One in five homes nationally is underwater.
That means 11 million homes have outstanding mortgages bigger than their market value.
Enough angst has been generated over that fact to make a Greek Chorus seem like a glee club.
But is all of the gloom and doom justified?
If you buy a new car and financed it using typical terms the second you drive it off the lot you’re upside down in your loan. The fact you owe more than your car is worth doesn’t send you into a mental tailspin.
Only in the last 50 years - particularly in California - has it been an assumed given that home values never retreat. Sure we had a setback in 1991, but that was only temporary.
It’s been since the mid-1990s that the rest of the country got the California mentality that home values are expected to go up. In many parts of the country if you sold a home after 10 years of living in it you were happy if you got out what you paid for it in terms of the market price. It didn’t upset you because in exchange for all of those loan payments you got a place to live in.
We used to be happy when homes were a hedge against inflation or buying one was a way to stabilize housing costs in retirement. But then we expected homes to gain in value at a rate significantly more than the rate of inflation. Simply buying a home was supposed to make us rich instantly just like buying 100 shares of Facebook was supposed to make people wealthy overnight.
Investing is long haul as is owning a home. Yes, you can find instances - aberrations actually - in years past of people making big profits by flipping homes every six months. It is no different than those who win big in initial public offerings of stock as opposed to those who don’t because the market fizzles or else they dump their shares way too soon.
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 with new vehicles as a prime example.
At the end of the first quarter CareLogic reported 11 million residential mortgages - or 22.8 percent of all outstanding loans - where underwater.
There is little doubt if people holding those mortgages 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 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 five years ago as the market was on the way down for $185,000. The assessor on Jan. 1, 2011 determined it was only worth $85,000.
Not only am I one of the 11 million mortgage holders that are underwater but I’m more than 45 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 five 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 concluding 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 24 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 are chugging along financially there is no reason to fret if you are underwater on 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.