Making Six Figures, But Still Poor

Owning a home is a fundamental part of the American Dream, and a decade ago, that dream took on a new dimension, as the housing market boomed from coast to coast. Despite the economic recession, new development was strong. Lax lending standards and the excitement around housing starts synthesized even greater demand, particularly for super-sized houses. Similar to the Cabbage Patch Doll craze of the 1980s, the surge in demand drove prices out of control. In fact, from 1997 to 2007, the average home price rose from $176,200 to $313,600, according to U.S. Census Bureau data.

Riding the wave of rampant enthusiasm, millions of people purchased expensive houses with exorbitant mortgage payments, often more than $4000/month. The move may have seemed reasonable at the time – housing prices were going up, and by 2003, America was pulling out of the last recession, with salaries and job growth on the rise. Buying a large and expensive house was a wise investment, since prices would only go higher…or so people thought.

Of course, the housing bubble burst in 2008, with prices plummeting 40 percent or more in many parts of the country. In addition, over the past several years, salaries have remained flat or gone down while the cost of living has gone up. Expenses have increased for homeowners, while the value of their investment has dropped dramatically, and millions of Americans found themselves stuck carrying a hefty mortgage note.

It’s not surprising, then, that many households bringing in a six-figure income are having to live on a shoestring, because their expenses are out of control. A $4500/month mortgage payment amounts to $54,000/year, not including property taxes and increasing utility costs. These homeowners cannot take extravagant vacations or eat out often, because despite the number on the paycheck, their disposable income is non-existent.

Analysts predict it could take 20 years or more for home prices to return to their previous highs. This means that homeowners carrying a mortgage that is now beyond their means likely will not recoup the value of their investment any time soon. At the same time, they owe more on their mortgage than the value of their house, meaning they cannot afford to sell their home and eat the loss. In many cases, a short sale is the best option.

Ironically, part of our culture is the strong belief that you have to make your mortgage payments and keep your credit rating up, regardless of the sacrifice. Although you should always strive to uphold your commitments, if you’re committing financial suicide in an effort to maintain a perfect credit score and keep up with impossible mortgage payments, you are putting your family’s future in peril. There is a balance between what is culturally right, and what is realistic. In reality, it may make more sense from a business perspective and a personal perspective to let the house go – negotiate a short sale and walk away – rather than exhaust all of your savings and retirement to keep up with untenable mortgage payments.

If you are underwater with your home and no longer able to afford your mortgage, don’t sell your future to keep a house that is worth less than what you owe, especially when it may be decades before home values return to the levels they were before the bottom fell out of the market. We encourage you to contact our office at 972-342-0011 to learn why short sale may be a wiser solution to help you make a fresh start.

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