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Should I Walk Away from My House?

This post was written by jd on April 10, 2009
Posted Under: Real Estate
  • walk

    So your house is worth less then you paid for it. Maybe the value has dropped thirty percent or more. Are you thinking of just walking away from it because you feel you are just wasting money?If that seems like a silly question to you, it’s surprising to me how many people are actually saying that to me. When they pose that question, I ask them why they bought a home. Did they buy the home to live in or to make a fast buck?  I can’t seem to get a straight answer other then the value of their home has depreciated.  So here’s what I think:
    History has shown that real estate goes up and down. We are in a down cycle right now. In the 1980’s people were saying the same thing to me. I’m going to bail out of my house, it’s worth less then I paid for it.  Well, houses are worth more now than they were in the 80’s. Prices will increase in the near future. So here are some reasons to stay in your home.

    Pride of Ownership

    This means you can paint the walls any color you like, attach permanent fixtures and decorate according to your taste. Home ownership gives you and your family a sense of stability and security.

    Appreciation

    While this may sound silly with the real estate market decreasing in value at the present in  real   estate has its cycles. Long term it will increase in value, that’s a given. Why do you think so many investors are buying homes now? They realize this is a buying opportunity of a life time. They are there to make money.  Holding on to your house will make you money in the long run in my opinion. If you walk away from your home now, you wouldn’t be able to buy another one for three to five years.  Back to renting and your credit score drops like a rock.

     Mortgage Interest Deductions

    Yes you can deduct the interest on your mortgage.  Home ownership is a superb tax shelter and our tax rates favor homeowners. Interest is the largest component of your mortgage payment. Check with your accountant on this deduction.

    Property Tax Deductions

    IRS Publication 530 contains tax information for first-time home buyers. Real estate property taxes paid for a first home and a vacation home are fully deductible for income tax purposes. In California, the passage of Proposition 13 in 1978 established the amount of assessed value after property changes hands and limited property tax increases to 2% per year or the rate of inflation, whichever is less.

    So my advice to you is, even if your house is worth less then you paid for it, so what, you have a place of your own to live in. Values of real estate will go up and it’s far better to have a place to call your own then it is to rent.

Reader Comments

30%?? We are talking Nevada and California right? Many of these places have dropped 50-60%. This isn’t really that great of a buying opportunity. If you look at prices they still aren’t in line with historical norms indicating that we have even further to fall. I completely disagree with your assessment. The only argument you can make for it being a good time to buy are the historically low interest rates. House prices are not going to suddenly recover because the bubble we were in was unsustainable. If you really look historically houses barely outpace inflation. For the most part if your house has dropped 50-60% in most scenarios you are likely to owe more than your home is worth for at least 15 years. Better to walk(saving all the money you would pay during the foreclosure process) and rebuy in 5 years.

#1 
Written By DG on April 10th, 2009 @ 1:05 PM

I’m with John on this one. John did say “thirty percent or more”, and he isn’t speaking about any one house in particular. Every situation is different, of course. I have a house in California that is in a good area and has only dropped in value by roughly 20% (based on comps and the opinion of a neighbor who is a real estate agent specializing in my area). So sure, there are probably many houses in California/Nevada that have dropped in value by 50-60%, but there are many others that have dropped far less.

And OK, say you walk away. Where are you going to live? Try renting something these days: I, for one, couldn’t rent a two-bedroom apartment in a decent neighborhood in the Bay Area for what I am paying for my mortgage (on my Bay Area house). And I do indeed get a nice deduction for both my mortgage interest and my property taxes.

John never said anything about “foreclosure” – he’s simply referring to people who’s house is currently worth less than they paid for it, not those who are facing foreclosure. If you are facing foreclosure, you are in a whole different ball game than what I believe he is talking about here…

As for whether or not this is a buying opportunity, well, things do seem to be stabilizing a bit, indicating that we might be at or near the bottom. And the bottom is exactly where you want to buy (if you are in the market). Sure, prices aren’t going to “suddenly” recover- it’ll be a slow process. If you are looking for a short-term investment, well, I would _never_ put short-term money into a house, even in a good market. Over the long-term, though, the population keeps growing, and people gotta have a place to live. Which causes competition for housing, and rising housing prices. Prices are low–perhaps as low as they are going to go–and interest rates are extremely low. Looks like a good time to buy, to me.

