Not Everyone in Housing Trouble is a Deadbeat

Recently had this comment left here on my post titled When You Owe More on Your House than It's Worth (a post I wrote two years ago):

Don't ASSUME that if someone is upside down it's because they were irresponsible and bought their place with a no-money-down loan. SOME of us put down 10 to 15 percent, even 20 percent, and are upside down because this market is really that bad. That is my situation. I bought a home for $270,000 that was appraised around $300,000. I put down 15 percent and the home value has dropped below that. Now my finances are tied in a depreciating asset.

Good point. Some people did it all by the book and still got burned. Of course it only becomes a problem if you have to sell, but still, I thought this comment was worth sharing.

Comments

[Mark B.]

Great comment. I am in the exact same situation. It hurts that all of these people are walking away from their homes, and hence their debt, while I still work hard to pay the payment on a depreciating asset.

[Mark B.]

Additionally, the government is helping out all of the people who overextended and got into trouble. For example, here are the people that the U.S. gov't is helping:

1) Large mortgage banks (Fannie Mae, etc.)
2) Sub-prime mortgage holders
3) Those with ARM mortgages
4) Those facing foreclosure

But those of us that do the honest thing and pay our mortgages and work hard, we get no help at all. We can't even earn enough on our savings to keep up with inflation. My house is now worth about $30,000 less than I owe on it. I could walk away from that $30,000 debt, but I won't, because it is not right. I can pay the payment, so I will do so.

I just think it is unfair that the ones who made mistakes get help, while the ones the do the right thing get nothing.

[Richard]

There are situations where people made the best decisions they could and still end up in trouble. Unexpected death, illness or natural disasters are the sorts of causes that are difficult to plan for.

Having the appraised value of your house drop below the price you bought it for isn't really a good excuse to not be able to afford payments though. People buy cars all the time, and their appraised value drops as soon as they drive them off the lot. Just like with cars though, the payments remain the same as the terms you signed to when you bought the house!

[ToughMoneyLove]

I suspect that some of these so-called "appraisals" were generated by appraisers bought and sold by the same lenders and brokers who were anxious to push gimic loans and the like on unsuspecting home buyers.

[Jim]

A lot of Southern California and several other areas have seen drops of 20-35% in the past year. The Western US is down -17%. See:
http://www.realtor.org/research/research/metroprice

So if you bought at the wrong time you could easily have a loan greater than your home value even with a 20% down payment.

Being underwater on a home loan isn't really a disaster in itself. If you have a fixed loan, can afford the payments and plan to stay in the home for at least a couple years then theres no immediate problem.

Jim

[MasterPo]

Mark B. - Right on! Where's our "help"?? Doesn't pay to do the right thing. :-(

As for those situations in your later post, that's what insurance is for. They should have had at least some life insurance, disability insurance, and what of the required home owner's insurance??

You are right to an extent. They did get into trouble later because they didn't think of the "what if" scenarios. All too common with everything these days.

[Jay]

Sorry, but as someone who doesn't quite understand why it was ok to put all your eggs in one basket with a home but not a stock, I have no sympathy for people who "did everything right."

Assets can appreciate and depreciate over time, and that's a risk that all home buyers assume. Would you bail someone out who borrowed hundreds of thousands of dollars with little money down to invest in the stock market? How about to invest in rare books?

Home are only different because people live in them, but that is no excuse for shoddy diversification and silly assumptions about the housing market only going up! up! up!.

Wow, same thing happened to me. I bought a new car drove it off the lot and guess what it was worth much less. I couldn't walk away though because then I'd have to walk everywhere. Stop crying and pay your bills. Learn the the first to rules in life are #1 - life isn't fair and #2 - Nothing is free.

[FMF]

Jay --

Who said this person put all their eggs in one basket?

[MonkeyMonk]

I agree with a lot of what others have been saying. People like Mark B. and MasterPo seem way to preoccupied with worrying about others when they should be taking responsibility for themselves. They agreed to the home loan and they should take full responsibility for it. I don't agree with bailouts in general but people should be criticizing the bailouts in principle and not whining that they didn't get a handout too.

[Kevin]

I'm sorry but why does everyone feel entitled that their house would eternally go up in value? If I bought Starbucks stock and it went down in value I wouldn't go to the government for reimbursement of my losses. There are no guarantees in life, housing included.

[Jay]

FMF,

This person - no one. But many, many first time homeowners saved every last penny to dump it all into a down payment on a highly leveraged home.

Either way, my argument still stands: people assumed that homes were the only investment on the planet that was guaranteed to go up. It doesn't matter how leveraged they were. If they bought their home in cash and the value dropped 25% over the next year, too bad. If they bought it on a superduper -100% down mortgage, I still don't care. It's their problem. Again, imagine if they had borrowed the money to invest in a rare book collection. Bail them out? I don't think so!

But back to the "all your eggs in one basket" question. Simply, if people who owned homes were adequately diversified they would not need bailouts. They could write off the bad investment and move on in life. Think about this as if a home were a single stock in a portfolio. It goes down, others go up, volatility is reduced, and you survive. (And if the volatility doesn't cut it for you, stick to fixed income products.)

