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A home’s value versus its worth

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POSTED September 18, 2009 2:04 a.m.
Why, the reader asked in an e-mail, are you still in your home if you paid $189,900 for it in March 2008 and the assessor says it is worth only $102,000 as of Jan. 1, 2009?

The implication, of course, is only a fool would keep paying for something that is worth less than what they paid for it and that someone with smarts would walk away from it.

The question and the implied answer speaks to what is wrong not just with how we have viewed purchasing a house but also attitude toward credit.

I’d like to start my response to the reader with a question – have you ever bought a new car? If you have, the second you drove it off the lot it dropped in value, substantially in most cases. Does that justify walking away from your obligation with the lender financing your car?

The real danger is if people with fairly decent credit keep pulling stunts like walking away from houses when they have the ability to make payments on a legally binding agreement to purchase a home it ultimately will undermine the concept of responsible borrowing.

People – read that banks – aren’t going to be so willing to lend people money if they keep getting burned. Would you? It explains in part why banks today will go for a cash offer that is $20,000 less than a loan. On the surface it doesn’t make sense because by waiting 30 or so more days they can pocket another $20,000. However, many banks haven’t just been burned once but twice by the same borrower. Remember when loan modifications first started 18 months ago and lenders were working to readjusting interest rates? The end result in San Joaquin County alone was a 60 percent default rerate on those modified loans. Many people never had any intention of paying the amount with some thinking if prices are continuing to drop why should I make the payment even if I can afford it?

This brings us to the biggie – the perceived value and worth of a home.
Value and worth are two separate things.

When it comes to worth, a home is a place where you live. It also helps stabilize the biggest day-to-day expense of living – housing costs.
I always remember a comment made about a clerk at a downtown store who was married but his wife had never worked. It was back in the mid-1990s as prices started rising. This particular person I was talking to couldn’t understand how the clerk could afford to have bought the home he lived in with a clerk’s salary plus have an RV and such.

The answer is actually simple. He stayed put for 35 plus years. His mortgage was based on what he was making in 1961 when the minimum wage was $1. The house in 1995 was worth about $145,000. He probably paid less than $15,000 for it new.

By staying put and not buying bigger and bigger homes, his housing costs stayed at 1961 levels. And by buying he protected himself from having to pay 1995 rent. In case anyone hasn’t noticed, rents have a tendency to go up a lot more than they do to go down.

If his housing payments were a third or so of his income in 1961, it definitely had shrunk to next to nothing 30 years later. Then, of course, once it was paid off there was no monthly mortgage – or rent – payment.

If you bought a home a few years back as a way to make a few quick bucks, then you should be panicking about your decision.

If you bought it to live in, its value is less important than what it is worth to you. Eventually prices will come back up.

The key is staying put over the long haul which will allow you 20 years down the road to enjoy 2009 housing costs as part of your income compared to 2029 housing costs.

That is how owning a home builds true wealth by allowing you in the long haul to spend less and less of your income toward buying or renting. It’s appreciated – or depreciated – value means nothing until you go to sell.
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