"Underwater" Overhyped?

The U.S. housing bubble finally burst - not with a whimper, but a bang.

Some thought it would never happen, others couldn’t believe it took so long, few foresaw that its “pop” would engulf the world. Ridiculous mortgages were sliced-and-diced into a weapon-grade virus that have poisoned the global economy, and something must be done to stem the infectious spread - but not at any cost, not with an eye towards saving everyone.

I refuse to join the populist chorus of righteous bill-payers or screaming cable hosts who decry the housing package as unjust because it provides a "free ride" to over-extended neighbors. It is easy to grab a torch and pitchfork (or CNBC microphone) and crusade against an incite-full (if not insightful) hypothetical situation where respectable folk are forced to bail-out the Joneses and the Jacuzzi they could not afford, but is also inaccurate and short-sighted. Despite what AM radio may screech, the current plan is not a windfall for lazy leeches, but aims to prevent the economy (and our neighborhoods) from going down that Jacuzzi’s drain. You may prefer the Schadenfreude of watching the Joneses pack their just desserts in the back of a U-Haul, but if we do nothing to stop this slide, you may want to put down a deposit on the same truck for next month or year.

This does not mean that we must assist everyone who invested in a home and is not happy with the investment’s performance, or excuse them from contractual obligations that look less advantageous in the short run than they had hoped. A limited, well-targeted program to help responsible-but-needy homeowners will ultimately benefit us all. The question is: what defines “needy” in a society of get-rich-quick aspirants who sign 30-year agreements and panic if the investment does not provide immediate returns?

At the center of the residential bailout efforts are a legion of “underwater” homeowners who are universally acknowledged to be doomed, but whose irreversible and tragic fate has not been fully explained. That they are needy or imperiled is not at all clear.

“Underwater” homeowners are not the still-damp denizens of New Orleans who continue to wait for Bobby Jindal to steer a rescue boat (or at least shepherd the Federal dollars that he has NOT rejected) to their addresses. “Underwater” is the ubiquitous media moniker for a financial situation where more is owed on a mortgage than a property is currently worth. Unquestioned conventional wisdom has it that no one in this predicament (estimated at up to 20% of homeowners) will make a payment on an undervalued asset, and so these sub-marine commanders are presumed to be abandoning ship: packing up and walking away from their homes and mortgages.

But why?

Here’s shocking news -- when one adds in the interest that compounds over the life of 30-year mortgage, we are all paying banks far more than the purchase price of our homesteads! Using this underwater rationale, shouldn’t every driver walk away from every auto loan (or plead for government help) when the car loses half its value as it rolls off the lot?

Admittedly, I’m no economic expert, and I’m certainly not an underwater financial expert (lacking either an MBA or SCUBA gear). Judging by our current predicament there is no such thing as an economic expert, so allow me to offer common sense in lieu of an Ivy League-vetted algorithm: a dip in one’s home price is not cause for extreme alarm, let alone a governmental intervention!

The American Dream (© copyright 1950) revolved around home ownership to provide a PLACE TO LIVE, to RAISE A FAMILY, to secure one’s FUTURE…not as a way to score a deed that could quickly be flipped for a gnarly profit or constantly refinanced for tidy unearned profits. When one buys a home, they generally do so with a 30-year loan…why should it matter if the value slips in years 4 - 9? As long as it provides a roof over one’s head, should not the value after 30 years be the relevant benchmark?

According to the National Association of Realtors, the median price of a home sold in 2008 fell 13% from the previous year -- an astonishing drop that was the largest on record, but one that must be viewed in context. The plunge represented the average value falling from $208,000 to $181,000 ($27K on a 30-year mortgage), and most owners bought their homes prior to 2008, so their houses were only “dropping” from an artificial high which they never paid. The average price just 5 years ago was $198,000, meaning that values have dropped only 8.5% since 2003 -- certainly disappointing if you’re hoping to quickly double your cash, but not catastrophic or bailout-worthy.

Unlike precious metals or commodity futures - where prices exist solely to fluctuate on the seas of supply and demand - homes are an investment that have a practical PRIMARY purpose -- you live in them. How about we try that: pay our mortgages, shelter our families, accept that we’re not going to become overnight millionaire land barons, and trust/hope that the country, the world, and our titles will all rebound by the time we have paid our notes?

As a youngster on the Jersey shore, I initially panicked when waves threw me headlong beneath the surf; I’d cough, cry and crawl away from the tide, frightened by the unfamiliar and unbridled force of nature that could suddenly turn me on my head. Thankfully, I was taught to control panic -- when I went underwater, I learned to hold my breath, keep my calm and know that I was going to resurface.

Sage advice that now reaches far beyond the sandy boardwalks of my youth.

Undeniably there are legitimate issues and victims in the housing market that require redress; folks who can afford legitimate payments but not the skyrocketing ARM resets, those who were targets of overtly misleading and predatory lending, the suddenly unemployed, and others -- but tax dollars and governmental resources should not be used to extend the false belief that every dotted line is a trail to wealth.

Allowing underwater homeowners to re-buy their properties at current appraisal values - retaining future appreciation and passing along current depreciation (as some have suggested) - is ridiculous; creating a program where they may refinance current debts with more favorable interest terms (as the President has proposed) is a sensible tact that ultimately benefits society and all parties.

Those fortunate enough to be financially secure in troubled times should not begrudge this responsible approach that preserves accountability, those who have seen a dip in their property values should not ask for more.

If you’re underwater, hold your breath, keep your calm and know that you’re going to resurface. For now, your home can just be a home…and that should be enough.