We keep hearing about homes being "under water". So what! For some reason we have been convinced that being "under water" is some kind of sin. Why don't we hear this same complaint regarding GMC cars? When we drive them off the sales lot, most are worth less than we owe on them. If that is the case, why is it such a big deal when it comes to homes? I have some more thoughts about the subject. Here goes.
Let me explain this with a little story. Take two families, both want to live in a home that has a cost of $200,000. One family has saved up $200,000 to use to buy a home and the other did not save and had to borrow the same $200,000. Both families moved into similar homes. They both lived in their homes for 10 years and then decided to sell their homes and move to take jobs in different states. Now let's run the numbers.
The average rental rate for a $200,000 home is 1% per month or $2,000. The family who saved up the money to buy their home did not have to pay rent or loan payments for the 10 years they lived in their home. Their savings added up to $240,000 for the 10 year period. During the 10 year period, their home went down in value by 25% and thus was "under water" as it is defined today. Their $200,000 home is now only worth $150,000. This first family sold the home for $150,000 and then sat down to run the numbers. Rather than saving the original $240,000, they figured that they really only saved $190,000. Follow that? Now the other family.
The second family who took out the $200,000 loan did the same as the first family, only they had monthly mortgage payments of $963.83. After paying toward their loan for 10 years, they still owe $157,181 on their home. Their home is only worth the same $150,000 and is thus "under water" by $7,181. The second family did not pay rent either and thus, they saved the same $240,000 on rent too. The total of the payments on the loan for 10 years was $115,660. The second family sold their home for the same $150,000 which was $7,181 less than what they owed. This means that they only saved ($240,000)-($115,660)-($7,181)= $117,159.
The first family saved $190,000 and the second family saved $117,159, so both actually saved by buying their homes. This business of being "under water" is all BS. Why is it that no one ever considers the fact that the people were getting "value" out of living in those homes for those 10 years. Home owners and our politicians are all mixed up on this "under water" things. Home values going down is not the problem, our history of homes going up is the part that is screwed up. Get used to it. Wait till our money goes down in value big time and then look at what the prices for things look like.
