6 ms·

What would you do if property values declined such that you were underwater 20% on your condo? It seems like some minimum amount of equity is a stabilizing for

by nugget 10y ago

What would you do if property values declined such that you were underwater 20% on your condo? It seems like some minimum amount of equity is a stabilizing force in turbulent markets, the lack of which contributed to some of the unpleasantness in 2008.

panzagl 10y ago
walk away
- phhlho 10y ago
  Just remember - state matters heavily in that decision! If I had lived in a non-recourse state, I would have gladly performed a strategic default a couple of years ago and left the bank to pay the loss in value of my place.
AnimalMuppet 10y ago
Then you can't sell (without taking a financial bath). But you can still live in the condo, and the payments don't go up. Or you can try to walk away in some fashion and leave the bank with the problem. As you say, that contributes to instability.
hx87 10y ago
People walking away from houses wasn't the problem. People walking away from houses they were underwater on was the problem. Besides, if you were underwater and could still afford the payments there is no reason to walk away. I am currently underwater on my car, but I can still, you know, drive it.
- codegeek 10y ago
  yes, but you make the assumption that you don't have to sell the house due to factors such as sudden job loss, unplanned events such as accident/injury causing disability etc. The point of 20% down is that you have enough equity even for a turbulent market and if you do need to sell quickly due to possible factors above, you still should be ok. Otherwise, you are assuming that nothing bad will happen and you can continue paying the mortgage.
  - muninn_ 10y ago
    To your point I think that you just always have that risk. But I'd rather have that 20% I would have spent either invested in a 401k or a retirement fund or even using it for other things like getting another degree. Now I'm not saying those are necessarily the wisest options, but I like the opportunity. I mean this in the kindest way but all you're arguing against here is the risk/reward. In the same token, what I'd home values appreciate 30% in 10 years and all the while I'm renting the place and having somebody else pay the mortgage? Just different risk factors is all. If I find it impossible to get a job as an engineer doing the work I do, than the entire country is probably in another depression. I'm just betting against that.
    - cmdrfred 10y ago
      I think together my fiance and I had about 8% down. Thing was, to rent our current house would be about $1600/month. Even a shitty 2 bedroom was $1200, mortgage with insurance and taxes is $1100. For some people it's not a matter of can we afford to, it's can we afford not to. Even if rent dropped 10% (that has never happened in my area, they were still going up in 2008-2009) it would be a better deal to have a mortgage.
      - jackcosgrove 10y ago
        "can we afford not to" Bubble alert!
        cmdrfred 10y ago
        Rents have to fall a lot to put us in a situation were that's a bad thing (we aren't moving for a long time), and then at that point we can just let the bank foreclose and move into a $500 a month 2 bedroom.
      - mattmanser 10y ago
        Your mortgage is temporarily low because interest rates are low. http://www.bankrate.com/finance/mortgage-rates-history-0112.aspx http://www.bankrate.com/finance/mortgage-rates-history-0112.... If your interest rate doubled, could you afford to? Do you know how much you'd have to pay?
- enraged_camel 10y ago
  Cars and houses are not the same thing. Cars depreciate in value from the moment you drive them out of the parking lot of the dealer. House values generally stay the same or go up. Continuing to make payments on a house when you're underwater on the basis that you can still live in it is a really bad idea. Even if you can afford the payments, why would you want to overpay for something? That's why so many people walked away from their houses during the real estate crash: when you have no guarantees that the asset you're paying for will appreciate in value back to the original value, it's a much more financially sound decision to ignore the sunk cost and cut your losses ASAP.
