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Alex Anderson

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The Car Debt, House Debt Double-Standard

“Housing’s Hidden Undertow” is the title of a recent article written by James R. Hagerty and Ruth Simon of the Wall Street Journal. The article discusses the recent “problem” of home values in decline leading to a situation where more is owed on a home’s mortgage than what the home is currently valued at, which they call being “under water.” I find it very interesting that people have such a different viewpoint on real estate than they do on purchasing automobiles, which leads to a very large double-standard on personal finance practices.

Say your neighbor tells you he just went to a car dealer and purchased a $25,000 car with a small down-payment and a six year loan. What would your thoughts be? Any financial concerns on behalf of your neighbor? Whether your neighbor knows or cares about it, the moment he takes possession of the new car he ALREADY OWES MORE THAN WHAT THE CAR IS WORTH! And worse, only after at least a few years of pay-down on the loan will the car actually be worth more than what is owed on it.

Day after day people knowingly purchase vehicles (and other large purchases as far as that’s concerned: TVs, furniture, etc.) that will never again be worth as much as the original price and will only be worth as much as what is owed after debt is paid off. But for some reason when it is mentioned that you owe more on your house than what it is “worth” people start becoming frantic. The article mentioned above gives an example of a family who purchased a home in 2004, even took out a second mortgage to pay off bills when the value was still high, and are now surprised to hear that after the decline in home values they owe more on the home than what it currently is appraised at.

The article mentions that they “even thought about sending the keys to the lender.” If people turned in their car keys every time they owed more on it than its value, new car owners would drive off the lot and then turn right around to the dealer! And here’s the amazing part: real estate has a proven track record of appreciating in value over time; it’s a known fact that home values almost ALWAYS go up over time and car values almost always DO NOT!

It is also a known fact there always have been ups and downs in the real estate market but over time the long-term value of homes steadily increases. Admittedly, it could be scary if you have an adjustable-rate loan and you’d like to refinance but you can’t because more is owed than what the home is currently worth (i.e.; a mortgage company will not refinance you); but that’s just a reminder to always be careful when selecting financing and think about the “worst-case scenario.” If you’re “under water” for awhile, put on a snorkel! Keep making your monthly payments and your home’s value WILL go up in value, just give it some time and DON’T THINK ABOUT SHORT-TERM NEGATIVES. Value declines are TEMPORARY, be patient and persistent!

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