Car buyers upside down after driving off the lot

I understand that most car buyers are not purchasing vehicles for an investment, but you have to admit that just because you’re upside down in a borrowing situation does not mean that you are unable – or unwilling – to make the payments.

When you took the zero down payment plan and drive your new car off the lot guess what? You’re upside down. You may owe more money to the bank than what the car is worth. It does not really feel good, but you make the payments. The same thing is happening to some home owners. We need to look at the culture of lending and borrowing.

If you’ve got a fixed loan, or even a variable rate to a certain extent, your payments are your payments. You budget $800, $1,800 or whatever towards your mortgage each month. It really does not matter if the value of your home has gone up or down.

James Hagerty and Ruth Simon from The Wall Street Journal wrote about these “under water” statistics today in a piece entitled Housing Pain Gauge: Nearly 1 in 6 Owners ‘Under Water.’

The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults — the very misfortune that touched off the credit crisis last year.

The result of homeowners being “under water” is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

Note again that we’re talking about feelings here. If you purchased the home with the intention of selling and moving on within 24 months, you take a risk your investment will decline in value.

If you plan on staying in your home for the long term and passing the estate on your your children or other family members, you would probably be OK with the ups and downs of home value.

Now, I do understand that there are families in tough spots. They may need to relocate to another state for a job opportunity, and those are – without doubt – difficult situations. But if your home value dropped, home values in other areas may have dropped as well so hopefully, it works out.

Maybe our home-buying culture needs review? In the 1930s, when you purchased your home, that was your home, not just an investment vehicle.

How many of us in our 30s, 40s and 50s had grandparents that stayed in their home for 30, 40 or 50 years? (My grandparents were in their home about 60 years.)

When it comes to the home-buying culture of the last decade, the problems are many.

  1. Homeowners were offered “no money down” opportunities and they took them. Discipline and knowledge about budgeting would be required to come up with down payments in the 10 to 20 percent range. That would be a good thing.
  2. As home values increased, owners treated that extra equity as an ATM. Not a good idea.
  3. Of course, you’ve got that whole thing with the government demanding that lenders lend money who can not afford it.

Ed over at Hot Air asks about the regionalism of housing prices after looking at this chart. (Click to check out the interactive map)

In looking at the WSJ’s map, in fact, the problem appears mostly concentrated in Florida and California, with hot spots in Green Bay, up the West Coast, and to a less intense extent on the northern East Coast.  What does that mean politically?  Does it mean that the fallout from the housing bubble can be quarantined to these regions?  Interesting questions, with no real answers at the moment.

Good question.