Here’s an interesting question about the current housing market and I think it hits on Brian’s “location, location” all right. It’s from Nobi, and he says, “I bought my house at 900k in Orange County, California, at 5.125 percent. Now my house is valued at 730k. What should I do?”
Well, I mean, I dealt with this back in the 2000s. I had a lot of neighbors asking. Honestly, what should I do? Okay, so I bought this house, and it’s at 5.125%, so that kind of gives me an idea of when you probably bought it unless you bought it a long time ago and you did not refinance. But I don’t think that’s what happened, so I bet she bought it kind of recently, and now it’s gone down in value. What should I do? Am I in trouble? Is this a bad thing?
Well, no, not necessarily. If this is your primary residence, and if it is a used asset, and at some point you said, “Okay, I can justify a 900,000 dollar purchase price for me to be able to use this asset in the way in which I want to use it,” then the value of the house moving has not changed anything. Just because the value drops 200,000 dollars did not change the way that you’re going to use that or the way that you should.
Warren Buffett gives the example: if you had somebody just standing on your street corner just yelling out, you know, every day a price at which they would buy or sell your house, you would ignore them, right? Unless they yelled at a crazy number that they would sell it for, then you might entertain it. But you’re just not going to pay him any attention. That’s kind of the way home values are. If you’ve only been in the house for a short amount of time, which based on Instagram, I’m guessing it is, I don’t think that nobody needs to do anything unless rates fall and maybe refi.
Well, here’s what I think he’s probably also asking. Is because I saw it in the Great Recession, if this real estate marketplace gets ugly, I had quite a few neighbors back in Georgia that used short selling or defaults as a planning tool. And they even changed the, remember the tax laws change to where that forgiveness of debt, what used to be income, is actually was tax-free. So a lot of people start thinking about, should I use this as a planning tool to walk away from this? And I can tell you as a financial mutant, be very careful because that might in the short term feel like an easy solution just to walk away from this obligation, let the bank deal with it. But the Ripple effects of what this does to your financial life, I mean, it’s gonna take you five to seven years to recover from that, at least, at least five to seven years to recover. And I just don’t like that because how do contracts work, how does anything, how does the fabric of the economy and society work? Is that you have to feel the weight of that, you’re going to honor obligations, and I just don’t like that. So I don’t like looking at default or short selling as a tool.
The second thing is that if you need to be careful, I would double back to looking at your liquidity, meaning your cash reserves and access to cash because if you had something that disrupted your Apple card of your financial life, and you’re underwater in the house, like if you had to move to take another job to go someplace else.
Like it sounds, you paid $900, now the house is worth $730. There’s a chance that if you had to move, they would either want you to write a check to pay off the negative equity at closing, or you might have to rent it. This is the situation I got when I relocated my family to Nashville in the 2016 era, and I still had a primary residence in Georgia. I looked at the housing market, I tried to sell it, but it just wasn’t getting me the value that I wanted, so I rented it for three years.
To kind of bridge that gap, that was less than ideal, I did not want to be a landlord on that property right now because it’s so hard to buy homes. Renting might not be a crazy idea right there’s probably a market for that in most markets right now. So, I would, but you need to have liquidity so in case you can’t rent it very quickly, you could carry it for a few months. Go check your liquidity, make sure you have good cash reserves, but don’t get in a hurry to make desperate decisions because there is a chance you might just have to, it’s kind of what Bo was implying, drive through this adjustment. If Orange County prices are adjusting right now, it’s one of those things you might have to just keep the background of your financial life healthy enough so that the grin phase of going through this crazy fluctuation of housing doesn’t take down your entire higher financial household.
That’s the big thing. I’ve been there done that. That’s why it’s very important nobody makes sure they’re paying attention to it. Anybody who’s listening to this is a cautionary tale. Go through that eight-point checklist that we had at moneyguy.com/resources so that you can plan through your all three the dream plan of what you think will happen with this housing decision, what you know is likely going to happen with it, and then the doo-doo situation, the bad one where it just doesn’t work out. Like the poop hits the fan, and you’re having to deal with it. You need to have a plan for that too.
I mean, I hate to be all gross and, but it that’s why we named it that way. I want you to think about how bad things could be, plan accordingly, so that when you actually approach it in real life, you’re like, “Oh, been here done that, and I’ve got a plan for it, and I’ll be okay,” because you began with the end in mind.