Your House is a Home—Not an ATM

The nation may be in recovery mode but millions are still stuck in a financial quagmire. Over the past few years, far too many were careless in managing one of their most precious assets: their home.

Let’s step back a few years to when this nation was in the middle of the biggest housing boom in more than a half century. Just six years ago, the Federal Deposit Insurance Corp. reported that 15% of the nation’s metro areas experienced real estate price hikes of a staggering 72%. During that period, hundreds of thousands bought their slice of the American Dream as financial institutions made them affordable and accessible, offering subprime loans, zero-interest loans, zero-down payment arrangements, and low-interest adjustable rate mortgages, to get virtually anyone into a home. For legions of newly minted homeowners, gaining shelter wasn’t enough; with skyrocketing home values, many got caught up in irrational exuberance and converted their homes into ATMs, using home equity lines of credit to borrow a lifestyle. Instead of making repairs and enhancements to boost the value of their properties, they purchased expensive cars, took exotic vacations, and bought other luxury items they simply could not afford.

When the bubble finally burst, the caviar lifestyle disappeared for some and the faux safety net evaporated for others. The collapse of the housing market wiped out roughly $7 trillion in housing value from the third quarter of 2006 to the end of 2009, according to the Federal Reserve. This past March, USA Today reported that more than 11 million homes across the nation are worth less than their mortgages, while some borrowers with negative home equity may not realize any positive gains until as late as 2020. (According to a Pew Research Center survey in February 2009, 12% of African Americans said their mortgages were “underwater.”)

My advice to those waiting for the market to rebound to pre-2008 levels is quite simple: Wake up! We must realize that although property can and should serve as a valuable wealth-building tool, it also serves a practical purpose–your house is a home.

Black Enterprise has reported on scores of individuals who have opted not to take serious action to correct their finances or sell their homes due to an emotional attachment to their property or a false idea of what it’s worth. As a result, their families suffer through staggering costs as they remain caught in a debt trap. Shortcuts or quick fixes are as effective as repairing a leaky roof with duct tape. I urge you, with the help of a financial adviser, to make a clear-eyed evaluation of your finances and recalibrate your life.

For one, adjust your expectations: It’s highly unlikely that your home will ever again increase in value 5% to 10% every couple of years as it did during the past decade. (In February, home prices fell 0.9% on a seasonally adjusted basis, according to the Standard & Poor’s/Case-Shiller index. This was the fifth-straight monthly decline.) If you manage your affairs so you can make monthly mortgage payments with no more than 30% of after-tax income and you’re not drowning in debt, hold on to your property for the long haul and anticipate an increase in wealth as the home makes slow but steady gains in value.

If you face the possibility of default, seek a loan modification through such programs as Making Home Affordable. You may find, however, that selling your home is the only option to remain whole. There’s not a bit of shame in rightsizing–eliminating unmanageable debt, scaling back on nonessentials, boosting your savings, and preserving your credit. Done right, you’ll position yourself to purchase an affordable home, sock away emergency funds, and develop a comprehensive retirement plan. Lastly, don’t ever treat your property like a piggy bank again.

My parents’ generation believed when you bought a home, you didn’t try to time the real estate market. You scrimped and saved until eventually you owned the property outright. It may seem old school, but we all need to embrace the basics of homeownership.

Earl “Butch” Graves Jr. is the president and CEO of Black Enterprise.