  - PretzelFisch 10y ago
    you borrowed money and already made the purchase, just like a loan for a car. Car's depreciate quickly but people don't default on the loan because they are underwater based on ltv.
    - joeblubaugh 10y ago
      The debt is collateralized by the house - give up the house and let the bank pay for the risk they took on you. You're under no obligation to the bank to overpay for housing when things change - you're just not likely to get another mortgage either.
      - dpark 10y ago
        > You're under no obligation to the bank Yes you are. You signed a contract. This gives you an ethical if not a moral obligation. You have a legal obligation to pay in all states, which is why the lender can foreclose on you if you fail to do so. In some states, you also have a legal obligation to make the lender whole if they can't recoup their loss with the foreclosure sale.
  - muninn_ 10y ago
    I think it depends on your risk tolerance and world view. I think the world is just going to get more wealthy and property prices, even when there are downturns, will eventually always appreciate if you buy in the right area. I'm not saying I can predict that, but in the area I live in there were houses in the $600,000 range that sold for far less than that during the downturn, and now they're right back at the pre-recession value. On the other hand there are areas that have never recovered. I think as a general rule if you buy a place in a mixed-used development neighborhood you'll be able to weather the storms. At least that's my opinion (and take that for what it's worth).
muninn_ 10y ago
Well, unless I lose my job keep paying for it. There are always risks with every financial decision. I'm just accepting those risks right now and I feel like that's a good decision for me. It might not be for somebody else.
- nugget 10y ago
  Yes, you personally are much better off with no money down (0% equity) and a long-term, fixed rate, tax deductible, low interest and non-recourse mortgage loan. You control the asset (the condo) but have very little downside risk. If prices fall 20%, even if you kept your job, even if you won millions in the lottery, it might be in your self-interest to walk away and let the bank foreclose. I don't think there's a moral dimension to that decision; it's a matter of contract law. But I am pointing out that this is a tragedy of the commons in that millions of people acting this way creates an environment in which downside risk is hugely amplified in the event of significant price declines in the housing market, which is what we saw in 2008 - the system beginning to feed on itself in a vicious downward spiral. When I read things such as your initial comment a little voice in my head says ''here we go again''.
Gibbon1 10y ago
The unpleasantness in 2008 onward was a conscious decision by the Obama administration to not bail out underwater home owners. Banks were bailed out. Large businesses were bailed out. Ordinary homeowners caught up in a massive housing bubble, reviled and sent down the river.
- dragonwriter 10y ago
  > The unpleasantness in 2008 onward was a conscious decision by the Obama administration to not bail out underwater home owners. You might be able to make an argument that the unpleasantness in 2009 onward (or, more specifically, late January of 2009 onward) was the fault of some conscious decision of the Obama administration, but as popular as it has been with the Trump campaign recently, pretending that the Obama administration is responsible for things which occurred before his inauguration is indefensible without some kind of strong evidence for the extraordinary claim of retrocausality. (Also, factually, the administration decided to bail homeowners out in a variety of ways, though perhaps not as direct, universal, and significant of a bailout as some advocates -- myself included -- would have preferred.)
- nugget 10y ago
  I consider tax free discharge of defaulted mortgage loans to be a bailout of ordinary homeowners.
- unprepare 10y ago
  >The unpleasantness in 2008 onward was a conscious decision by the Obama administration Bush was president for 100% of the year 2008.

