Where readers ask, and we (the community) try to answer. This is a good one, and a great thought. Thanks for the email MM:
So I have a question that I’d love your take (and maybe your reader’s take) on: Why do people walk away from a house that’s underwater when no one walks away from anything else that’s worth less than they paid for it?
I mean, think about a car. People drop 50, 60, 70 thousand dollars on a car that’s instantly worth less than they paid the second they drove it off the lot. But no one would ever say “Well, I’ve still got 5 years on my car loan and it’s worth half of what I paid, so I’m just walking away.”
No one says “I’m paying 12% interest on this new $5000 big screen TV I bought on credit, and it’s now not worth what I paid, so I’m just going to walk away from my credit card bill.”
Is it because we’ve been conditioned over the years by the financial and real estate industries that homes are an “investment” that will only go up? Or that homes are only worth it if we’re going to make a ton of money on them down the road?
Call me crazy, but I think if you buy a house where you can afford the monthly payments, it shouldn’t matter at all how much your house is worth compared to what you paid.
Thoughts?
Very interesting thought, and honestly something we do not have an answer for. We’d have to guess that every person is different and a house payment is likely much larger than a TV or car payment, so walking from something like that carries larger financial gains/losses.
Does walking from a credit card carry the same credit punishment as walking from a house and going into foreclosure?
We can say there are many people walking away from their credit card bills, but the odd thing is, they get to keep the TVs! As for the car, remember “REPO Man”?
We think your question may spawn more questions and doubt there is really one specific answer, but we (like you) would love to hear what some readers have to say.
Having lived in a condo situation and having represented several sellers, I truly believe that the vast majority of homeowners have never crossed over from being tenants to home ownership. The ability to walk away from a debt responsibility is just like renting. There’s no commitment.
The other thought is that at $3k to $6k a month, it seems easier to walk away from that much debt than from a $100 a month minimum payment on a credit card or $600 a month on a luxury vehicle.
No?
One factor may be that renting a house is cheaper than buying a house. So there is a ready made alternative to owning a house.
is it possible to rent an equivalent car for the same cost as owning one?
Not sure it is.
also you have to live and sleep in the thing which basically took up every cent you own. Life savings gone.
That must stink an make people want to walk away from it.
The mortgage is such a soul-sucking crushing thing when it goes up, your car payment/big screen tv just doesn’t compare. People don’t go through divorces because of a car payment but unpaid mortgage sure. Plus what’s the downside of not paying your mortgage these days ? You get to re-negotiate it, the downside of not paying the car loan ? well it gets re-possessed quickly.
It’s a financial equation where each individual places a value on their credit score. Some people value their credit score very highly, and they should. But if I were <$500k underwater on a property and was servicing a toxic loan — you can be certain that I would be exploring the option of walk-away. No question about it. For others, credit score is less valuable and they may be willing to walk away for much less.
I’ll add that there are certainly people who decide to just walk away from their cars. If servicing the debt does not make economic sense and the liability is backed by the underlying asset — walk away is a viable economic option. More so now since the CH 7 bankruptcy laws are much more difficult thus leaving walk aways as a legitimate option.
What a bunch of absolutely IRRESPONSIBLE comments. Is no one held accountable these days for being an adult and owning up to financial responsibility? The comments talk about how much “easier” it is to just walk away when the going gets rough! Did the buyer consider that when they bought more of a house than they could really afford? A house is (or was) supposed to be where you live, not a vehicle for your investment portfolio. But this kind of thinking is typical of a certain group of people who feel “entitled” to a good life, an easy life, a life free from responsibility. I find that an offensive way of thinking, and living one’s life.
Two different animals.
It makes no sense to “walk away” from your car. Not only will it quickly get repossessed, but you are still on the hook for any balance on the loan still outstanding after the repo is sold. So you haven’t really “walked away” from anything.
Walk away from your house and generally you owe nothing more to anybody, ever.
Bankruptcy, of course, changes things with respect to a car repo. But that is an ugly, last resort.
