10 ms·

It'll arguably end even worse if they keep going up though.

ChuckMcM 8y ago
I'll take that argument :-). If we enter a deflationary spiral in housing it traps people with mortgages who find themselves owing more in their house than it is worth (we saw that after the Mortgage meltdown). Where as if the prices continue to rise, we see people who would prefer to own houses kept out of the market, but their mobility is not impacted. Of the two scenarios, I consider the deflationary one "worse" in terms of its impact on more people.
- oculusthrift 8y ago
  they can always sell the house and take the loss. just like a stock bought on a loan. don’t get why it’s preferable that someone can’t afford a house rather than someone who already has a house no longer being able to afford it. that’s like saying no matter how big of a mortgage i take it’s immoral for something to happen where i can’t afford it anymore
  - DrScump 8y ago
    they can always sell the house and take the loss. If the proceeds aren't enough to pay off all mortgages, it's not so simple.
    - science4sail 8y ago
      Why not just default on the mortgages?
      - DrScump 8y ago
        Exactly. That's how the "mortgage crisis" happened. In such cases, "forgiven" debt is taxable as regular income in that year, which adds another layer of problems.
        sjg007 8y ago
        Yeah that is how they really get you.. They want their pound of flesh..
      - toast0 8y ago
        Some mortgages are not non-recourse, so you could be forced into bankruptcy. Either way, your credit is going to take a big hit, which may mean you're stuck wherever you moved to, since many landlords will avoid renting to people with recent forclosures or bankruptcies. (Probably a good idea to move before you default). A lot of people are uncomfortable defaulting on a debt if they have the ability to pay, even if it's the smartest move economically.
        deleted 8y ago
        [deleted]
      - Rapzid 8y ago
        100k down on a 500k house for 20%. Value dips significantly and your house is worth 300k. You owe 400k on a 300k valued property. You default and your 100k is gone forever. Do not pass go, do not collect 200 dollars.
        thaumasiotes 8y ago
        So? It's gone forever whether you default or not. How is your situation improved by sticking around to pay $400,000 + cost of financing for a $300,000 house? That just loses you a second $100K (plus cost of financing).
        adventured 8y ago
        > So? It's gone forever whether you default or not. Your premise assumes housing values never go back up. The value is not necessarily gone forever. The house that declined to $300k can climb back to $400k or $500k. You can continue paying the mortgage, do absolutely nothing else, and watch as the property value climbs back to where it was due to economic factors (whether a hot economy or low interest rates fueling value recovery). Over five years, from Jan 2010 to Jan 2015 you pay $120,000 in mortgages payments on the $400,000 mortgage. You get back to 2015 and the housing market has recovered your property back to over $400k (from the low of $300k). You continue making your mortgage payments. By Jan 2018, thanks to hot asset prices, your house is now worth $550,000. You're now solidly above water, you've paid off ~26% of your mortgage term (eight years of payments), and you're sitting on maybe $200,000 in equity value vs your original $500k purchase price. The value of the property recovered, and you didn't lose your $100k down payment from walking away. Depending on the circumstances, you may very well have been better off holding on to a property in 2009-2010, rather than selling at a loss. The housing value recovery has been extraordinary over the last six or seven years. Certainly some property scenarios were extreme, where owners were perma-buried. The worst hit states, such as Arizona, Nevada, Florida, etc. saw rapid value recoveries.
        naveen99 8y ago
        How about default, and then buy back from the bank, maybe at an auction at $300,000...
    - ChuckMcM 8y ago
      This was the scenario that I saw during the mortgage crash. People who would have to pay the bank tens of thousands of dollars in order to "sell" their house.
      - Rapzid 8y ago
        10s? To be so lucky...
      - jartelt 8y ago
        Then those people had spent beyond their means when they purchased the home. When you buy a home, part of the risk is that most of your net worth is wrapped up in the home, and as a result you may not be able to move if you have to sell at a harsh loss. If you are not prepared to ride out a dip in the housing market, you shouldn't buy in the first place.
        ericd 8y ago
        The problem is that if everyone is making stupid bets (and the bank is also making stupid bets), you may also have to make a stupid bet if you're determined to own your home. Or you could rent, but that's not just an economic decision.
        masonic 8y ago
        Or, you could rent and live frugally before the crash, and then buy cheaply.
