Earn What You Spend

The WSJ reports this morning that now over 20% of houses in this country are underwater - that is, the owners owe more on their mortgage than their house is worth:

The increase in the number of such “underwater” borrowers comes amid signs that falling prices are making homes more affordable for first-time buyers and others who have been shut out of the housing market. But falling prices also make it more difficult for homeowners who get into financial trouble to refinance or sell their homes, and for others to take advantage of lower interest rates.

For instance, fewer will qualify to take advantage of a key component of the Obama administration’s plan to stabilize the housing market. Under the plan, announced in February, as many as five million homeowners whose loans are owned or guaranteed by government-controlled mortgage giants Fannie Mae and Freddie Mac can refinance their mortgages, but only if the mortgage loan is a maximum of 105% of the home’s value.

I’ve noted before that underwater mortgages aren’t necessarily so bad - if you can make the monthly payments, then you can simply ride out the storm.  It’s a buy-and-hold strategy that should work just fine if you have a long enough time horizon.  But as I also noted in that post - not everyone is so lucky: health care costs and job losses are just two reasons people might need to move in a hurry.  And if you’re home is underwater, you find yourself in an incredibly tough situation.

20% is, without a doubt, an incredibly high percentage of homeowners.  Housing was sold by virtually every financial advisor out there as a sound, secure way to build wealth.  Unfortunately, now over 1/5 of homeowners have learned what our investment bankers are now learning: when you use leverage on a depreciating asset, your losses are magnified.