“Call me crazy, but I think if you buy a house where you can afford the monthly payments, it shouldn’t matter at all how much your house is worth compared to what you paid.” What a cute, naive thought!
@noearch, what would you do if you lost your earnings capacity and became significantly underwater on your home? Sometimes people walk away since there is just no other option.
I wonder about these reader inquiries sometimes. Hard to fathom.
The issue isn’t generally the choice-
What happens with these ARMs is that after a certain amount of time the payment can often triple. That means where someone was paying $1000/month, they now pay $3000/month.
Most people were promised by their loan broker that this situation would not happen. They were told when the payment is set to rise, they can just re-finance. The broker expected the value of the home to go up, and that the homeowner would then have more equity to work with.
“Call me crazy, but I think if you buy a house where you can afford the monthly payments, it shouldn’t matter at all how much your house is worth compared to what you paid.” What a cute, naive thought!
I agree.
certainly when prices were rising, many owners were heard pontificating at how much their houses were increasing.
Now it’s head in the sand time for them, and time for renters to start speaking up at how much they saved by not buying..
@ eddy: Your comment is exactly what I was talking about. Guess what? one should act responsible. If you lose your job..ah..gee..how bout getting another one? ever think of that? And just because your house value goes down it does NOT mean the monthly mortgage payment goes down. Again, your thinking assumes that the house should act like a savings account always going up.
There are some people who should never be home buyers. They should remain renters; yes there is less risk…But even if a renter loses his or her job, the rent still must be paid..
Responsible people should never assume automatically that their house is an ever increasing portfolio for wealth.
Sorry, noearch, that’s a sucker’s thinking. The lenders priced the home loan with the risk, to them, that the buyer could walk away with “no recourse” factored in. I.e. the rate they are charging buyers is higher because of it. A buyer accepts the higher rate but in return also retains the right to walk away. Your sucker thinking gives the lender all the benefits of the deal but deprives the borrower of the same. Nothing wrong at all about walking away from an underwater house. It is all part of the contract that the parties entered into.
“Call me crazy, but I think if you buy a house where you can afford the monthly payments, it shouldn’t matter at all how much your house is worth compared to what you paid.” What a cute, naive thought!”
I’m the one who sent in the original question, and I’m just wondering why this is such a naive thought?
The idea of your house as an investment is a relatively recent thing – pushed on the public by the financial sector (and parroted by the real estate sector) as a way to get more people to go into debt (i.e. to raise their profits via debt). It’s barely been 70 years since mortgages became widespread in the U.S.
Maybe it’s you that’s naive to think of a house as more than simply something you own to live in. You’ve bought into all the marketing. Because it really is true – if you buy a house, can make the payments, and have no intention of moving, what your house is “worth” at any given moment is irrelevant.
Now there’s a much longer argument on why being a nation whose economy is fueled by debt is a bad thing. But maybe if people started to look at a house the same way their grandparents did – as a place to live and not as a way to get rich – we wouldn’t be in the predicament we’re in now.
First, the majority of people don’t buy a $60K or $70K automobile. They spend maybe $20K to $30K so they stand to “lose” $15K at most.
Secondly, if you purchased a condo in 2006 for $222K that is now worth $89K you just lost $131,000. That’s a LOT different than depreciating $15K no?
Lastly, if your payment on that condo is $2K/mo you are paying $24K a year. If it’s another 8 years before that condo is worth what you still owe, then you just threw another $192,000.00 down the toilet. That’s money you NEVER get back, because 8 years later you will just be beginning to pay anything at all towards equity.
Do the math, and spare me your moral outrage.
Further when you stop making your mortgage payment and it takes 10 months to foreclose, that’s $20,000.00 in your pocket. I just paid CASH for a condo and sent the keys to this one back to the bank.
Matt,
my point is that when prices were rising the homeowners weren’t saying ‘I don;t care that my house has doubled o(or tripled) since I bought it’.
