Note: this is the second entry in a two-part series on real estate. Check out the first post to catch up.
When my parents bought their home in Hawaii in the 70s, they put most of everything they had into the deal. The time was right and they went for it. The result was a beautiful two-story home nestled in a small valley named for its swirling winds.
Over the past 30 years or so, the house has been a constant. My parents twice opened a home equity line of credit, a loan that has a limit based on a percentage of the total value of your home, minus the balance still owed on the mortgage. They tapped it once to buy a new car, then again several years ago to make some renovations.
The house is likely my parents' largest investment (other than me; kids are expensive!) and their largest single asset -- its value has appreciated ten-fold over time. Traditionally speaking, the home has usually been the greatest asset for many Americans. But as a whole, the concept of someone's home being their monetary bedrock is starting to shift.
In early March, it was reported that for the first time since 1945, home equity rates averaged below 50 percent. So what does this mean? In a nutshell it means that on average, American homeowners owe more for their homes than they own.
Traditionally, a home has been an asset. But with this big housing downturn, we're starting to get stuck with depreciated money pits instead. Home equity lines of credit can't work well if you don't own a decent stake in your home. With their backs against the wall between resetting mortgage rates and plummeting home values (which were overinflated to begin with), some folks are choosing to walk away. This is when a beleaguered homeowner literally hands over the house keys to the creditor, says "I'm through," and walks out. Obviously, this is not what creditors or the Federal Reserve want. Cutting your losses by quitting a mortgage wrecks your credit, but for some people, they'd rather get hit by foreclosure rather than bankruptcy, which stays on your credit report for 10 years. Since some owners entered the market paying little to no money down, they're attempting to cut their losses and increase their rebound time by walking away. The idea is to wait a few years, try and heal their credit and then buy a new home - for a lower price. There's even a new industry that has developed from people choosing to walk away from mortgages, which was recently covered by ABC News. If you're in a mortgage bind, check out what the FTC has to say about your financing options before throwing in the towel.
In March, Fed Chairman Ben Bernanke urged lenders to go beyond scaling back interest rates and start cutting the size of mortgages, a move that would hopefully persuade homeowners not to walk away, according to a report in the LA Times.
If you're thinking about buying a home down the road like I am, it's good to keep at least a casual eye on all this news. Right now, the housing climate is cutting both ways - not only forcing some owners into bankruptcy, but swinging back and bopping lenders on the nose too as folks walk away from their houses. The concept of home equity is shifting, especially for our generation. It may take a while before the homes we buy become a resource rather than a liability.