Nearly four years after the real estate market peaked, an alarming number of Americans remain in danger of losing their homes. A non-seasonally adjusted 15 percent of home mortgages were either delinquent or in foreclosure at the end of the fourth quarter of 2009, according to the Mortgage Bankers Association. That's the highest-ever tally in the history of the MBA's National Delinquency Survey.
Mike Larson of Weiss Research points to two key factors behind these high delinquencies. Sharply falling real estate values have put about 21 percent of homeowners underwater, meaning that they owe more on their mortgage than their home is worth. Property owners in this position—which is also known as having negative equity—may find it in their best interest to simply walk away from the home (even, in some cases, when they can afford to make their monthly payments). At the same time, an uncomfortably high national unemployment rate of 9.7 percent means that many Americans won't have the income they need to pay their bills.
Today, some particularly hard-hit markets are in the unenviable position of having both elevated unemployment and high concentrations of negative equity. "Clearly, those are the markets where you are going to see some of the worst metrics on the foreclosure side," Larson says. "You are going to see a lot of people walking away [and] you are going to see a lot of distressed inventory that's being dumped on the market." To pinpoint housing markets that are facing these twin default risks, U.S. News compared negative equity data from Zillow with unemployment figures from Moody's Economy.com. (All data refers to the fourth quarter of 2009.) Based on this data, here is a look at 10 cities that face a double whammy of default risks.
1. Las Vegas: Speculators and exotic loans pushed home prices in this gambling Mecca dramatically higher during the first half of the previous decade. But after peaking in 2006, the real estate market's crash cleaned out investors and submerged an alarming portion of area homeowners. Through the fourth quarter of 2009, more than 81 percent of single-family home mortgages in Las Vegas were underwater. Meanwhile, the implosion of the housing sector has hammered the local labor market, says Larry Murphy, the president of SalesTraq. When the housing market was sizzling, construction emerged as a key job provider for Las Vegas residents. But as home prices tumbled, the jobs disappeared. "When the housing market goes in the tank, the construction market goes in the tank," Murphy says. "Then you have unemployment and those people can't buy [property] and so it's kind of like a death spiral." The unemployment rate in Las Vegas reached 13 percent in the fourth quarter of last year.
2. Merced, Calif.: California residents looking for alternatives to pricey big cities helped send home prices surging in places like Merced during in the early to middle parts of the last decade. Real estate values in this city of 77,000 residents, which is located east of San Francisco, increased at monster rates before running out of steam in 2006. The proliferation of exotic, adjustable-rate mortgages played a key role in this development, says John Walsh, the president of DataQuick. But the subsequent crash dragged more than 64 percent of area homeowners underwater through the fourth quarter of 2009. And the impact of the real estate bust stretched beyond home prices. "You go to places like Merced and you've got a real significant percentage of the population [that] was involved in either home building, home financing, or home sales," Walsh says. "And all of the sudden all three pieces of those are gone." As a result, Merced's unemployment rate stood at 19 percent through the fourth quarter of 2009.
3. El Centro, Calif.: The same forces that upended Merced's housing and labor markets also hammered the city of El Centro, Walsh says. Residents looking for a cheaper alternative to nearby San Diego moved to El Centro, increasing home prices in this city of 40,000, Walsh says. But when home prices crashed, nearly 57 percent of homeowners found themselves underwater through the fourth quarter of 2009. And without real estate-related industries churning out jobs, the unemployment rate has hit nearly 30 percent.