The word “underwater” would normally connote literally being under the surface. I would usually think of the ocean, or maybe being in a
swimming pool and going under. Either way, actual water would be a part of the instant reaction when hearing that word. Not money, right?
Well, if you’re a personal finance blogger, the word underwater might now bring to mind real estate-related issues! I came across an article from the LA Times that referenced some data showing that over 31% of U.S. homeowners are now underwater on their mortgages. So, just over 3 in 10 homeowners here in the US have been hit by the real estate problems in this particular way.
When one is underwater, more is owed on the mortgage than the value of the actual home. A very simple example might be a case of someone who put down $40,000 on a $200,000 home, thus owing $160,000. If the value of the home suddenly dropped by 25% to $150,000, the home would be worth less than the amount owed on the mortgage. The homeowner is now underwater on the mortgage.
Even more staggering is a figure noting that of those who are underwater, 15% owe at least double the amount of their home’s value! Applying that to the 31% figure noted earlier, one can say that almost 1 in 20 homeowners in the U.S. have a home no more than ½ of what they owe on the mortgage!
With such abysmal figures, it makes me think once again about whether or not this is a good time to buy a home. It sure seems like a much better time to buy for somebody currently renting! But regardless, with home prices dropping so much, people who held off buying a few years ago have to be thanking their lucky stars they stayed on the sidelines.
Is this a good time to buy? Well, prices have dropped despite interest rates being exceptionally low by historical standards. The thing is, I wonder if prices have more to drop. I suspect that there are quite a few people who would like to move, but are probably overpricing their homes. Why? If they are underwater or close to it, they don’t want to take a paper loss on a home sale. My guess is that there are some homes for sale that are at lower prices than they would have been a few years ago, but not low enough. People just don’t want to take a big loss.
With such stats, I wonder if we’re becoming a less mobile society for the immediate term. If you buy, it’s not like you can expect to resell quickly as you might have been able to a decade ago. With less movement in the market, people seem to be stuck in place a bit more.
- In some markets, home prices might still have some room to drop, and we might not have seen the price floor yet
- If you buy, utilize all available data when making a home purchase. The short sales out there might really wreak havoc with market values.
- Be prepared to view your home as being a much less liquid asset than it might have been a decade ago. In other words, be ready to stay there for a while, even longer than you need to, so like the place you’re getting.
My Questions for You:
What are your thoughts as you read that almost 1 in 3 homeowners is underwater on their mortgage, and 15% of that group owes twice as much as the home value?
Does this surprise you in terms of how high these figures are?
Do you tend to view this as a buying opportunity to be taken advantage of now? Or, do you think that the market will likely head lower and that buying now could be premature?