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Understanding “Underwater” Differences
Staff Reporters
Mark Cuban wrote an interesting piece on his website on November 11. On it, he asks; “so what’s the difference between being underwater on a mortgage and underwater on a stock?”
The Experts
According to Mark, the “experts” will tell you to hold the stock in hopes of it going up in value and then explain that those with homes worth less than their mortgages shouldn’t feel bad about breaking them and defaulting?
The Buy and Hold Scam
He thinks “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.”
The Stock Difference
A share of stock … well you can … you can look up the price anytime you want if you think that’s fun. There is no utility for a share of stock beyond its financial value. The value of a house is that it is your home. Moreover, “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 shouldn’t matter if your house is worth 10 pct of your mortgage. If you can make the payments, make them.”
Example:
Furthermore, as Mark recalls, “I remember being freaked out watching as my rate on my Adjustable Rate Mortgage went up and up as I watched the value of my house go down. For 2 years my rate went up, my house value went down. Fortunately, I liked living there. I wasn’t building any equity, in fact, I was negative, but I was going to have to pay to live somewhere. On top of everything, my credit was bad enough and I didn’t want to make it any worse. In fact, I knew that if I didn’t make the payments on my house, my chances of ever owning a house again were none and none. So I kept paying the note every month; in spite of the financial pain.”
Changing Times
Then, Mark says, a funny thing happened. Interest rates started to go down. I didn’t even know it until I got my annual notice saying that my mortgage payment would go down. The value of my house wasn’t going up, but for the next several years, my payments went down. It took years, but I actually built equity in the house; which is exactly the point!
Assessment
Finally, says Cuban: “Buy and hold works when it comes to the home you live in. Turning in the keys because you have negative equity is a fool’s game. If you do, you will never own a home; you will be a renter forever“. 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.
Conclusion
Attention profligate doctors, and financial advisors, your thoughts and comments on this Executive-Post are appreciated.
Related Information Sources:
Practice Management: http://www.springerpub.com/prod.aspx?prod_id=23759
Physician Financial Planning: http://www.jbpub.com/catalog/0763745790
Medical Risk Management: http://www.jbpub.com/catalog/9780763733421
Healthcare Organizations: www.HealthcareFinancials.com
Health Administration Terms: www.HealthDictionarySeries.com
Physician Advisors: www.CertifiedMedicalPlanner.com
Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com or Bio: www.stpub.com/pubs/authors/MARCINKO.htm
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Filed under: Financial Planning, Investing, Op-Editorials | Tagged: home ownership, stock ownership |
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Depending on when you purchased your home, you are probably asking the question.
Do I keep my home or do I give it back?
According to Yale economist Robert J. Shiller: A History of Home Value “The 1890 benchmark is 100 on the chart. If a standard house sold in 1890 for $100,000 (inflation-adjusted to today’s dollars), an equivalent standard house would have sold for $66,000 in 1920 (66 on the index scale) and $199,000 in 2006 (199 on the index scale, or 99 percent higher than 1890)”
Source: “Irrational Exuberance” 2nd Edition, 2006, by Robert J Shiller
What this chart shows that home values can range during time and homeowners should realize that depending on when they purchased a home, values can go up or down. If you currently own a home it is too late to do the math to see if you should have purchased or not. You should now consider if you can afford the home.
Banks use (Debt to Income Ratio) income-expense to determine affordability; this calculation only uses fixed cost such as auto payment, credit cards and PITI. However homeowners should also consider maintenance and repairs needed to maintain the home throughout the years, which is a variable cost of homeownership.
In addition, there are some advantages of owning vs. renting:
1. Tax deductibility of interest.
2. Possibility of appreciation.
3. Stability of ownership.
4. Owning an asset.
If you can not currently afford your home, working with your lender for modification might be a solution, but don’t’ expect any free rides because eventually you will have to pay to keep your home.
It is unfortunate but many Americans will lose their homes because they can not truly afford to keep it based on many factors. However, some are simply walking away do to negative equity on their home. These homeowners will realize that entry to the market will be more difficult and even impossible in the future.
The CCC is back in the housing market.
Credit:
Their once was a time when a 500 credit score could qualify you for a home. Many lenders have increase this requirements and are currently requiring over 640 credit scores. Even those lenders that offer FHA loans are requiring higher scores regardless of FHA guidelines, that currently allow 540 credit scores to qualify.
In addition, to lower scores lenders have tightened the guidelines in regards to foreclosure and bankruptcy. Most lenders are requiring a five year seasoning before even considering the application. (Exceptions do apply especially to Veterans loans)
Capacity:
Income documentation has been changed and liar loans (Stated Income Loans) are gone and are probably not coming back anytime soon. So essentially your debt to income will have to fall within allowed guidelines and must be fully verifiable if you desire to qualify for a loan.
Collateral:
Down payment requirements are going to be a required regardless of credit scores. Lenders no longer have an appetite to approve loans where the customer has no money in the purchase. FHA guidelines of 3% exist and FNMA will be back to require 10 to 20 % down regardless of credit.
Walking away from your current residence is not as easy as making a decision on selling or holding a stock. So for those homeowners that can afford their current home but are negative in equity there are two main questions I would ask:
1. What is my credit worth, 50, 100 or 200 thousand dolars?
2. Do I want to be a renter again?
If you desire to keep your credit in good standings and you desire not to be a renter again the negative equity should not be a concern if you can afford to keep you home. Eventually, the housing market will stabilize and even out. However don’t expect the housing market to resume its unrealistic appreciation over short periods.
Amaury S. Cifuentes; CFP
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