The recession and housing bubble affected many — including homeowners who are responsible financial planners. But according to housing data from CoreLogic, during the fourth quarter of 2010 more than 23 percent of Americans’ mortgages were underwater. Simply stated, this translates to roughly 11.1 million households where the amount owed on the mortgage is greater than the value of the home.
If you are one of the millions of Americans whose home loan is underwater, it’s important not to panic and to approach your situation logically. First, keep paying your mortgage. It demonstrates financial responsibility, while not paying your obligations on time can seriously impact your credit standing and future access to borrowing money. Holding onto your home is the most reliable way to weather a downturn in real estate values. Like the ever-fluctuating stock market, the housing market is subject to change. A stock bought at $15 a share might fall to $10 the next week, but over time, there is a belief that the stock market will again rise. The same can be said for the ups and downs in the housing market.
Second, remember that most of us don’t have to sell our home at a loss. We can hold onto it until its value improves relative to what we owe on it. It’s not unlike getting a loan to buy a new car. The minute you drive your new car off the dealer’s lot, you likely owe more on it than the car is worth. Your loan-to-equity situation improves as monthly payments are made, and along the way, you receive value for your purchase in the form of reliable transportation. You might sell your car five or more years down the road when you can come out ahead. The same is true for homes.
Remember that while a house can be a profitable long-term investment, it’s also where you live and raise your family. So think long-term. You’ll own your home for decades, not months.
As famed investor Warren Buffet said in Berkshire Hathaway’s 2010 annual report, “Home ownership makes sense for most Americans … The third-best investment I ever made was the purchase of my home, though I would have made far more money had I instead rented and used the purchase money to buy stocks. For the $35,000 I paid for our house, my family and I gained 52 years of terrific memories with more to come.” (In case you’re curious, Buffet said his two best investments were wedding rings.)
Having a home that is underwater may seem dire, but patience, a cool head and strategic planning can put homeowners ahead over the long run. For more advice, contact our financial representatives.