Upper Bracket No Longer Immune
The rich are different than you and me.
–F. Scott Fitzgerald
When it comes to escaping the scourge of foreclosure, the rich have three singular advantages — and one distinct disadvantage — relative to mere financial mortals.
First, the advantages:
One. Bigger financial cushion.
More affluent home buyers frequently put down 20% or more (and occasionally pay cash!).
Not only does that avoid mortgage insurance, but it also represents a buffer in the event of a housing downturn.
Of course, it’s also the case the heftier downpayments qualify Buyers for lower interest rates.
By contrast, first-time Buyers and those of more modest means often buy homes with as little as 2% – 4% down.
Consequently, even a small drop in home prices wipes out their equity (and critically — in today’s economy — their wherewithal to refinance at lower rates).
Two. Job skills and security.
Wealthier homeowners often trace that wealth to their job skills and employment (the other source: inheritance).
In a soft economy, high-powered executives and professionals (doctors, lawyers, etc.) have more saleable skills — and more job alternatives — than workers lower down the food chain.
Three. Stronger balance sheets.
Part of being rich is, well . . . being rich.
So, people of means have stocks, bonds, and other investments to tide them over financial rough spots that other people lack.
Should their homes drop in value, affluent homeowners can draw upon these other resources to plug any shortfall.
So, what is the one, distinct disadvantage associated with wealth?
In a housing bear market — and today’s is the worst since the 1930’s — the homes frequently owned by the affluent drop more in value.
Not necessarily in percentage terms, but in absolute dollars.
Put it this way: if a $200k home and a $2 million home both drop by 30%, the former home is worth $60,000 less, while the latter is worth $600,000 less.
To be sure, there are many people whose balance sheets can sustain such a hit.
However, judging by the increasing number of foreclosures I’m seeing in upper bracket Twin Cities neighborhoods, more of the (formerly) well-to-do are succumbing to such setbacks.