  - foota 8y ago
    Not immoral, but the collateral and first order effects of millions of people losing their homes? Not great.
- darawk 8y ago
  It seems they both impact mobility equally? In a rising market, people are priced out of entering an area. In a falling market, people are priced out of leaving. Seems symmetrical to me, unless i'm missing something.
  - ChuckMcM 8y ago
    I see it a bit differently. If people are priced out of buying into a market they can often still rent in that market, and the rising sales prices allow people with ownership to sell and move to new markets. But in a falling market the renters can still move but owners can't (or are pressured not to) sell and move. They do have the option of becoming landlords but that can limit their cash flow and make it harder elsewhere.
    - darawk 8y ago
      I don't think that quite follows. When property values increase, so do rents. When rents increase, someone is getting priced out. That is, if you could buy before, maybe now you have to rent. But if you could only rent before...maybe now you can't even rent.
      - jbarham 8y ago
        > When property values increase, so do rents. Maybe, but probably not at the same rate. Broadly speaking, rents are tied to incomes, house prices to the availability and cost of credit (i.e., interest rates). Average income places an upper bound on rents because renters can only pay rent from income (since no bank will lend you money to pay rent). I'm currently benefiting from this phenomenon myself as I rent a house for ~$25k/year (in Melbourne, Australia). Buying that same house would cost me ~$45k/year.
        thaumasiotes 8y ago
        > no bank will lend you money to pay rent I'm pretty sure every bank will do this, in the form of a credit card.
- ramen-san 8y ago
  The fed agrees with you. That’s why they have an inflation target of ~2%. They’re basically saying outright that they expect to erode the purchasing power of the USD over time. It’s one thing we can count on - inflation might be bad, but deflation is worse. I did a more thorough review of historical inflation, and the implications for investments here - cheers: https://ramenretirement.com/2018/04/23/inflation/ https://ramenretirement.com/2018/04/23/inflation/
- stale2002 8y ago
  Well, then those people can default and declare bankruptcy. I will take people declaring bankruptcy over people being unable to afford to live in a home ANY day.
- beefield 8y ago
  This is why in my opinion local goverment should somehow credibly commit to keep land prices nominally constant by adjusting taxes on property. (Land, not buildings) Inflation would take care of long term lowering of the housing costs which is arguably a good thing to most people.
- dcosson 8y ago
  I can't follow this logic at all. When home prices go up, rents also go up. How is your mobility not affected when you can't afford rent and have to move out of the city? Or for the people whose rent goes above what they can afford and they end up homeless? If you're underwater on a mortgage, it's still the same payment month over month that you were expecting when you took out the mortgage. It'll recover eventually if you hold on. When you're paying rent month to month, that number changes on you as prices rise and you can't just hold on.
  - icelancer 8y ago
    >>It'll recover eventually if you hold on. The market can remain irrational for longer than you can remain solvent. Additionally, your statement is false under many conditions. It is not close to a proven fact that it is true "eventually," no matter the time horizon.
  - westpfelia 8y ago
    home prices and rent prices arent entirely correlated.. sure home prices can impact the overall cost of living in the area, but that also is more influenced by the average salary in the area.
  - refurb 8y ago
    I can't follow this logic at all. When home prices go up, rents also go up If that were true, the purchase price to rent ratios would all be the same. They aren't.[1]. There are some places in the US (looking at you SF!) where renting is cheaper than buying and vice versa. [1] https://www.mashvisor.com/blog/best-real-estate-markets-price-to-rent-ratio/ https://www.mashvisor.com/blog/best-real-estate-markets-pric...
  - ChuckMcM 8y ago
    > When home prices go up, rents also go up. Not if the supply of rental units is increasing. One apartment building can put 100 - 500 units on the market versus perhaps 10 single family houses in that same space. A good example of this in action right now is Sunnyvale, which has had rising home prices over the last three years but flat rents because the number of rental units coming online has greatly exceeded the available housing inventory. It would be accurate to say that house rents go up with rising housing prices, but it is not true that all rents go up with rising housing prices. What it does is re-factor the ratio of renters to owners in favor of renters.

