Many Were Upside Down on Their Mortgage Ten Years Ago

Many Were Upside Down on Their Mortgage Ten Years Ago

We have frequently been hearing reports about the numerous people who owe more on their houses than their houses are worth.

The implication is that the market will see still more distressed sales such as foreclosures and short sales.

Further the implication is that these distressed sales will drive the value of real estate down to a bottom which it has supposedly not yet reached.

Of course, it is an implication that this will happen and not a fact, however, the more that something is spoken the more likely it is that it will actually happen since this constant message tends to influence the actions of people.

But is this constant reporting of the continuing decline of real estate simply a convenient news story for the always cry wolf doom and gloom media? Has this actually been a natural condition of purchasing real estate for years?

Ten years ago, when there was no major problem being reported about the real estate market, there were still numerous homeowners who were upside down in regards to their mortgage.

For example, a typical property purchased for $100,000 would have closing costs of about $5,000 to $10,000.

Because of these closing costs, you could reason that the recalculated value of the property was from $90,000 to $95,000.

The majority of loans whether conventional or FHA were for 95 to 100 percent of the original value of the property or for the example $95,000 to $100,000.

This would leave many buyers immediately in the hole by as much as $10,000 or 10 percent of the owed amount.

With predicted appreciation of 3 to 4 percent per year, one could expect to be upside down for about three years.

If the average person was relocating every five years, it would seem like they would make a profit based on the last two years of ownership. However the closing costs related to selling would wipe out most of this profit.

Notwithstanding these facts, real estate was being pushed as a good investment unlike the way that it is being reported today.

I have simplified the situation, but there is obviously more to be considered in the decision to purchase real estate than the simplistic reports which we are hearing in the media.