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Why We're Better Off with Falling Home Prices


Housing must bottom for all of us to benefit.

One reader from Arizona writes:
"I know you've heard the story before: I purchased a house in 2005. It was a new build that was completed in May 2006, and I've been living in it since.

"The house is in Scottsdale, Arizona (a non-recourse state). I purchased it for $740,000 with minimal money down ($40,000). The house is now worth maybe $450,000 -- maybe.

"I've been able to afford the payments up to this point, but recently my income has been reduced due to the current economic situation, and now I think there's a chance that I may even lose my job.

"I won't ask you for specific advice regarding my situation, but in my humble opinion, we are well past the point at which it would make 'financial sense' for me to walk away. But I feel morally conflicted. Every time I make the payment, I fear I'm losing money that I may need for necessities -- perhaps sooner than later -- but maybe if I could 'hang on' long enough, I could eventually sell the house to break even and/or perhaps my income will increase again.

"So, I will keep my question very simple: In your opinion, disregarding whether or not I can afford the house, how long will it take for home values to get back up to their 2005 levels?

"My guess is that you're going to have bad news for me. Thank you for your time."
I have good news and good news masquerading as bad news. The good news is, this reader is thinking clearly and is right to be concerned about finances. I'd suggest reviewing Walking Away Revisited -- Reader Mailbag -- Moral Dilemma, Emails from Housing Hypocrites about Ethics, and Many Chime In On "Housing Hypocrites" Post. Here's the key idea from the latter, from a friendly neighborhood anonymous East Bay realtor/lawyer:
"Mortgages aren't ethical documents, they're legal contracts. The typical residential mortgage for an owner-occupied home gives the borrower 2 options: pay on time and in full, and keep paper title to the house and full entitlements to any appreciation upon its later sale after the mortgage is satisfied; or stop making payments, and hand the keys back to the lender.

"Morality and ethics don't even enter the equation. Both options are perfectly legal for the borrower, and the only criteria should be business-based. All the ethics you need are contained within the 4 corners of the pages of the mortgage contract.

"Indeed, the ethical thing to do is for each borrower who's underwater to look without blinders at their family's financial situation -- not just now, but over the long term."
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