I'll take that argument :-). If we enter a deflationary spiral in housing it traps people with mortgages who find themselves owing more in their house than it is worth (we saw that after the Mortgage meltdown). Where as if the prices continue to rise, we see people who would prefer to own houses kept out of the market, but their mobility is not impacted. Of the two scenarios, I consider the deflationary one "worse" in terms of its impact on more people.

oculusthrift 8y ago
they can always sell the house and take the loss. just like a stock bought on a loan. don’t get why it’s preferable that someone can’t afford a house rather than someone who already has a house no longer being able to afford it. that’s like saying no matter how big of a mortgage i take it’s immoral for something to happen where i can’t afford it anymore
- DrScump 8y ago
  they can always sell the house and take the loss. If the proceeds aren't enough to pay off all mortgages, it's not so simple.
  - science4sail 8y ago
    Why not just default on the mortgages?
    - DrScump 8y ago
      Exactly. That's how the "mortgage crisis" happened. In such cases, "forgiven" debt is taxable as regular income in that year, which adds another layer of problems.
      - sjg007 8y ago
        Yeah that is how they really get you.. They want their pound of flesh..
    - toast0 8y ago
      Some mortgages are not non-recourse, so you could be forced into bankruptcy. Either way, your credit is going to take a big hit, which may mean you're stuck wherever you moved to, since many landlords will avoid renting to people with recent forclosures or bankruptcies. (Probably a good idea to move before you default). A lot of people are uncomfortable defaulting on a debt if they have the ability to pay, even if it's the smartest move economically.
      - deleted 8y ago
        [deleted]
    - Rapzid 8y ago
      100k down on a 500k house for 20%. Value dips significantly and your house is worth 300k. You owe 400k on a 300k valued property. You default and your 100k is gone forever. Do not pass go, do not collect 200 dollars.
      - thaumasiotes 8y ago
        So? It's gone forever whether you default or not. How is your situation improved by sticking around to pay $400,000 + cost of financing for a $300,000 house? That just loses you a second $100K (plus cost of financing).
        adventured 8y ago
        > So? It's gone forever whether you default or not. Your premise assumes housing values never go back up. The value is not necessarily gone forever. The house that declined to $300k can climb back to $400k or $500k. You can continue paying the mortgage, do absolutely nothing else, and watch as the property value climbs back to where it was due to economic factors (whether a hot economy or low interest rates fueling value recovery). Over five years, from Jan 2010 to Jan 2015 you pay $120,000 in mortgages payments on the $400,000 mortgage. You get back to 2015 and the housing market has recovered your property back to over $400k (from the low of $300k). You continue making your mortgage payments. By Jan 2018, thanks to hot asset prices, your house is now worth $550,000. You're now solidly above water, you've paid off ~26% of your mortgage term (eight years of payments), and you're sitting on maybe $200,000 in equity value vs your original $500k purchase price. The value of the property recovered, and you didn't lose your $100k down payment from walking away. Depending on the circumstances, you may very well have been better off holding on to a property in 2009-2010, rather than selling at a loss. The housing value recovery has been extraordinary over the last six or seven years. Certainly some property scenarios were extreme, where owners were perma-buried. The worst hit states, such as Arizona, Nevada, Florida, etc. saw rapid value recoveries.
        naveen99 8y ago
        How about default, and then buy back from the bank, maybe at an auction at $300,000...
  - ChuckMcM 8y ago
    This was the scenario that I saw during the mortgage crash. People who would have to pay the bank tens of thousands of dollars in order to "sell" their house.
    - Rapzid 8y ago
      10s? To be so lucky...
    - jartelt 8y ago
      Then those people had spent beyond their means when they purchased the home. When you buy a home, part of the risk is that most of your net worth is wrapped up in the home, and as a result you may not be able to move if you have to sell at a harsh loss. If you are not prepared to ride out a dip in the housing market, you shouldn't buy in the first place.
      - ericd 8y ago
        The problem is that if everyone is making stupid bets (and the bank is also making stupid bets), you may also have to make a stupid bet if you're determined to own your home. Or you could rent, but that's not just an economic decision.
        masonic 8y ago
        Or, you could rent and live frugally before the crash, and then buy cheaply.
