The President’s initiative to solve the mortgage mess brings the housing industry back to the front burner of economic issues. I personally do not favor using public funds to reduce the “underwater” positions of home owners. If the lenders want to do it, so be it. But this should not involve public funds since that is simply making tax payers pay to improve the investment position of individuals.
A home purchase is relatively unique, since it is both the purchase of shelter and the purchase of an investment. There are few other investments that provide service as well as investment growth with fine art being one of those few and perhaps jewelry. The home is both a fundamental need and typically the largest investment of most American families.
When I sold homes I always advised my clients to buy what they wanted as a home, either main residence or second home. I said that the investment aspect was definitely a secondary factor. I explained that in Florida, it cost about twice the price to buy a home as opposed to renting the same size home. I said if investment was their main objective, it was better to rent a home and invest the savings in stocks. In fact, even though I sold property, I put all my investment funds in mutual funds that invested in Eastern Europe and India. And, while during the boom years up to 2007 home values in Florida doubled in less than three years, my mutual funds tripled in value.
Of course a home as an investment was made more attractive by government policy. First, it was the only investment available to the average person for which he could borrow up to 100% of the cost. Federal rules severely limit borrowing for stock investments. Second, the interest on the borrowing was, and still is, the only interest charge deductible from taxable income. Third, for most home investors, they realized capital gains at sale with no income tax obligation. However, in spite of these additional benefits, I still urged those looking for an investment to rent a home and use the savings for investing in stocks.
The whole concept of the home being “underwater,” which means the home’s value is less than the mortgage due, relates to the home as an investment, not as a place to live. The house remains the same size, with the same facilities, the same neighborhood, the same proximity to work, schools, shopping and leisure. The only change is that its value as an investment is less.
Therefore, proposing to reduce the “underwater” situation for a home as an investment is no different from suggesting we improve one’s stock portfolio and I hear no one calling for federal action to help investors with “tanked” stocks. The “underwater”property continues to provide a place to live and raise a family or enjoy all the benefits of a home. The “underwater” aspect only relates to the home as an investment.