One of the greatest things about Twitter is it lets you peer into the minds of some of the smartest people in the world – all without them really knowing that you are listening.
Just follow a few smart people and soon you will be amazed at the amount of wisdom they can share in 140 characters or less.
Consider this insight shared with his followers from Zillow’s COO:
After I looked up the word pernicious, I couldn’t help but think “He is right – many of the foreclosures – especially the ones that could be considered strategic can be traced right back to the degree of leverage being used by people to finance their homes.”
Leverage: It Cuts Both Ways
Say for a moment that you put down 20% when you bought your home 2 years ago. Even though 20% would have been considered a healthy down payment 2 years ago, that still means that you are able to live in a place that costs 4-5 times as much as you have into it in cash.
Then say with the current economic problems, you have a hiccup in your income (job loss, decreased bonus, demotion, less business income, etc.) and you are unable to continue to make the monthly payment on your current mortgage.
If home values in your area have went down 10%? You can still sell your home for more than you paid, and move into a cheaper living situation – either buy a smaller home or rent a place that is less on a monthly basis.
But when home values have went down 50% in your area, you then have some decisions to make, and those are the tough decisions that I see homeowners wrestling with every day.
Because I live in one of the sand states where foreclosures are rampant, I speak with people all the time who are 50% (or more) under water from when they bought their home just a few years ago. What is alarming about these conversations is that there really is not a solution in place to the problem of having severe negative equity in their property and a hiccup in their income – and so I am left with giving no real advice, but rather just explaining options.
And the option list is rather short:
- Continue making your payments
- Short sell your house
- Attempt to get a loan modification that will most likely still leave you with 50% (or more) negative equity
- Foreclosure
What Should You Do If You Have 50% Negative Equity And A Hiccup In Your Income?
The short answer: If you can’t continue to do #1 (make your payments) and you want to live in the home, try #3 (loan modification) with your lender but be ready to do #2 (short sell your house) to hopefully avoid #4 (foreclosure).
Leverage.
I can’t think of a better word than pernicious, when values go down.
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