Here’s a Catch-22: As we know, the housing market in 2008 took a major downturn, and many Americans quickly discovered that their mortgage balances exceeded what their homes were worth. In other words, they were “underwater.” The sliver of hope for most households was that the economy would improve, boosting property values and effectively providing relief for their unfortunate and ominous predicaments.
Then, between 2013 and 2018 the housing market began to slowly recover. That was great news, right? Not so fast: There’s now a new, more daunting hurdle to overcome.
What is that hurdle exactly?
Simply put, it is becoming more burdensome than ever before for American homeowners to meet the demand of rising mortgage payments, rising interest rates and rent increases. Add to that swelling utility expenses, real estate taxes and insurance premiums.
Where is the relief now?
Many Americans (perhaps even a vast majority) are having to make major — and often difficult — financial decisions in order to meet the inflated obligations associated with their most valuable asset: their house. In other words, they may be overleveraging themselves financially, emotionally and/or physically.
Some of the most common examples of this include:
• Postponing retirement contributions
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• Securing a secondary form of employment
• Using high-interest rate credit cards
• Eliminating a portion of their health insurance coverage (such as vision and dental)
• Relocating to a more affordable, less attractive community
• Selling other truly valuable assets (such as sentimental jewelry)
Divorce (a category that’s continuing to rise at an alarming pace) also provides unique challenges for homeowners. Many American divorcees find themselves so emotionally attached to the marital home that they are willing to forfeit most, if not all, of their liquid assets in order buyout their spouse and retain the family home. In other words, they are putting themselves in position to be house rich and cash poor.
These challenges around affordability are widespread and real. They often don’t rear their ugly heads until it’s too late.
Adding insult to injury, a significant percentage of Americans live in areas where their mortgage expenses account for one-third or more of their household earnings. This is prohibitively expensive.
Imagine living in a community in which you need to spend, at the minimum, 30% of your gross monthly income on your home. The figures that play a role in this calculation include your mortgage payment (both principal and interest), mortgage insurance premiums, property tax installments, hazard insurance premiums and homeowner association dues.
Even if you felt comfortable and secure enough in your financial situation that you were willing and able to fork up this sort of money, you might find yourself hard-pressed to find a lender that will qualify you for a loan.
Most banks, including government-sponsored enterprise (GSEs) Fannie Mae and Freddie Mac, will only lend you money up to a certain point where your total monthly obligations (including auto loans/leases, credit cards, student loans, etc.) cannot exceed 45%-50% of your gross monthly income (otherwise known as your debt-to-income ratio). If 30% of this ratio is eaten up by your primary residence, you better have limited debt elsewhere — otherwise, you’ll find yourself priced out of the market and hard-pressed to find a legitimate source of financing.
The only true method of controlling this phenomenon in housing prices is by adding more new supply: something that is referred to as the “great unknown” heading into 2019, according to Freddie Mac. If the American dream of owning a home was the fire, then these statistics drench it with water.
So, the question to ask yourself is this: Does overextending yourself to buy or retain a home remain a worthwhile investment as it relates to building wealth and assets? The resounding “yes” that we’ve heard in the past may be beginning to fade.
That’s not to say this would be an entirely bad thing. As a country, we may have been overzealous in suggesting homeownership far too often as the key to wealth building.
The bright side: Appreciating property values have catapulted many borrowers out of “underwater” housing scenarios. These appreciating values are a direct benefit and a welcome relief to most. It’s important to keep in mind that this financial benefit can only truly be realized if and when the equity is accessible.
There are only two clear cut ways to access this equity, or cash, in the event you need it: sell your home or borrow against it
We already identified the qualifying challenges in borrowing against your home via cash-out refinance, adding an equity line or applying for any other type of mortgage product. We can only hope that property values hold steady and that this perceived accumulation of wealth can actually be taken advantage of when the time comes.
In the meantime, let’s be pragmatic in our approach to wealth building. This includes assessing our true financial objectives (rather than emotional) and understanding the consequences that putting all our eggs in one basket might present.