Search

Sunday, March 24, 2013

Negative Equity

10:22 PM

For most of my life, I believed in the American Dream.  You go to college, buy a house, start a family.  And that house will appreciate at a rate that makes the interest rate ok.  And that house will, in turn, be a way to build wealth.  A way to make things better for your family.   You pay the house off, and you're better off than when you started.  You can sell the house at a profit, downsize and have a nest egg, that hopefully you can pass down to the next generation.  So that your children don't have to work as hard, and their children won't have to work as hard.

But then things changed.

We purchased our home in 2007.  Right before the bubble burst.  We thought we were making a good investment in our future.

Today, our home is worth approximately 54% of what we paid for it.   There's a home in our subdivision that is currently under contract for a third of what it was sold for in 2007. I know someone that also purchased in 2007 that holds a mortgage on a home that is worth 23% of its purchase price.    If the market appreciates at 3% from now on, it will take 24 years for us to get back to what we paid for it.  Let me say that a different way.  It will take 24 years for us to break even, for us to get back to zero.  That doesn't take into account the money we've put into the house, or the amount we've paid in interest.     That isn't building wealth.  Sure, 24 years from now the house will be virtually paid off.  But when you look at how much we will have paid in mortgage payments the numbers don't make sense.

When the housing crisis started, the pundits would talk about the foreclosure rate, and how people were just walking away from their homes.   Here's the thing pundits.  You don't fight to save a bill.  You don't stress yourself out, work two jobs, eat only beans and rice to save something that is worth less than nothing.  Sure there are exceptions.  There are people who are in their dream home, in their dream neighborhood and they are willing to fight.  There are people who strongly equate home-ownership with their sense of self, and those people are willing to fight.

But it's hard when you can literally give up on your house and go live in the house across the street that looks just like yours, for much much much less.

What is the prudent thing to do financially? Ride it out and protect your credit? Cut your loses and try again in a few years? Try to rent it and downsize? I don't think there's one right answer, but it certainly a question hundreds of thousands are struggling with.

What would you do?

Written by

2 comments:

  1. My husband and I aren't in the market to buy anytime soon. We currently rent in the cheapest borough we could find and we like it. Our rent is cheap and we take comfort in knowing that we don't have to stay here indefinitely. I like the idea of home ownership but I'm just as happy renting. A couple of good friends of mine are in the same position. They own a home in another state and live in NYC..it's killing them financially and putting strain on their marriage. They are currently renting their home out and trying to downsize here in the city. My foolish self would probably sell it at a loss and take the credit hit because what is credit anyway compared to your peace of mind?

    ReplyDelete
    Replies
    1. That is awesome! Having inexpensive rent allows you so many more options, because you're not a slave to your living expenses.

      Marriage is hard enough without having money struggles.

      And you're right, there is no price for peace of mind.

      Delete

Follow by Email

 

© 2013 A Bacon Flavored Life. All rights resevered. Template by Templateism Web development by Lapin Design

Back To Top