Negative Equity - A state of Mind?
03/02/10 12:01 Filed in: Real Estate
The NY Times recently has an article that focuses on
homeowners who are walking away from their home
rather than continue to service a loan that is larger
than the value of their property. If you want to read
the full article follow the link to
No Help in Sight, More Homeowners
Walk Away.
A few thoughts on the situation.
First, if the person did not know the value had fallen would they be in such a rush to walk away? As one person in the article states, they did not feel they over paid when they purchased their condo. It is only because the value has changed that they are considering if it makes sense to continue paying on the loan as agreed.
Second, what if the property’s value rises so the gap is closed? Would someone walk away if they thought that in 2 or 3 years the value would rise enough so the loan is now smaller than the value of the property?
I can understand people who are struggling with the payments because they have an income issue. If they are honestly thinking they should move for economic reasons what does that say about their commitment to their promises?
Third is how does this compare to other aspects of their life. If a person buys a car and they get a loan through the dealer before they drive off the lot they are most likely upside down the minute they drive away. The value of a new car drops with the first owner taking control. Most cars continue to lose value as they are driven each year. For most borrowers they remain upside down until they pay in enough to pay down the debt below what the asset is worth. In other words the borrowers deal with the negative equity by making sufficiently large payments so they catch up.
Maybe the owners recognize there is no hope that the car will rise in value so they go into the transaction knowing they have to pay the debt down. With housing in the US there was a 67 year run where home values rose (national average, specific houses or regions could have been different). People expect to buy a property and see the value rise over the long term.
The above leads me to conclude that much of the issue is based on a mindset of rising prices rather than a commitment to pay as agreed. People did not think about what they were doing when they signed up for the loan. Or they really did think it through and they always expected to walk away if the deal did not work out; a calculated risk.
-John Corey
A few thoughts on the situation.
First, if the person did not know the value had fallen would they be in such a rush to walk away? As one person in the article states, they did not feel they over paid when they purchased their condo. It is only because the value has changed that they are considering if it makes sense to continue paying on the loan as agreed.
Second, what if the property’s value rises so the gap is closed? Would someone walk away if they thought that in 2 or 3 years the value would rise enough so the loan is now smaller than the value of the property?
I can understand people who are struggling with the payments because they have an income issue. If they are honestly thinking they should move for economic reasons what does that say about their commitment to their promises?
Third is how does this compare to other aspects of their life. If a person buys a car and they get a loan through the dealer before they drive off the lot they are most likely upside down the minute they drive away. The value of a new car drops with the first owner taking control. Most cars continue to lose value as they are driven each year. For most borrowers they remain upside down until they pay in enough to pay down the debt below what the asset is worth. In other words the borrowers deal with the negative equity by making sufficiently large payments so they catch up.
Maybe the owners recognize there is no hope that the car will rise in value so they go into the transaction knowing they have to pay the debt down. With housing in the US there was a 67 year run where home values rose (national average, specific houses or regions could have been different). People expect to buy a property and see the value rise over the long term.
The above leads me to conclude that much of the issue is based on a mindset of rising prices rather than a commitment to pay as agreed. People did not think about what they were doing when they signed up for the loan. Or they really did think it through and they always expected to walk away if the deal did not work out; a calculated risk.
-John Corey
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