But now they are in free-fall, that the argument. That is doesn’t matter.
I am not buying it, thats not how they acted on the way up.
Well, Jinglemail obviously missed the point…
If you’re paying $3000 a month for a house, and you can afford that payment, why does it matter if your house is worth $500k or $50k?
Answer: Unless you have to sell – it doesn’t matter at all. It only matters if you’re looking at your house as an “investment.”
There’s no moral outrage. Just logic.
Dothemath,
Anyone who bought a home but didn’t take out any equity, in effect, didn’t care.
Paper gains, just like paper losses, don’t mean a thing if you never plan to realize them.
but what % of home buyers NEVER plan to realize them?
very low, surely? close to zero maybe.
I have to agree with MattM on this one. The drop in values are paper losses. I imagine some of those complaining fall into two categories: those who needed the equity from expected increase in values and those who simply feel they were ripped off because they purchased high and now cannot afford to sell low.
The first category of people are those who were maybe tricked into the situation. There are those who knew exactly what they were doing and possibly had done it prior with some success or were hopping on the bandwagon hoping for a profit in short time.
The latter category might have no justifiable qualms about lowered values. They planned to stay for many years and can afford a drop in value.
There’s an author (I won’t name because I don’t support) who claims those who think like Matt and I do are wrong; paper losses are important and affect equity. Of course it affects equity, but it only affects those who needed or wanted it. There are still the rare ones who believe a home is a roof over the head rather than another asset in the portfolio.
MattM said basically what I did. it’s all about logic, and common sense.
View your house as a place to live and enjoy, NOT as some speculative investment, that you expect to increase in value forever. Yes, you should be responsible as the buyer, but some of the blame on this bubble mentality should rest with the mortgage and real estate industries. They marketed (and still do) heavily on convincing you that your house is an “investment”.
and of course, one further point..if you do expect to live in your house foreever, the drop in values means you could have waited and bought a bigger and/or better place, or in better ‘hood etc…
and i re-iterate, not one owner said to me before 2008 that they it didn’t matter how much their house was worth compared to what they paid for it.
since 2008….many have.
…If you’re paying $3000 a month for a house, and you can afford that payment, why does it matter if your house is worth $500k or $50k?…
Is this a joke? Seriously?
so matt you’d happily pay 750k or so, and pay 3k a month for something that’s only work 50k?
wow
Dothemath, how do you know how much your house is worth? Answer: Until you sell it, you don’t know for sure. So you have no idea right now whether you’re paying $750k and $3k a month for something that’s going to be worth $50k or not.
And you know the ONLY way to eliminate the risk that you may be paying too much for your house? Never sell. Which is exactly my earlier point.
Paper losses are only paper losses until you realize them.
jingle seems to be advocating the clear lack of accountability that got this country into this mess.
the “$20,000 in your pocket” is not money that magically appears there. it’s basically stolen from the bank from which you got your loan.
the point of a house is to have a place to live, not a bottomless ATM to support a lifestyle above your means.
Unless you are going to sell, the price of your home is irrelevant.
but they are walking away from their cars, and their tossing a match for good measure
smokey, no bandit
every post here reflects the general naiveté of the US population, this artificial situation was orchestrated by the corporate-owned US govt, and those corporate owners are smiling as their success drives you all to point at each other
it’s an economic decision – pure and simply – just like the one Greenspan and his buddies played on us
To echo Stu, people are shedding their toys, such as boats (which have a very stable resale value) and just letting them be free!
http://www.nytimes.com/2009/04/01/business/01boats.html
And you know the ONLY way to eliminate the risk that you may be paying too much for your house? Never sell.
umm…not quite.
How about not buying it?
Then you don’t have to live in the same house for the rest of your life regardless of whether you lose a job, want to relocate, get married, have kids, suffer a death in the family, get bored of the area..
presumably then, we should be equally un-concerned about the recent 50% fall in peak from equities – only a paper loss also. and most people will be selling their house before they realise their 401k if you look at average ages, average home hold periods etc.
also, never sell..and what? just pass on the house to the next generation?
