Negative Equity Doesn't Always Have to Mean Goodbye

The San Francisco Examiner reported a few weeks ago that “the percentage of "underwater" homes — worth less than they are mortgaged for — rose sharply in San Mateo County in the first quarter of this year. In the first quarter, 17.5 percent of all borrowers there  were under water, up 6 percent year-over-year.

And they think they have problems?

When the Marin County Assessor’s Office released its records for April, at first there seemed to be reason for celebration in Novato. Overall sales of single-family homes were up 33 percent month-over-month, to 36. Industry veterans who remember the nuclear winter of 2008-2009 will recall months like February 2009, when only 10 homes changed hands in Novato. The market was frozen and looking at a long thaw.

It’s good that homes are again selling in Novato. And if we only look back a few months, we’ll see that prices are rising as well. The average property in Novato has gained back more than 20 percent of its value since January.  As long as we remain focused on 2011, the outlook is good; gotta keep those pesky memories of 2006 and 2007 at bay.

In April 2007, the average single-family home sold in Novato fetched a shade above $900,000. In April 2006, the average price was $952,000. Novato real estate has shed 38 percent of its value in five years. There’s no way to sugar-coat that. In fact, as of January local homes had lost 48 percent of their value in less than five years.

These numbers add up to Novato having a serious negative equity issue, in line with that of California as a whole (33 percent). Still, with cities like Miami experiencing a 25 percent rate not of underwater mortgages but of homes in severe mortgage distress, heading for short sale or foreclosure, the local impact is nowhere near being the worst in the country — or even the state. Novato has suffered more than many other Bay Area cities, but our region as a whole has fared pretty well, comparatively.

For plenty of local homeowners, upside-down mortgages are a reality. Enough of them are suffering that the question now should not be “How many underwater mortgages are there in Novato?” but rather “What should you do if your mortgage slips into negative equity territory?”

As an indicator of a struggling market, negative equity ranks with foreclosures and short sales, but it is not necessarily a precursor to them. One reason foreclosures are up, however, is that a significant number of underwater mortgage holders are choosing to walk away from their properties rather than continue making payments.

A Feb. 2, 2010 article in the New York Times suggests that there is a value-to-loan threshold that owners will not cross before walking away from their home. Once their home’s market value falls below 75 percent of the money owed on their loan, they give up and bug out. While these people are arguably acting with sound financial judgment, they’re also ignoring the many legitimate reasons not to walk away — not all of which are based on emotional attachment to a pile of wood, glass and stucco.

Assuming you are not a speculator, landlord or home-flipper, you purchased your home as a place to live. You did so for a variety of reasons — location, convenience, quality of public schools, square footage, yard — plus the unspoken but understood perk of return on investment. Even if you take away that ROI, you still have all of the other components, plus stability, making a good argument for staying in place. Walk away and what’s the first item on your post-home-ownership agenda? Finding a place to rent, hopefully with a comparable amount of room, convenience and access to good schools. And woe to you if you own pets.

The decision to walk away from an underwater mortgage should not be taken lightly – and should not be made for financial considerations only. Staying in a home burdened with a bad loan requires a paradigm shift. If you can afford your payments and can live with the psychic weight of feeling like an economic patsy, why not stick around and make your house a home, even if it doesn’t make short-term financial sense?