- foota 8y ago
  Not immoral, but the collateral and first order effects of millions of people losing their homes? Not great.
darawk 8y ago
It seems they both impact mobility equally? In a rising market, people are priced out of entering an area. In a falling market, people are priced out of leaving. Seems symmetrical to me, unless i'm missing something.
- ChuckMcM 8y ago
  I see it a bit differently. If people are priced out of buying into a market they can often still rent in that market, and the rising sales prices allow people with ownership to sell and move to new markets. But in a falling market the renters can still move but owners can't (or are pressured not to) sell and move. They do have the option of becoming landlords but that can limit their cash flow and make it harder elsewhere.
  - darawk 8y ago
    I don't think that quite follows. When property values increase, so do rents. When rents increase, someone is getting priced out. That is, if you could buy before, maybe now you have to rent. But if you could only rent before...maybe now you can't even rent.
    - jbarham 8y ago
      > When property values increase, so do rents. Maybe, but probably not at the same rate. Broadly speaking, rents are tied to incomes, house prices to the availability and cost of credit (i.e., interest rates). Average income places an upper bound on rents because renters can only pay rent from income (since no bank will lend you money to pay rent). I'm currently benefiting from this phenomenon myself as I rent a house for ~$25k/year (in Melbourne, Australia). Buying that same house would cost me ~$45k/year.
      - thaumasiotes 8y ago
        > no bank will lend you money to pay rent I'm pretty sure every bank will do this, in the form of a credit card.
ramen-san 8y ago
The fed agrees with you. That’s why they have an inflation target of ~2%. They’re basically saying outright that they expect to erode the purchasing power of the USD over time. It’s one thing we can count on - inflation might be bad, but deflation is worse. I did a more thorough review of historical inflation, and the implications for investments here - cheers: https://ramenretirement.com/2018/04/23/inflation/ https://ramenretirement.com/2018/04/23/inflation/
stale2002 8y ago
Well, then those people can default and declare bankruptcy. I will take people declaring bankruptcy over people being unable to afford to live in a home ANY day.
beefield 8y ago
This is why in my opinion local goverment should somehow credibly commit to keep land prices nominally constant by adjusting taxes on property. (Land, not buildings) Inflation would take care of long term lowering of the housing costs which is arguably a good thing to most people.
dcosson 8y ago
I can't follow this logic at all. When home prices go up, rents also go up. How is your mobility not affected when you can't afford rent and have to move out of the city? Or for the people whose rent goes above what they can afford and they end up homeless? If you're underwater on a mortgage, it's still the same payment month over month that you were expecting when you took out the mortgage. It'll recover eventually if you hold on. When you're paying rent month to month, that number changes on you as prices rise and you can't just hold on.
- icelancer 8y ago
  >>It'll recover eventually if you hold on. The market can remain irrational for longer than you can remain solvent. Additionally, your statement is false under many conditions. It is not close to a proven fact that it is true "eventually," no matter the time horizon.
- westpfelia 8y ago
  home prices and rent prices arent entirely correlated.. sure home prices can impact the overall cost of living in the area, but that also is more influenced by the average salary in the area.
- refurb 8y ago
  I can't follow this logic at all. When home prices go up, rents also go up If that were true, the purchase price to rent ratios would all be the same. They aren't.[1]. There are some places in the US (looking at you SF!) where renting is cheaper than buying and vice versa. [1] https://www.mashvisor.com/blog/best-real-estate-markets-price-to-rent-ratio/ https://www.mashvisor.com/blog/best-real-estate-markets-pric...
- ChuckMcM 8y ago
  > When home prices go up, rents also go up. Not if the supply of rental units is increasing. One apartment building can put 100 - 500 units on the market versus perhaps 10 single family houses in that same space. A good example of this in action right now is Sunnyvale, which has had rising home prices over the last three years but flat rents because the number of rental units coming online has greatly exceeded the available housing inventory. It would be accurate to say that house rents go up with rising housing prices, but it is not true that all rents go up with rising housing prices. What it does is re-factor the ratio of renters to owners in favor of renters.