7.5 million homeowners "underwater"
CNNMoney had an article last week titled 7.5 million homeowners ‘underwater’. It’s primarily a breakdown, by state, of what percentage of mortgages are higher than the value of the underlying asset. The technical term for this is negative equity, but it’s also know as being underwater or upside down on a loan.
No one wants to find themselves owing more on their mortgage than the house is worth, but is it as big a problem as people feel it is? Negative equity is obviously a problem for the investor, but are you a homeowner first or an investor first?
Negative equity is not necessarily a problem for a long term homeowner. I think too many people have become accustomed to using their homes as ATMs; constantly withdrawing the equity from value appreciation, all the while thinking it will go on forever upward. That’s when negative equity becomes a BIG problem. For those old school home owners who never built their financial lives upon such a flimsy premise, negative equity is hardly a factor. For the fixed rate mortgage holder, declining home values don’t affect his ability to make his mortgage payments.
Negative equity is a requirement for foreclosure, and here we venture into the debate over how many people are simply going to walk away from their obligations to pay back their mortgage. But again, if these people bought the house thinking it was an investment, then they should pay the price. But if they were looking to buy a home to settle down in for the long term, and they’re upset they paid too much – just accept the timing was bad, and that the market will turn back up again over time. It’s only a problem if you have to sell in these conditions.
I am reminded of something a local financial planner once told me:
“The reason the stock market is so tough psychologically is that you get constant feed back on what your portfolio is worth. With a house, you don’t see the day-to-day changes because it’s a relatively non-liquid investment. Mr. Market isn’t coming to your door at the end of every day offering to buy your house for more or less than he was yesterday.”
I think with all the news of sub-prime foreclosures and borrowers being underwater, we’ve found ourselves in an environment where we do get daily feedback on the values of our homes. But how relevant is that feedback?
Just because the news is largely negative on a national scale, doesn’t mean it’s representative of what your home is worth. Homes are not stock certificates. We don’t all own a piece of the same house.
We must focus on why we buy real estate, and remember that real estate is largely a regional investment.
Photo by lorkatj
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