As many of us know, from working in the real estate industry and widely reported over the years, the majority of Americans carry their wealth in their homes. In short, every time Johnny Home Owner paid his mortgage, he was essentially making a payment into his savings account. The number one problem with this practice is, it locks up your money because, it’s not liquid cash, it’s equity. And as many of us have learned, you can’t drawn on that equity when credit markets tighten and home values drop. So for many Americans, they saw their savings account dwindling……dwindling and now, almost 25% of all Americans owe more on their home than it’s worth and therefore, nearly 25% of all Americans have lost the single largest money account they had…..their home.
As reported by the Associated Press on June 9, 2011, average home equity has plunged from more than 61% at the start of 2001 to 38% in the 1st quarter of this year. For many homeowners, they are looking at average home prices that are reminiscent of 2002.
What is really hard on the average American purse strings is the fact that now, 25% of us are paying down our mortgage however, we aren’t see a return in higher equity….it’s like we are burning money. For this reason, many people are now starting to engage in strategic defaults or strategic short sales. In short, these are people who don’t have equity, see no value in paying for a home they will net them nothing in the short term so, they just stop paying, declare a hardship (which for some bank, having no equity is a hardship now. ) and short sale or foreclose.
My point here is, a very large portion of this country ….. approximately 25% of us have lost almost all of our wealth because our only real savings of wealth was in the value of our homes. Sadly, for many of us, we are deciding to stop the bleeding by simply walking away and starting over. Unfortunately, this action doesn’t do anything to help the rest of us who are struggling to make ends meet and sticking with our obligations.
If any lesson is to be learned here, it can be summed up in one word…….diversification.