by nugget 10y ago

panzagl 10y ago

walk away

phhlho 10y ago
Just remember - state matters heavily in that decision! If I had lived in a non-recourse state, I would have gladly performed a strategic default a couple of years ago and left the bank to pay the loss in value of my place.

AnimalMuppet 10y ago

Then you can't sell (without taking a financial bath). But you can still live in the condo, and the payments don't go up. Or you can try to walk away in some fashion and leave the bank with the problem. As you say, that contributes to instability.

hx87 10y ago

People walking away from houses wasn't the problem. People walking away from houses they were underwater on was the problem. Besides, if you were underwater and could still afford the payments there is no reason to walk away. I am currently underwater on my car, but I can still, you know, drive it.

codegeek 10y ago
yes, but you make the assumption that you don't have to sell the house due to factors such as sudden job loss, unplanned events such as accident/injury causing disability etc. The point of 20% down is that you have enough equity even for a turbulent market and if you do need to sell quickly due to possible factors above, you still should be ok. Otherwise, you are assuming that nothing bad will happen and you can continue paying the mortgage.
- muninn_ 10y ago
  To your point I think that you just always have that risk. But I'd rather have that 20% I would have spent either invested in a 401k or a retirement fund or even using it for other things like getting another degree. Now I'm not saying those are necessarily the wisest options, but I like the opportunity. I mean this in the kindest way but all you're arguing against here is the risk/reward. In the same token, what I'd home values appreciate 30% in 10 years and all the while I'm renting the place and having somebody else pay the mortgage? Just different risk factors is all. If I find it impossible to get a job as an engineer doing the work I do, than the entire country is probably in another depression. I'm just betting against that.
  - cmdrfred 10y ago
    I think together my fiance and I had about 8% down. Thing was, to rent our current house would be about $1600/month. Even a shitty 2 bedroom was $1200, mortgage with insurance and taxes is $1100. For some people it's not a matter of can we afford to, it's can we afford not to. Even if rent dropped 10% (that has never happened in my area, they were still going up in 2008-2009) it would be a better deal to have a mortgage.
    - jackcosgrove 10y ago
      "can we afford not to" Bubble alert!
      - cmdrfred 10y ago
        Rents have to fall a lot to put us in a situation were that's a bad thing (we aren't moving for a long time), and then at that point we can just let the bank foreclose and move into a $500 a month 2 bedroom.
    - mattmanser 10y ago
      Your mortgage is temporarily low because interest rates are low. http://www.bankrate.com/finance/mortgage-rates-history-0112.aspx http://www.bankrate.com/finance/mortgage-rates-history-0112.... If your interest rate doubled, could you afford to? Do you know how much you'd have to pay?
enraged_camel 10y ago
Cars and houses are not the same thing. Cars depreciate in value from the moment you drive them out of the parking lot of the dealer. House values generally stay the same or go up. Continuing to make payments on a house when you're underwater on the basis that you can still live in it is a really bad idea. Even if you can afford the payments, why would you want to overpay for something? That's why so many people walked away from their houses during the real estate crash: when you have no guarantees that the asset you're paying for will appreciate in value back to the original value, it's a much more financially sound decision to ignore the sunk cost and cut your losses ASAP.
- PretzelFisch 10y ago
  you borrowed money and already made the purchase, just like a loan for a car. Car's depreciate quickly but people don't default on the loan because they are underwater based on ltv.
  - joeblubaugh 10y ago
    The debt is collateralized by the house - give up the house and let the bank pay for the risk they took on you. You're under no obligation to the bank to overpay for housing when things change - you're just not likely to get another mortgage either.
    - dpark 10y ago
      > You're under no obligation to the bank Yes you are. You signed a contract. This gives you an ethical if not a moral obligation. You have a legal obligation to pay in all states, which is why the lender can foreclose on you if you fail to do so. In some states, you also have a legal obligation to make the lender whole if they can't recoup their loss with the foreclosure sale.
- muninn_ 10y ago
  I think it depends on your risk tolerance and world view. I think the world is just going to get more wealthy and property prices, even when there are downturns, will eventually always appreciate if you buy in the right area. I'm not saying I can predict that, but in the area I live in there were houses in the $600,000 range that sold for far less than that during the downturn, and now they're right back at the pre-recession value. On the other hand there are areas that have never recovered. I think as a general rule if you buy a place in a mixed-used development neighborhood you'll be able to weather the storms. At least that's my opinion (and take that for what it's worth).

muninn_ 10y ago

Well, unless I lose my job keep paying for it. There are always risks with every financial decision. I'm just accepting those risks right now and I feel like that's a good decision for me. It might not be for somebody else.

nugget 10y ago
Yes, you personally are much better off with no money down (0% equity) and a long-term, fixed rate, tax deductible, low interest and non-recourse mortgage loan. You control the asset (the condo) but have very little downside risk. If prices fall 20%, even if you kept your job, even if you won millions in the lottery, it might be in your self-interest to walk away and let the bank foreclose. I don't think there's a moral dimension to that decision; it's a matter of contract law. But I am pointing out that this is a tragedy of the commons in that millions of people acting this way creates an environment in which downside risk is hugely amplified in the event of significant price declines in the housing market, which is what we saw in 2008 - the system beginning to feed on itself in a vicious downward spiral. When I read things such as your initial comment a little voice in my head says ''here we go again''.

Gibbon1 10y ago

The unpleasantness in 2008 onward was a conscious decision by the Obama administration to not bail out underwater home owners. Banks were bailed out. Large businesses were bailed out. Ordinary homeowners caught up in a massive housing bubble, reviled and sent down the river.

dragonwriter 10y ago
> The unpleasantness in 2008 onward was a conscious decision by the Obama administration to not bail out underwater home owners. You might be able to make an argument that the unpleasantness in 2009 onward (or, more specifically, late January of 2009 onward) was the fault of some conscious decision of the Obama administration, but as popular as it has been with the Trump campaign recently, pretending that the Obama administration is responsible for things which occurred before his inauguration is indefensible without some kind of strong evidence for the extraordinary claim of retrocausality. (Also, factually, the administration decided to bail homeowners out in a variety of ways, though perhaps not as direct, universal, and significant of a bailout as some advocates -- myself included -- would have preferred.)
nugget 10y ago
I consider tax free discharge of defaulted mortgage loans to be a bailout of ordinary homeowners.
unprepare 10y ago
>The unpleasantness in 2008 onward was a conscious decision by the Obama administration Bush was president for 100% of the year 2008.