#2 
Written By Greg Wilson on April 10th, 2009 @ 2:38 PM

There might be isolated pockets that haven’t dropped by that much although I haven’t seen many, but on a county by county basis almost everything is down at least 50% since the peak in 06. I still challenge you to compare current prices/incomes with historical prices and incomes and realize that we are still a little bit on the high side. This does not indicate an unprecedented time to buy. Prices only seems low because they were so insanely high the past few years. In all actuality they haven’t even returned to the historical norm.

With that being said if you are in a place that is worth less than what you owe, you can likely expect it to continue losing some values. I’ll admit it may not be a lot more compared to what it has already lost, but I certainly don’t think it is over based on the number of foreclosures still happening. If you truly love your house and have a fixed loan with payments that are comfortable then I’d say stay and don’t even watch prices. My guess is less than 20% of all loans made in the past 5 years are in this boat. Most are struggling greatly to make payments on a place that is worth far less than what they owe.

If you believe like I do that prices are not finished dropping now is the time to walk away from the home. Currently the monetary penalties for doing so are extremely low. Your credit will get ravaged for 7 years, but prices 7 years from now are not likely to be much higher than they are now. In most cases you will be able to rent a home for significantly less than you are currently paying. If you are smart about it and save the money while living rent free during your foreclosure, then save money each month due to paying less rent, in the end you will come out way ahead. I calculated the number for my own situation and realized in 7 years I can still be in my house and owe $350,000 or I can buy the same house back in 7 years with a decent down payment and owe around $120,000.

#3 
Written By DG on April 11th, 2009 @ 8:41 AM

I agree with the first comment. We are deflating from a historical bubble in housing backed by a historical bubble in credit. Judging by past bubbles, it will take about a decade to truly return to a norm. The only problem is that we have even more challenges besides the bubble. We have a baby boomer population which is just starting to retire and they will downsize, die and move into assisted care homes. There is not a population demographic behind the baby boomers of the same size and so more downward pressure will show up against housing, especially the higher priced homes. Add to this the high probability that higher inflation will ultimately show up through a weaker dollar which will raise the prices on all good s that we import, things like oil, food and energy will likely jump in price which will put even more downward pressure on prices for things like houses that are financed by debt. The great shame of the last decade has been that people wages have lagged severely behind inflation. Add this to the phony service economy that has existed off of easy credit for the past 25 years and peoples wages will only continue to have downward pressure on them, oh yeah, and unemployment will likely keep rising for at least another year thereby driving more pressure on people who can’t afford their homes.

Why finance a non-appreciating assest? Why catch a falling knife?

Housing prices will really go lower if we have a currency crises and the Fed is forced to raise interest rates. Rents are falling currently and not rising and so even at 50% off, it is still questionable if now is safe time to buy.

Owning a home isn’t always the American dream, ask many and they will tell you that lately it’s been the American nightmare.

Hope our state sales taxes don’t go up even more.

Paul
UCSC economics major.

#4 
Written By Paul on April 22nd, 2009 @ 11:38 AM

RULE OF THUMB! DON’T PAY MORE THAN 3 TIMES OF YOUR TOTAL HOUSEHOLD INCOME FOR A HOUSE. IF YOUR HOUSEHOLD INCOME IS 70K THAN 210K IS YOUR MAX. JUST BECAUSE A HOUSE IS 40% LESS THAN WHAT IT WAS 3 YEARS AGO DOESN’T MEAN IT IS AFFORDABLE STILL. PRICES IMO NEED TO GET TO WHAT PEOPLE CAN AFFORD.

#5 
Written By CHRIS on April 23rd, 2009 @ 11:31 AM

Recently, economists have said that it will be 8-10 years before the market returns to where it was (before things got screwed up). So I don’t know if I want to wait 10 years to get to where my home’s value was four years ago. Fourteen years doesn’t seem like a good investment to me since I don’t plan to be in this house any longer than 6. It’s not my fault the crooks and idiots got the bail out and those you “behaved” got screwed.

#6 
Written By SC00BY on May 21st, 2009 @ 9:31 AM

I paid 180k in Jan 09 for my home, it was a short sale, a good deal I thought, now it’s worth 135k in oct 09, I think I got screwed

#7 
Written By Anonymous on October 9th, 2009 @ 12:50 PM

Just wait until 2011-12 and see what your house is worth. I bet it will be more than 180K

#8 
Written By jd on October 10th, 2009 @ 8:25 AM