I’ve been reading some “sky is falling” articles lately regarding underwater mortgages or upside down mortgages, where the amount owed by the house owner is greater than the value of the home. These are often referenced in the same sentence as subprime mortgages.
Maybe I’m missing something, but I just don’t understand the big deal over the fact that some house owners have bigger mortgages than the house is worth. I certainly appreciate that this is not a desirable situation but I don’t see how the “sky is falling” attitude is anywhere near reality.
If your house is worth less than the mortgage, should you walk?
Imagine someone who finances a brand new car with small down payment. That new car owner was probably “underwater” on their car loan about three minutes after they drove it off the lot. Should they bring the car back to the dealership and “hand in the keys”? Should they abandon it in a field or lake somewhere? Probably not – they might just want to keep driving it and unless they had some major financial situation occur like a job loss or medical emergency, then they should just keep going with the payments regardless of what the car is worth.
How did this horrible situation occur? Well probably because they only purchased a small amount of equity in the car when they bought it, which of course disappears very quickly since new cars depreciate quite a bit at the beginning.
If someone buys a house with little or nothing down, then it obviously doesn’t take much of a price drop for them to be underwater on their loan. Is this such a bad thing? Nope. The key is the payments. Since you still have to pay for a roof over your head, as long as you can afford the house payments (within reason of course) then you shouldn’t even worry too much about the house value or consider giving up the house.
Of course there are some situations where an underwater house is a problem – generally if you want to sell it because you are moving to another city or area or because you can’t afford the payments. In that case there is not much you can do – sell the house, assume the loss and add it to your debt and move on. And save the paperwork for the next idiot who thinks that real estate is always a great investment.
What if my real estate investment property or flip is underwater?
Mmmm…tough luck? Even if you end up losing a lot of money you will at least get the satisfaction of learning a hard-earned lesson about risk, leverage and real estate investing.
Bottom line is that it’s easy to look at the raw statistics and draw whatever conclusions you feel like. Equating the number of home owners who are upside down on the their mortgage with home abandonment or a major financial crisis is faulty logic.