In all the hullabaloo about the (finally!) recovering real estate market, what has gotten less publicity is the fact that millions and millions of homeowners are still languishing with upside-down mortgages.
A recent report from CoreLogic, though, serves as one of the first bright lights on this piece of the housing market puzzle. At the end of 2011, 12.1 million homeowners were upside-down, owing more on their homes than they were worth. But by the end of June 2012, only 10.8 million homeowners were underwater; nearly 2 million were within 5 percent of being back in the black.
And this is news that everyone, not just current homebuyers and sellers, can be grateful for.
It begins to paint a more complete picture of a pending market recovery, fleshing out the fact that buyer demand has increased, home inventory supply has decreased, lending has loosened up a bit from the overly strict criteria of the last few years, and interest rates are very, very low.
But my experience has been this: In the exuberance of a victorious moment, our memories can be very short for the traumas of the recent past.
If you are a homeowner who has recently seen your upside-down home mortgage situation right itself due to rising home values, here are a few things not to do, to avoid the errors of the last ascent and peak of the market:
1. Sell just because you can. Many homeowners have felt stuck in their homes because to sell would have meant taking a short-sale hit on their credit, or coming up with the shortfall out of their own pockets.
However, the fact that your home’s value is beginning to right itself doesn’t necessarily mean you should be racing to sell it, just because you can, despite the fact that we’re tempted to take advantage of still (relatively) low prices and (very) low interest rates and get something even bigger and even better while the getting’s good.
One of the most powerful lessons of the recession, in my opinion, has been that many of us need much less — space, luxury, debt and material stuff, generally speaking — than we might have thought, and that a simple life that is easily financially sustainable and allows for us to save, invest and generally experience a life of financial integrity can be a very nice life indeed.
So, if you’ve been staying put in your home due to upside-down values, and you don’t absolutely need to move for work or your household’s evolving space or other needs, consider whether you could continue to improve your financial status if you continue to stay in your current home for the duration — or at least long enough to allow it to appreciate significantly enough to give you a sizable down payment for your next home.
2. Pull cash out. Just don’t do it — unless you’re planning to use the cash for something you’re willing to stake your home on. The "home as ATM machine" belief system was what got millions of American homeowners in trouble when they borrowed cash against their home’s peak equity at the top of the market, then couldn’t keep the revolving debt door spinning when their home’s values plummeted at the bottom.
If you have a home mortgage with a good or great interest rate, a sustainable monthly payment and are paying for your lifestyle in cash, don’t be tempted by fliers in the mail touting that you might be able to get an equity line — unless you plan to make smart home improvements with it and can easily afford the increase in monthly housing payments.
3. Do ill-advised home improvements. There are times it makes sense to upgrade and improve your home, and there are times when the upgrades and improvements are frivolous or overly expensive customizations that might actually make it harder, not easier, to sell your home.
Smart home improvements, in my book, are those that make your home more comfortable and efficient to live in and operate, like shelving and organizational built-ins, dual-paned windows, tankless water heaters and other "green" improvements, or ones that boost its attractiveness and enjoyability to yourself and your family, including needed upgrades to kitchens and baths. Less wise is to pour funds into costly home improvements that tend to turn buyers off, like pools, sports courts and massive garage additions.
4. Try to be a flipper. You might be tempted, as a veteran survivor of a couple of market cycles, to use a little of your newfound equity (or the confidence it may inspire) to try your hand at investing in low-priced distressed homes, fix them up and turn them around at a profit.
Investor beware: The bottom of the market has passed in many cities. In the areas where it hasn’t, there is no certainty that you’ll be able to flip a bargain-priced home at a profit, because buyers are still very wary of hopping off the fence in those markets and neighborhoods.
Flipping homes is a viable business model for a very small number of investors who treat it as a business, and who have ample resources to survive even if one or two flips fall flat. Don’t risk your burgeoning home equity or stake your recovering net worth on a gamble in today’s still-volatile, still-uncertain market.
