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Underwater? Not a big deal unless you are treading water

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POSTED December 17, 2010 3:57 a.m.

Home prices aren’t going to go up again.

Bet you’ve heard that line.

It’s typically uttered by people who believe it makes no sense to buy a home, someone who is stewing over the fact they’ve lost equity, or someone trying to tell someone else that they are “stupid” to stay in a house that is “underwater” even though they can still make the payments.

Those eight words aren’t uttered by everyone but for the most part it seems to be a given to many.

Go back six years ago.

It was when many people were saying something much different.
Home prices aren’t going to go down.

A lot of folks believed that and made what ended up being a fateful decision to rationalize what should have appeared to be risky loans for them to pay-off and made the plunge with the blind faith that growing home equity was the new proverbial printing press for money.

It now is painfully clear that equity is what equity always has been - bogus money until someone pays the price when you sell your home so you can capture and physically pocket that equity.

Prices will eventually go back up. And they will in all likelihood easily reach the 2006 levels in terms of not being adjusted for inflation in most people’s life times.

It is important to keep that in mind given that a lot of attention is being focused on the percentage of mortgages that are “underwater” or where borrowers owe more than a home is worth.

Virtually all purchases you make on credit almost immediately go “underwater” the second you buy them. New vehicles are a prime example.

At the end of the third quarter CareLogic reported 10.8 million residential mortgages - or 22.5 percent of all outstanding loans - where underwater.

There is little doubt if people holding those mortgage get into financial trouble via the loss of a job and can’t make payments there is a serious problem as they wouldn’t be able to sell their homes to get out from under their debt.

But most of those loans represent people who can afford their current payments and simply owe more than their home is currently worth.

That should never be a criteria to walk away from debt that you can afford. If enough people did that, the days of zero down financing for cars or even anything for less than 20 percent down to buy anything - cars, homes or other big tickets items would be gone forever. If enough people who can afford to keep paying instead walk away from homes because of “perceived loss of value” the greater the chances lenders are going to want to make sure that you won’t walk for that reason if they lend you money. That means significantly higher down payments to account for out-of-the-gate drops in value whether it is a car or a home.

By the way, it really is a “perceived” lose in value because you don’t really need it until such time all money is on the table.

I bought my home three years ago as the market was on the way down for $185,000. The assessor on Jan. 1, 2009 determined it was only worth $115,000. Then on Jan. 1, 2010 the assessor’s office assigned value for my 2011 property taxes as $80,000.

Not only am I one of the 10.5 million mortgage holders that are underwater but I’m more than 55 percent underwater. So it must mean I’m on the verge of financial ruin, right? Wrong. Barring a major personal financial catastrophe that is simply not the case. Today I’m financially better off than I was three years ago when I was renting.

If I stay put the value will eventually return and the odds are good in my lifetime it will exceed what I paid for it - but probably not the $325,000 price that the previous owner forked over.

That means in the coming years my financial situation will continue to improve over what it was in 2007 and what it is today if all other things remain constant. Its true my home “value” is down and will take a ways to come up but determining whether you are on the verge of financial collapse just because the value of your home has dropped is nuts.

Back in 1991 several people who had bought on Mission Ridge Drive four  years earlier were bemoaning that they had lost $7,000 in equity. When asked if they were going to sell they said no. They also conceded they could still afford the payments.

Yet they were still hung up on the fact they had “lost value”. One of those two homeowners is still living in the same home. And while the values skyrocketed since then and subsequently dropped, his home is still worth about $50,000 more than he originally paid for it back in 1988,

While that doesn’t sound like a great return over 22 years - some 40 percent over the original price - it is the only “investment” one can live in.

At the same time rents in Manteca for a similar three bedroom two bathroom home have more than doubled.

The bottom line is simple. If you are a homeowner and chugging along financially there is no reason to fret if you are underwater in your mortgage.

If you are a potential home buyer, it makes a lot of sense to buy now unless you plan on moving out of the area in the next three years or so. Prices will go up. And, equally important, interest rates will go up as well.

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