[Jon @capitalistmven.com]

When my internet stocks all went down in 2000, I was upside down in them too. I didn't complain. I settled up my margin balance by transferring some cash and called it a day. If the commenter would just make a nice big payment towards the principle they wouldn't be upside down either. A "responsible" buyer would have been prepared for a drop in value and not whining about being "upside down" today.

[LotharBot]

Being "upside down" isn't a problem. Lots of people are "upside down" on their cars the moment they drive them off the lot... but as long as they can keep making the payments, they're fine. If your home loses value, it's no different from any other investment loss, provided you can still afford it. And there's no need to bail you out...

The problem is people who *can't make their payments* and are upside down, and therefore are stuck between a rock and a hard place. If they sell, they end up still owing... and if they don't sell, they'll probably end up in foreclosure. Either way, they end up losing money, and chances are, the lender also ends up losing money.

For the most part, people who can't make their payments AND are upside down are in that spot because they were irresponsible (there are exceptions, but not many.) And for the most part, the people who created those bad loans were also irresponsible. And the lenders that backed those irresponsible loans? Also irresponsible. Unfortunately for us, a lot of us responsible people are stuck with part of the bill.

[FMF]

Jay (and others) --

I'm not using this post to say that bailouts are ok or that I agree with them (I don't -- I think that's clear from what I've said in other posts.) I'm simply talking about the fact that many people made financial decisions that we all would make (put a good amount down, buy a home they could afford, get a house at the then market price, etc.) and still are underwater. That's it. That's the only point I was making.

I wasn't going into whether or not people put all their eggs in one basket because we have no idea if this person did or not -- so why even assume it's true? I wasn't saying that they made a smart financial move or not (I can't tell -- there's not enough info.) And I wasn't saying they were right for complaining -- though I can certainly understand why they are disappointed.

The key point in me posting this was that I think many of us (me included) often assume that the entire real estate problem today was because everyone borrowed 110% of a home's value with an interest-only loan with a reset rate in the teens in two years -- all the while lying about how much they made and buying a house that was twice what they could afford. The entire purpose of this comment was to remind us all (me included again) that some people took prudent steps to buying a home (whether this person did or not, we can't tell for sure, but it seems like it), and now their home is worth less than it was when they bought it.

That's it. Nothing about whether they're right to complain about it. Nothing about diversifying. Just the thought that the whole problem isn't only with irresponsible people.

[Jay]

Thanks for the clarification, and good point.

[MasterPo]

MonkeyMonk - LOL! You think you know me that well?

No. My wife and I didn't buy our house as an investment. We bought it as a home. Obviously I want it to appreciate but I don't have every penny I ever saved tied up in it.

Besides, you totally missed my point. People like me (and I think Mark B) played the rules, put down a nice down payment, have all the right insurance, do what we need to do to cover our martgage payments even in bad times (I was out of work for 4 months not too long ago and still found a way to make the payments). But no one is offering us "help".

Meanwhile people who make $9/hr at Wendy's and borrowed $300k for a dream house get tax payer funded handouts and armfulls of symapthy.

That's why I said 'Why bother?'

[Pop]

"I'm simply talking about the fact that many people made financial decisions that we all would make (put a good amount down, buy a home they could afford, get a house at the then market price, etc.) and still are underwater."

We all would choose to become knife catchers? I don't think so. The commenter is clearly a knife catcher based on their comment:

"I bought a home for $270,000 that was appraised around $300,000."

They thought they were getting "instant equity" of 30K, but instead they were suckered into buying about 18 months too early. Greed kills.

[Todd]

I don't think being upside down is really the issue. Rather, the issue is someone who can't afford to make the payments on the home, loses it in foreclosure and then sticks his hand out and asks for those who behaved responsibly to bail him out. Let 'em rot.

[Marco]

The home is not a depreciating asset. Over the long term it will go up in value. just not tomorrow. there is always the risk of being upside down.

to reduce that chance, simply make bigger payments on the mortgage. that attitude of losing value is what makes people just walk away from their mortgage. you signed a contract to payback money

[D]

I agree with some of these comments regarding "upside down". You are only upside down if you are trying to sell. If you are planning on staying in the home for many years to come then who cares what the market is doing today. In fact, your actual housing taxes may go down. If you are in an upside down market you can get your house re-appraised and actually spend less in taxes.

Now if your plan was to buy for only a couple of years then you were taking a big risk--similar to day trading stocks...

[Jenny]

Regardless of how "responsible" someone was in obtaining a mortgage, why all the gnashing of teeth over the value going down for 1-2 years? Aren't houses supposed to be a long-term investment? Unless you need to sell now, whether you're underwater should be about as relevant to your life as whether your 401(k) is worth what you put into it (mine currently isn't). And if you *do* expect to sell within 1-2 years of buying, why did you invest in something in the first place that is expected to go up LONG TERM, but not necessarily short term?

Irresponsible financing is certainly the major part of the issue. But calling something a "depreciating asset" because it dropped in value over the short term suggests a limited grasp of appropriate financial issues.