Now, more than ever may be a good reminder that it’s never a bad time to downsize your home. Americans are house rich and cash poor, not a great mix in times of economic turmoil.
Wealth in cash is very liquid, you can spend it on what you need when you need it. Even stocks and bonds are relatively easy to sell to generate funds. But houses, they’re a lot harder to sell quickly if you want to get all the value from them you deserve.
In the Wall Street Journal, Ryan Dezember explains how many house-rich but cash-poor Americans are faring today, writing:
Americans with mortgages have accumulated nearly $10 trillion in home equity thanks to a decade of rising home prices. Yet millions of them have fallen behind on mortgage payments and risk losing their houses.
It is a potential bonanza for rental-home investors. Since the coronavirus pandemic began, big single-family landlords have raised billions of dollars for homebuying sprees.
Even if there isn’t a surge in repossessed homes to buy cheaply off the courthouse steps—which led to the emergence of Wall Street’s landlords during the foreclosure crisis a decade ago—there is likely to be a lot of forced sales and new renters.
“A lot of people are house-rich but cash-poor,” said Ivy Zelman, chief executive of real-estate consultant Zelman & Associates. “If they bought in the last two or three years, even if they bought five months ago, they have equity.”
Having plenty of home equity but reduced means to keep making payments could prompt many to sell while prices are high and exit homeownership with a cash cushion, Ms. Zelman said.
People behind on their payments aren’t being kicked out of their houses yet because of federal and local restrictions on foreclosure enacted during the pandemic. Many with federally guaranteed mortgages have entered forbearance, which allows them to skip payments for up to a year without penalty and make them up later.
Some 3.5 million home loans—a 7.01% share—were in forbearance as of Sept. 6, according to the Mortgage Bankers Association. Many more borrowers are behind on their payments but not in forbearance programs with their lenders.
Downsizing your home to a smaller house and pocketing the proceeds from your larger house can give you added liquidity in times like these.
Action Line: Be careful not to tie too much of your wealth up in illiquid assets like a big house, an expensive vehicle, or a piece of modern art. If you need cash quickly, these may be hard to sell, and if you can sell them, it may be at a steep loss. Start looking for a better America today.