2010 Real Estate Guide
House and sky
mortgage
Invisible threat to home values

A convenient location, good schools, well-maintained homes and a modest inventory of properties for sale: These are the traditional cues that homeowners and buyers look for to assure that home values will hold up in a neighborhood.

But whether values sink or stick is now dependent on an "invisible" factor: the mortgage balances of homeowners in the area.

Approximately one-third of all mortgage holders have a loan balance that's higher than the current value of their home, according to a recent government report on federal anti-foreclosure programs.

Homeowners in this unfortunate position are dubbed "underwater" borrowers. 

As their tide of debt rises above what they could get from selling, these owners have less incentive to care for their properties, which depresses area prices further, finds the Congressional Oversight Panel's report on the Troubled Asset Relief Program, or TARP. And if they experience financial distress, underwater owners are more likely to lose the property to foreclosure, with the resulting empty homes adversely impacting prices up and down the block.

Spotting signs of home abuse

Sometimes it's evident that mortgage balances are sabotaging neighborhood values.

For example, John Sullivan, president of the National Association of Exclusive Buyer Agents, says he's encountered relatively new subdivisions that normally would still look fresh, with finishing touches being added, like additional landscaping.

Instead, lawns are scraggly, windows are dirty and other signs of home abuse abound.

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It's a safe assumption, says Sullivan, that owners got "easy 100 percent financing" a few years ago when the development began, and now price declines have left owners in the red -- and some may have already been foreclosed upon.

Many underwater owners are clustered in newer developments, since those who took out a mortgage in 2006 and 2007 are the most likely to have debt toppling their home's value, says Sam Khater, senior economist with First American CoreLogic.

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