Why a big investor says they feel bad for anyone who has bought a home in the past year
Bleakley Advisory Group’s chief investment officer Peter Boockvar says he feels bad for people who have bought homes in the past year. On CNBC News, Boockvar made no indication that the economy was about to collapse. Rather, the investment expert spoke with compassion for those who are likely to be hurt the most if and when house prices are correct.
According to Boockvar, it is those who can least afford the financial blow who are likely to suffer losses. Let’s say a buyer hoping to take advantage of historically low interest rates jumped in late last year. While the nationwide home price surge hovered about 15%, imagine that this homebuyer got lucky and bought in a city where prices were only 10% higher. So the buyer moved 5% on the house into a property that was worth 10% more than the year before. So far, so good.
It gets sticky here. If house prices are correct and the home buyer‘s property suddenly drops back to pre-pandemic levels, it is immediately worth 10% less than what they paid for it. The homebuyer has only given in 5%, and that leaves them “underwater” – they owe the house more than it’s worth.
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Cons of being underwater
Once a homeowner owes more on a property than it is worth, several problems can arise, including the following.
Inability to refinance
Lenders will not allow a homeowner with no equity to refinance. They fear that a homeowner has no “skin in the game” and is more likely to get off the mortgage. Plus, no lender wants to borrow more on a home than it’s worth.
No access to home equity
A homeowner with equity in a home knows that it is possible to borrow money on the property to cover an emergency, pay off high-interest debt, or make improvements. Without home equity, these options disappear.
To see how expensive it can be to be underwater, imagine that a homeowner owes 5% more than the property is worth but has to sell due to illness or job change. It could look something like this:
- The homeowner owes $ 200,000 on the mortgage.
- With property values down, the house is now worth around $ 190,000.
- The homeowner charges US $ 195,000 for the property but does not get any buyers. The final sale price is $ 190,000.
- Between brokerage fees and closing costs, the sale takes $ 17,100 (9%).
- The homeowner must also bring $ 10,000 to the closing table to make up the difference between what they are getting for the home and what they still owe, plus brokerage fees and closing costs. So it takes a total of $ 27,100 to get out of the mortgage.
Being underwater on a mortgage can be devastating to a homeowner who cannot easily raise the money to get it to the graduation table.
Stay on track if possible
There’s a close link between an underwater mortgage and a foreclosure – and maybe that’s natural. It’s hard to pay more for a house than it’s worth. But as with most financial matters, it is about making the best long-term financial decision.
Eventually, in the long run, the homeowner can build equity in the home and speed up the process by making an additional mortgage payment each month or making an additional mortgage payment each year. History shows that property values are likely to steadily rebound over time. Instead of suffering from the notion that they are paying too much today, a homeowner can benefit by looking at the street and imagining how good the building capital will be. And while they get there, they can still deduct part of the mortgage interest from their taxes.
Even if a homeowner needs a roommate to cover the mortgage, it almost always makes more sense to keep promises to the mortgage lender than to get out early. Time is the great healer when it comes to rebuilding equity, and remembering that there is a long-term solution to the situation can deter a homeowner from leaving their home and taking out a mortgage.
Not taking out a mortgage can disrupt a person’s financial life for years. For example, if leaving leads to foreclosure (which it almost certainly does), the homeowner’s creditworthiness can drop 100 points or more. All of a sudden, a person with a credit score of 740 has a score of 640 or less. That makes it harder to qualify for other types of credit – including credit cards, personal loans, and auto loans – and makes it more expensive to take out a loan. A foreclosure sticks on credit reports for seven years as well, and that can affect everything from getting a security clearance at work to renting an apartment.
If a financial situation gets worse than expected, it doesn’t mean it is impossible. Would it be disappointing for a new homeowner to end up with less equity than hoped? Absolutely. But they still own a home and can still work towards building the equity that will help them feel financially secure.