Earn What You Spend

Yesterday I wrote about my new appreciation for being underwater on your mortgage.  Mark Cuban, a wildly successful entrepreneur, was thinking along the same lines and wrote this excellent post.  He makes a number of points, but first tackles the difference between the “Buy and Hold” strategy for stocks versus your home:

I think “Buy and Hold” for stocks is one of the all time great marketing scams. Ignore it. Always.

“Buy and Hold” for your house is a mantra you should always live by. The difference ?

You can live in your house. You get utility from your house. You may get a deduction for interest paid on your tax bill. You can develop a positive emotional attachment to a house.

In terms of the “Buy & Hold” strategy for stocks, I personally think it is still a good one, though I can appreciate his point of view.  (It is much more nuanced than he lets on here - he has very specific reasons for why he thinks this strategy for stocks is a loser).  There are a number of great blogs that outline the invest over the long-term premise and why it can be so successful: Get Rich Slowly, Brip blap, and Consumerism Commentary are a few. 

But the second point, the “Buy & Hold” strategy for your home, is absolutely correct. Mark continues: 

The fact that you may be underwater in your mortgage is of no relevance if you can make the payments.

If you can make the payments on your mortgage, it shouldnt matter if your house is worth 10pct of your mortgage. If you can make the payments, make them.

Your home has far more value than its mark to market price because you can live in it . Do whatever you can to stick it out. It will pay off for you in the long run

This is the exact concept that has bothered me when so many people spoke only about the negative implications of falling housing prices - your home is not like a stock, so if the appraised value goes down, that shouldn’t matter.  You shouldn’t be buying your home in order to flip it.  If you can make the payments (and you don’t have an ARM), the appraised value does not matter.  Just keep paying your mortgage and enjoy living there, and eventually the price will catch up to where it should be. 

The point I had missed, however, is that not everyone is so lucky as to be able to buy and hold their house:

What if you lost your job and could no longer afford the mortgage payments?  This is increasingly common with the fall in employment.   You’d be forced to sell an underwater house.  What if your job was transferred to a different state, and you either moved or lost it?  You’d be forced to sell an underwater house.  Medical bills rising and you need to downsize to a mortgage you can afford?   You’d be forced to sell an underwater house.

Furthermore, the problems facing the housing market are only getting worse: 

Defaults lead to foreclosures that push down all house prices. Those falling prices — combined with rising unemployment, falling incomes and another expected surge in monthly payments on adjustable rate loans — will surely lead to more defaults and deeper price declines, threatening bank solvency and prolonging the credit crunch.

So Mark is right: for those who are lucky enough to be able to make their payments, just keep doing so and don’t worry about the appraised value of your home.  But for those who’ve recently lost their jobs - like those who working at Circuit City, for example, the situation is significantly more complex.