Is a house an asset? Yes! Through the ups and downs of the credit crisis, it is important to remember that your house is more than plaster, walls and a front door. It’s your home.
Unfortunately, though, the statistics can be demoralizing: If you bought a house before 2010, there is a good chance that your home may have decreased in value. If it was between 2005 and 2008, you may be suffering from negative equity in your property — negative equity occurs when a mortgage value is greater than its property value.
In fact, as of Q4 2011, 11 million U.S. homes, or approximately 23 percent of all residential properties with a mortgage, were in negative equity. A further 2.5 million mortgage holders had less than 5 percent equity (or near negative equity) in their homes. By state, Nevada had the highest level of negative equity, with underwater mortgages accounting for 61 percent homes, followed by Florida (44 percent), Michigan (35 percent) and Georgia (33 percent), according to CoreLogic.
However, it’s not all doom and gloom — healthier real estate markets with good mortgage rates include New York, Washington, D.C., Connecticut and Texas. These areas all have larger proportions of homeowners with more than 20 percent equity in their homes.
Negative equity has pushed many people to consider a “strategic default.” This means walking away from their home even though they may be able to make their payments. Strategic defaults are strongly concentrated in markets with a high prevalence of negative equity.
- Your lender may file a lawsuit against you called a “Deficiency Judgment.”
- Your credit will be ruined and may not recover for 7 years.
- You will still need to rent a different property to live in. In short, it is important to talk to an expert before considering such a dramatic step.
Assets vs. Liabilities
The good news is that most of these statistics are backward-looking and the most important factor in judging your home as an asset is your view of the future. Looking ahead, there may be some good news on the horizon for the housing market.
Rents are increasing quickly, and as argued by Jon Lansner, a real estate analyst, rising rents may be tipping the cost of housing in favor of ownership. He is forecasting annual rental price increases in California, one of the hardest hit markets, of 5 percent over the next two years. This is great news for homeowners as increasing rents will gradually turn renters into buyers. To get a better sense of the relative value of ownership versus renting, you can use decision engines like SmartAsset.
Rising home prices will alleviate the problems caused by negative equity. Indeed, if prices rise even modestly over the next few years, many underwater homeowners will return to positive equity. Consequently, with an optimistic view of the future, even with negative equity, your home can still be thought of as an asset.
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