I don’t mean to sound like a scold here, but I do think someone needs to point something out. Here’s a story published today by NPR called “Walking One Block Damaged by the Housing Crisis.” It talks about a homeowner in Riverside County who has refinanced eight times, and who now owes about $300,000 on a house worth about $80,000.
In all of the “sturm und drang” over the foreclosure problem, it seems that a reality check may be in order now and then: And that is that this homeowner has apparently pulled a couple hundred thousand out of a house that is now worth $80k. What does that mean? Effectively, that means that the house has already been sold, and that it was sold to the bank at the top of the market. Now it’s time to move. Yes, it is true that an unfortunate byproduct of selling the house in this strange way–by refinancing it, withdrawing all of the equity out of it at the lender’s expense and walking away at the bottom of the market–is not exactly how the homeowner envisioned the sale, and that this unorthodox “sale” will cause the homeowner to take an embarrassing hit to his/her credit profile. But from an economic perspective, they haven’t lost any money. They got in at the bottom, rode it to the top, cashed out, and then rode it back down. And by the time of the foreclosure sale, they will probably have been able to live rent free for several months.
I don’t offer this as a palliative nor as some sort of finger wagging exercise. But economically, good intentions and simple math don’t always answer the hard questions. And they’re also notoriously unreliable in handicapping the moral high ground or identifying easy villains. Just because someone has to move, and just because they have to move when it’s inconvenient and at the business end of legal action, doesn’t mean they’re victims. It’s not that simple. The problems we face in our economy are vastly more complex than mainstream media would have you believe.