It's a vicious cycle: Home values keep dropping because of the recession, then the homeowner gets laid off and stops making payments.
Selling the home would be an escape, but many owners find they can't: They owe more on the mortgage than the home is worth, so the bank ends up taking the property and they end up going from homeowner to homeless.
It's a scenario that's likely to repeat as job losses and foreclosures increase this year in Seattle, a panel of economic and real estate analysts told the Seattle City Council on March 23. After a 17 percent drop in housing prices from two years ago, said Stan Humphries, a vice president at realty website Zillow.com, nearly 21 percent of all homes in the Seattle-Tacoma-Bellevue area are now "upside down," or worth less than their mortgages, and 11.5 percent of all the homes that changed hands in the area last year were foreclosed on by a bank.
The numbers are unprecedented, Humphries said -- something the council's new Economic Stability and Recovery Committee, which brought in the five analysts, is looking to reverse.
One way to keep home prices from falling any further, said Eileen O'Grady, a loan risk analyst with Seattle's Elliott Bay Associates, would be for the city itself to purchase foreclosed or nearly foreclosed properties that would otherwise end up empty and drive down the price of homes nearby.
It's an idea that Councilmembers Jan Drago and Nick Licata endorsed, with Drago suggesting that the city use Housing Levy funds to help nonprofits buy such properties for low-income rentals.
The seven-year Housing Levy that Seattle voters passed in 2002 raised $86 million for affordable housing rentals, but included $7.8 million in downpayment assistance for first-time home buyers. The city is currently drafting a 2009 Housing Levy renewal measure to put on the November ballot and could write it to include the purchase of foreclosed properties, Drago said.
The current levy, Licata said, already allows the city to partner with third parties to finance homes, something Licata said he'd like the city to explore if the property were held in a trust -- a situation in which homeowners buy the house at low cost from a nonprofit that retains permanent ownership of the land it stands on.
"We've wrung our hands at the high cost of housing at the lower end" [of the economic scale], Drago told fellow councilmembers and 35 onlookers at City Hall's Bertha Landes Room. "It seems to me to be an incredible opportunity, working with nonprofits to really be able to invest in more housing at the lower rate."
Susan Greenwald, a vice president who oversees single-family home loans at Seattle's HomeStreet Bank, said there are currently 53 homes in Seattle and Tacoma that have been foreclosed but remain unsold by lenders Fannie Mae and Freddie Mac, which together hold half the nation's mortgages.
That's nothing, Greenwald said, compared to areas of the country where real estate speculation ran prices through the roof or jobs disappeared. In Phoenix, where speculators would buy up 80 percent of the new homes in a subdivision, she said, Fannie and Freddie have been left holding a total of 1,407 homes.
In Detroit, the mortgage giants own 404 homes, the lowest of which is priced at just $50, she said. In Seattle, by comparison, the lowest price of an unsold Fannie Mae home is $90,000.
Greenwald suggested the city entice sales of these properties by giving grants of 3 percent of the down payment to buyers. Councilmember Richard McIver also raised the idea of the city taking 10-year master leases on distressed multifamily properties to provide affordable rentals.
Desiree Phair, a regional labor economist with the Washington Department of Employment Security, cautioned, however, that the city might not want to get into the business of being a landlord. It's an approach, she said, that's temporary and doesn't address the long-range need for meaningful education that puts people in higher-skilled careers.
The academic quarter or so of education that the state currently provides for laid-off workers, she said, just puts people on the lowest rung of a job-skill ladder that they're always the first to be pushed off. And the effects of layoffs at Boeing, Microsoft, Starbucks and other companies will continue into at least early 2010, economist Dick Conway said.
"I would prefer people have jobs longer than 12 to 18 months," Phair said, "that don't have to keep being fed stimulus funds."