdened—they paid more than 30 percent of their income for housing. Among those, 13.6 percent of homeowners (9.3 million) were severely cost-burdened, paying more than 50 percent of their income for housing (U.S. Department of Housing and Urban Development 2013). All of these families are hanging by a thread and remain vulnerable to default and foreclosure.

Although recent increases in home prices have reduced the ranks of underwater homeowners over the past year, there is little likelihood that market forces, on their own, will solve the problem. The idea that all these families need to do is wait for the housing recovery to come to their city or neighborhood is a false premise. More direct action must be taken.


Nationally, after adjusting for differences in home size and quality, housing prices increased by 103 percent from March 2000 to their peak in July 2006. Once the housing bubble burst, one year later, home prices plummeted and did not show any sign of recovery until mid-2012. Not since the Great Depression did home prices fall so dramatically. At their lowest point, in March 2012, prices had declined by 35 percent from their peak levels. Prices have recovered somewhat since then, but as of January 2014, the most recent date for which data are available, they were still 20 percent below their peak levels (S&P/Case-Shiller Home Price Indexes 2014).

The total value of owner-occupied housing in the U.S. decreased from $22.6 trillion in 2006 to $15.9 trillion in 2011, a drop of $6.7 trillion. As of 2013 the total value had rebounded to $19.4 trillion, but it is still $3.2 trillion below the 2006 level.

Equally important, the rise in home prices that has been occurring recently is expected to slow down dramatically in 2014. Clear Capital forecasts that home prices nationally will rise by only 3.4 percent in 2014, about the historical average (Clear Capital 2014). Kiplinger’s Personal Finance expects an increase of 4 percent. (Esswein 2014)

These are the national trends. In many local areas, the downturn was more severe and the recovery has either been far slower or hollow, including metro areas as varied as Detroit, Miami, Las Vegas, Atlanta, and Chicago (S&P/Case-Shiller Home Price Indexes 2013). As the so-called recovery slows in 2014, these hot spots are not likely to see their fortunes change in the near future.

Furthermore, in some of these metro areas, cities, and ZIP codes, housing prices may have risen, but not primarily as a result of market forces, as that concept is traditionally understood. That is, it is not a matter of individual homebuyers re-entering the market and engaging in voluntary exchanges with willing sellers, resulting in higher prices commensurate with the growing demand. Instead, large investment firms and hedge funds have been purchasing properties in the hardest-hit areas in large quantities, often at fire-sale prices, pushing up home prices in those markets. The largest private equity firm in the world, the Blackstone Group, is now the nation’s largest owner of single-family rental homes. It bought 1,400 houses in Atlanta in a single day. 

These practices may have artificially boosted home prices, but they have also made local housing markets even more volatile. The investors are making a large profit renting the properties, but continuing to drain wealth from these communities (Gottesdiener 2013; Gittelsohn and Perlberg 2013). As prices rise, ordinary buyers have been priced out of the market. Consequently, demand and prices have increased in rental units, particularly in the nation’s hardest-hit communities. 

Table 1 showcases the Total Value of U.S. Owner-Occupied Housing


These losses in housing are not randomly distributed across the population. There are geographic hot spots where the problem is particularly dire. Many of these hot spots are areas with a significant population of African American and Latino homeowners who were targets of abusive and reckless banking practices, including an epidemic of subprime loans with predatory features. Banks, private mortgage companies, and mortgage brokers preyed on homeowners in low-income and minority areas. They did not just target low-income African American and Latino families; they also targeted middle-class African American and Latino families who lived in neighborhoods with high proportions of minority families. 

Table 2 showcases the Loans Originated or Denied as a Percentage of Loan Applications for Home Purchase, 2007

Table 2 showcases Higher-Priced Loans as Percent of All Loans Originated, 2006 and 2007

As TABLE 2 reveals, at the height of the housing bubble in 2007, African Americans and Latinos were much more likely to be rejected for conventional mortgage loans than whites. These differences cannot be explained by income differences among the racial groups. African Americans and Latinos with similar incomes as whites were nevertheless rejected for conventional loans at a much higher rate.2

As TABLE 3 reveals, African Americans and Latinos were also much more likely to receive high-priced (subprime) loans. These differences, too, cannot be explained by the fact that, overall, whites have higher incomes than African Americans and Latinos because African Americans and Latinos with similar incomes as whites were much more likely to have subprime loans.3 This pattern suggests that lenders often rejected African American and Latino consumers for conventional mortgages at a much higher rate than they rejected white consumers, even when they were eligible for conventional loans. Once this occurred, lenders often steered many Africans Americans and Latinos into taking subprime mortgages (Kochar, Gonzalez-Barrera, and Dockterman 2009).

These patterns and practices occurred in cities across the country and were carried out by a wide variety of lenders. In 2012, for example, the U.S. Department of Justice reached a $175 million settlement with Wells Fargo over its discriminatory lending practices. That settlement set aside $125 million in compensation to African American and Latino borrowers whom the lender had steered into subprime mortgages or to whom it had charged higher fees and interest rates than comparable white borrowers, and $50 million for down payment assistance to borrowers in communities where the Department identified large numbers of discrimination victims. Among the evidence cited in this case were statements by Wells Fargo loan officers who referred to subprime loans as “ghetto loans” for “mud people.” (U.S. Department of Justice 2012; Relman 2013.) 

Between 2005 and 2009, overall wealth among African Americans and Latinos declined by 53 percent and 66 percent, respectively, compared to 16 percent for whites (Kochar, Fry, and Taylor 2011). Among the vast majority of Americans, and particularly for people of color, their homes are their biggest asset and the largest source of wealth. Homeownership constitutes 92 percent of the net worth for African Americans and 67 percent for Latinos, compared to 58 percent for whites (Tippet et al. 2014: 4). The disparities in foreclosure rates among home loan borrowers between 2004 and 2008 – 11 percent for African Americans,14 percent for Latinos, and 6 percent for whites (Bocian et al. 2012)– therefore likely helped contribute to this discrepancy in wealth loss. 

  • 1. Zillow is the only data source that uses current outstanding loan balances on all mortgages when calculating negative equity. Other reports estimate current outstanding loan balance based on the most recent loan on a property (i.e., the original loan amount at time of purchase or refinance).
  • 2. Tables 2 and 3 are based on data from Rakesh Kochar, Ana Gonzalez-Barrera, and Daniel Dockterman. 2009. “Loans for Home Purchase in 2007.” Washington. D.C.: Pew Research Center, May 12. http://www.pewhispanic.org/2009/05/12/iv-loans-for-home-purchase-in-2007
  • 3. Some have argued that the reason that African Americans and Latinos were more likely than whites to be rejected for conventional loans is that they were less credit worthy than whites, even those with comparable incomes. However the Federal Reserve Bank of Boston conducted a study of mortgage lending that took credit-worthiness into account and concluded that lenders practiced racial discrimination even when credit worthiness was comparable. Munnell (1996), Ards (2001) and Carr (1993).