If you buy a stock and the price goes down and looks to stay down, you sell the stock. If you pay $400K for a house, and it’s worth $180K, do you sell and take the loss? If you put $1,000 down and have made mortgage payments of $2,500 since 2008, you have $500K, less interest write-offs in an investment worth $180K. According to reports, 24% of Americans are in a situation similar to this. The house next door is not selling at $180K and the house on the other side is renting for $1,000 a month. The landlord is Freddie or Fannie or the FHA, and the tenant gets a police visit once a month. And, 50% of the houses in the neighborhood are in foreclosure. Is this an unlikely scenario?
Not according to the front page of the USA Today. It describes nearly this same situation in Las Vegas. One couple is staying. A neighbor bailed in 2009, filed chapter 7, watched his credit score drop from over 700 to 500, took 6 weeks to find a rental, and now has his credit score back up to 680. He pays $1,350 a month rent for a townhouse in a better neighborhood, and banks one paycheck a month to buy a new house in the new neighborhood. He put down zero when he bought the house he walked away from like 31 of the 69 buyers in the new development.
The couple that is sticking it out put down $80K. They got the loan modified to 40 years from 30 years. The owner’s father calculated how long it will take to get back to even, excluding the $80K down payment, and it’s 2020. Dad says bail.
With this going on all over the country, and with a quarter of the population in this jam, the housing market has a long way to go to recover. And, we taxpayers have more and more bills coming to cover the losses from Freddie, Fannie, and the FHA, which is still making loans with low down payments. So, we are in it for the long haul.
As more an more homeowners realize that the house is not an investment that will always go up, and is like a bad stock decision, more and more will just bail. In the Las Vegas situation, those who had nothing down bailed first. If you had $80K of your own money invested, you tended to stay and pay. But, as the neighborhood becomes a place where half the houses are rented and those that are selling are selling for half what you paid for yours, it begins to look like a bad stock investment. Why not walk away?
If you buy a house for an investment you need to look at it like any other investment. It may go south. If it goes south, you may have a window to sell. If you miss that window, you may be forced to walk away or hold on and contribute to a bad investment just to protect your credit score.
Emotional attachment to houses makes this hard. Maybe it’s time to realize that a house is not an investment. Weigh the cost of renting vs. the cost of buying without putting appreciation into the equation. Put in some depreciation. Eventually, the price of rentals will start going up dramatically. That will be the only way this housing situation will get fixed. When investors start buying houses to rent, the price will get driven up. Then, and only then, will the market begin correcting.
Look at used cars today. Your idiot President fixed the problem of low prices on used cars. He put incentives on buying new ones. Then, he took millions of used ones off the market with cash for clunkers. Then the little problem in Japan happened. Combined with down years in new car sales ,and we have record high prices for used cars.
If the government stays out of the housing business, there will be a correction, but it will be long and painful.
