Upside Down Mortgages

Today’s paper mentioned some 14% of Americans are now upside-down on their mortgage—that is, they owe more than the house is worth. I’ve been reading about this for some time. I’ve vaguely wondered whether my house, bought in the heady days of 2006, might be one.

And then I realized—who cares? Seriously—unless you’re planning to sell, being upside down on your mortgage is irrelevant. I bet a lot more than 14% of Americans are upside down on their investments, yet how many financial advisors are recommending we bail out now and take the 40% loss?

Sure, if you are planning to sell, being upside down sucks. And, having to sell because your company just reassigned you sucks, too. (If you’re one of those folks whose company will buy your house, good for you, but that’s not the point.) And, if you're in that situation where you bought for $400k and your house is now worth $250k, believe me, I feel sympathy, even if I can't feel your pain. I have a good friend who was assigned to, and then from Las Vegas--I never had the heart to ask him how badly he was hurt in the sale.

But, let's also be realistic. Anyone who ever bought a house using a VA or FHA loan started out upside down—you can finance all those fees, plus a little more in order to make improvements. I didn’t get my loan and immediately think, “I owe more than it’s worth! I should just walk away!”

About 10 years ago, my Dad sold a house at a $30,000 loss when he found a better job across the country. He said it really hurt writing a check as the seller—but the market had dipped, and that was that. When I moved in August 2001, my goal was to make a small profit when my house sold. On September 12, my goal changed to “I don’t want to write a check at closing.”

The point is that you have to live somewhere. Either you own, or you rent. Being upside down doesn’t change either fact—it just means you’re renting from the bank instead of yourself for a while.

Of course, if the house you’re upside down in isn’t your primary residence, but a rental or an investment property, that’s different—but not in the way you might think. It’s different because now you’re a businessman (good for you) and you have a business decision to make. You shouldn’t be lumped in with other homeowners in order to make the statistics look worse.