Want to know the current state of home ownership? Consider this February 2010 report from a real estate analytics firm, a division of First American Insurance:
First American CoreLogic reported today that more than 11.3 million, or 24 percent, of all residential properties with mortgages, were in negative equity at the end of the fourth quarter of 2009, up from 10.7 million and 23 percent at the end of the third quarter of 2009. An additional 2.3 million mortgages were approaching negative equity at the end of last year, meaning they had less than five percent equity. Together, negative equity and near?negative equity mortgages accounted for nearly 29 percent of all residential properties with a mortgage nationwide.
That’s a lot of people with negative equity or, to use the colloquialism, whose mortgages are “upside-down” or “underwater.” What happens when you owe more on something than it’s worth? Your pride of ownership is diminished, certainly. And we’re really only talking about two things where this applies: houses and cars. We can buy stock and have it lose value, but stocks have more liquidity, so we can sell them quickly. We expect cars to depreciate, so that’s no big deal (if you feel that way, lease them).
But homes — that’s a different story. We expect homes to appreciate, whether they’re our primary residence or an investment. So what happens when almost a third of mortgaged properties stop meeting their owners’ expectations? The First American CoreLogic report cites an interesting observation: when negative equity reaches 25% or $70,000, people begin to behave not like homeowners but like investors who don’t want to pay for a declining asset any longer. They stop making payments and walk away.
That’s a lot of people potentially giving up on the American Dream of a safe harbor, a place to raise a family, a place tightly woven into the concept of controlling one’s own destiny. If you own your home, you can’t be evicted, and your lives and those of your children disrupted. Your rent can’t be raised exorbitantly. You get a mortgage deduction (this year, anyway). You get equity (usually) over the long term.
That’s really the key phrase: over the long term. People who walk away from a mortgage clearly have no appreciation of the long term. Not only do they not believe in it relating to the value of their property, but they also ignore the long-term ramifications of their actions on other facets of their life.
They forfeit their down payment and any other payments they’ve made. They forfeit any opportunity to see the value rise. But there’s more. You want underwater? Walking away from a payment commitment is like drowning your credit rating for seven to ten years. Your credit rating isn’t just something people look at when you want to buy another house when the economy turns around in the future; it’s something they look at when you buy a car, an appliance, apply for a credit card, or even rent an apartment.
There’s more: with the easy accessibility of credit reports, employers are using them more frequently to make hiring decisions. It doesn’t even matter if you’re going to be handling money; employers look at credit ratings and payment histories as a reflection of trustworthiness and stability.
In a country nurtured on instant gratification, patience is not a virtue highly valued. But in this scenario, people must begin to value it, at the risk of devaluing — no, crippling — their future opportunities.