I’d be pissed if my ‘rents bought a bunch of houses at the peak of the market with the attitude ‘it’s OK, we will never sell’ and passed on their underwater positions to me on death.
dothemath, this is a troll post if I’ve ever seen one.
http://i63.photobucket.com/albums/h159/Seahawklady/Non-card%20stuff/LOLZ/trolls.jpg
First of all people walk away from their cars all the time. That’s why repo men have full time jobs.
Second of all to the extent people don’t walk away from their cars when they could or should it’s because they need them to get to work (or take the kids to school etc), and renting cars is more expensive then owning.
The reverse is true when it comes to housing. Renting is a lot cheaper. And if your ARM is about to adjust and double your payments, and your home is underwater which means you can’t refi, then you really are in quite a pickle. You can either continue to throw money into a black hole and watch your net worth continue to decline or you can cut the anchor that is pulling you down and start the climb back up into financial stability.
Those who think they should just make the payments because they can and “it’s the right thing to do” are forgetting they are players in a system called capitalism. Trust me the banks are not worried about your net worth, they only care about their money. Likewise you should not worry about the banks net worth and should do what is right for your money. If you love your home so much you are prepared to go down with the ship, fine. But winning players in the game of capitalism do not typically allow themselves the luxuries of such sentimental niceties when they are in direct conflict with wealth generation and/or preservation.
A car is a national coming of age symbol. Giving up a car rings with retreat to childhood. Yes they are repoed but rarely given up unless the scammer has figured out how to bilk the insurance company.
Easy credit for the irresponsible has enabled consumers to live beyond their ability. The result –utilities unpaid, credit cards maxed, and bankruptcies.
Many of today’s foreclosures are loans to people who bought their home with no money down and payments cheaper than rent until the ARM rate raised to a rate that exceeded the ability to pay, walking away is in their mind a cost effective solutioon esspecially when one considers that just like a deadbeat tenant they can walk away. Furthermore, in todays economy the homeowner could, by walking away, get a better house for less money than thee mortgage.
A wise modern consumer sets aside ethics and calls it stupidity. Those of us that don’t take every advantage to make a buck are a rare breed today. It’s about the dying of ethics, social responsibility and religion in favor of the $$ at any cost. The economic climate existing now will just hasten the demise of the integrity and ethics. Corpporate irresponsility is gradually teaching that personal irresponsibility if acceptable.
I agree. Maybe some of you guys have never been laid off but I have. I am currently dealing with a pre-repossession f my car and was force to do a short sale on my townhome in 2007. So there, does that make me a dead beat payer? It just means the economy sucks and that there is less jobs out there!
People are not sympathetic to others until they are laid off or in the shelter homeless themselves…and that is the bottomline….
I agree Brown Suga! Go girl…I have been there to and it was a nightmare. Especially when you are use to paying your bills on time. Are these people collectors or credit bureau workers?
Whoever wrote this article had nothing else to do today huh? Now that is crazy!
currently live in las vegas and i am paying 11.5 percent on a large home loan for 205k. my second mortgage is 8.5 percent on a 40k loan. my townhome was baught when i was single and by myhself five years later i have a newborn a wife and 2 dogs. the town home now feels like a apt. so am i supposed to stay here in a cramped home with my growing family and throw half of my paycheck to a townhome that is 100k in the whole. 1 i cant have my family grow and live in this home and 2 i cant sell it so it is up to me to decide to walk or not. and i am, my wife is not on the mortgage so we will save the money and go buy new. it is not about morals but about my family’s future.
and i don’t consider it stealing from the banks when the banks got us all in this situation in the first place and the heads of those banks make the money they do. with the way they took advatage of young adults and older americans, heck even illigal imigrants got approved for homes the banks stole from us to make thier bottom line better. they took advatage of us all so why should i feel guilty about walking away from my house.