Opinion: How did homeowners get into home equity prison?

Just for a moment, let’s imagine a world in which a person purchases a home shortly before a global pandemic. Even though they have a low mortgage rate on their home loan, the pandemic causes unanticipated financial hardships which lead to a decrease in their annual income as well as the necessity of using credit cards for their basic needs.

Then, the housing market takes off like a rocket with home values exceeding all expectations. While the person sits back and watches the value of their house climb to levels that have never been seen before, they are still struggling to get back to their pre-pandemic income level while also having to pay more for homeowner’s insurance and property taxes, not to mention the fact that all of their other bills have increased as well.

As the person relaxes on the couch watching television at night, they occasionally check the current value of their home and do a rough calculation of the amount of equity that they have accrued. It comforts them for a brief moment. Then, questions of what they would do if they sold their house consume their thoughts. Where would they go? What could they ever afford at these prices? How could they ever justify walking away from a loan with this low of an interest rate? Would they even qualify for a loan now that their income is lower, and they are drowning in credit card debt?

The home equity prison

Does this scenario sound familiar compared to the situations of the homeowners that you are encountering lately in your real estate business? If any of this resonates with your personal experience in the current market, you have officially entered the realm of interacting with homeowners in the post-pandemic economy. Stated differently, you are dealing with individuals that may be in an equity prison. The world has changed. The way they work has changed. The way in which they interact with others has changed. Everything has gotten more expensive and uncertainty about the future lingers. So, how did we all get here in the first place?

The increase in the cost of basic needs can sneak up on people over time. Most of us have noticed this while watching the bill for our weekly grocery trips continue to grow larger and larger with less and less food in the shopping cart. Other categories of price increases are harder to recognize in our daily activities, but inflation is high.

One of the most common ways of calculating the inflation rate is by using the Consumer Price Index (CPI), which takes into account goods and services that we all spend money on throughout the year (food, gasoline, etc.), and performing a calculation that compares the average weighted cost of this basket of goods at different points in time.

The rate of inflation for 2021, 2022, and 2023 was 4.7%, 8.0%, and 4.1% respectively. Over a three-year cycle, we haven’t seen inflation rates this high in more than 40 years. Let’s face it, all of us are feeling the pinch in one way or another. When prices are increasing, and money is tight, many individuals start whipping out their credit cards more frequently throughout the month.

The New York Fed’s Center for Microeconomic Data Quarterly Report on Household Debt and Credit evidences that the total household debt balances grew by $228 billion in the third quarter of 2023 across all types of debt. Credit card balances grew by $48 billion in the third quarter with a total of $1.08 trillion outstanding. Additionally, the 2023:Q4 Report didn’t look any better with the aggregate household debt balances increasing by $212 billion, which included credit card balances increasing by $50 billion for a total of $1.13 trillion in outstanding credit card debt.

Credit card debt on the rise

Since it is more expensive to purchase the necessities of daily living and many homeowners are using credit cards to bridge the gap, are all of them actually making the minimum payments on those cards? Pursuant to the Center for Microeconomic Data, aggregate delinquency rates also increased in the fourth quarter of 2023. As of December 31, 2023, 3.1% of outstanding debt was in some stage of delinquency, up by 0.1 percentage point from the third quarter. Delinquency transition rates also increased for all product types, except for student loans, with an annualized amount of approximately 8.5% of credit card balances and 7.7% of auto loan balances going into delinquent status.

With each day that passes in the new year, as a direct result of the delinquency transition rates, we are seeing more and more credit card collection cases being filed across the United States. It is a common belief in the legal industry that foreclosures will spike as consumers max out their credit and run out of options for covering the living expense overage, but that remains to be seen.

How to communicate that the equity prison is a state of mind

If you are marketing to homeowners with significant equity in their residences and who are also feeling the pinch of a higher cost of living, it is very important to clearly communicate that they are not trapped. They have options, and they can’t allow the equity in their homes to prevent them from exploring those options. Notwithstanding, they still may have to make some tough financial decisions to stop their net worth from moving in the wrong direction. After all, an equity prison is a self-imposed detriment.

Even though having equity in their homes can feel comforting, they shouldn’t allow that to lull them into a sense of false financial confidence. If they can’t afford to pay their bills, those overarching issues are eventually going to eat into their equity one way or the other. Additionally, there is no guarantee that there won’t be a market correction in the coming months that may reduce the perceived value of their homes. Sometimes the best decision is for homeowners to cash out, pay down some pressing financial obligations, and either rent or purchase housing that meets their post-pandemic budget.

For those individuals that are considering selling in the current real estate market, it is important to stress to them that they have several paths that can be taken to find their new home while also not breaking the bank. For instance, they can take some of the profit from the sale of their current home and buy down the interest rate on the loan for their new house, thereby decreasing their monthly payment and staying on budget.

If they have the ability to work remotely, that flexibility expands their potential search area for a new house. Having the ability to essentially live anywhere gives them leverage in negotiations because there are more potential forever homes to make offers on than if they were focusing on a certain neighborhood.

They can also move to areas that are less established and currently being developed, which means new construction and lower prices for those that purchase in the early phases.

Finally, for those that are retired on fixed incomes, as well as those in the process of winding down their careers, there are many affordable options in 55+ communities with great amenities and neighbors at the same point in life. During your interactions, help these individuals to understand the reasons why the deal makes sense and why selling ultimately gives them more options than the alternative.

Sometimes selling is the only answer

One of the worst things that a person can do during times like this is to allow debt-related default judgments to be entered against them. Incurring unnecessary credit card debt to cover the cost of daily living indirectly eats into their equity because they are going to have to pay it at some point down the road or deal with the headache of bankruptcy. Also, once a home goes into foreclosure, the additional attorneys’ fees and costs, as well as loan-related late charges and default interest, cause the outstanding balance to increase even more, thereby depleting the equity cushion in their homes. All of these things ultimately eat away at their equity, with some of the bites being bigger than others.

If you have been marketing to homeowners that need to make some changes in their lives to avoid the pitfalls of incurring unmanageable debt, let them know that it isn’t too late. If you haven’t been marketing to these individuals, you should seriously consider doing so to help you capture some of the distressed sale market.

When all is said and done, these homeowners still have time to make the necessary changes to escape from their equity prisons. The most important thing is for them to initiate timely conversations with professionals like you and to craft the best plan of attack to thrive in the post-pandemic economy.

Craig Kincheloe is President of The Kincheloe Group, which focuses on helping individuals and families buy and sell homes in Tampa, Florida, and the surrounding areas.

David J. Miller is the Managing Partner of David Miller Law, PLLC, in Largo, Florida, and assists in an Of Counsel capacity with Lucas, Macyszyn & Dyer Law Firm.

Editor’s note: This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
David Miller at [email protected]

Craig Kincheloe at [email protected]

To contact the editor responsible for this story:
Tracey Velt at [email protected]

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