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As someone who doesn't own a home yet because of insane competition, if I were to buy a home tomorrow and afford the mortgage, and suddenly the value dropped by

As someone who doesn't own a home yet because of insane competition, if I were to buy a home tomorrow and afford the mortgage, and suddenly the value dropped by $300k, I wouldn't care. I'm not looking for a home as an investment, which is the problem. I would still have that same home to live in and raise my family in. If anything, I might be able to reduce that fictional mortgage. I'm not in favor of homes dropping in value either, but if the argument is it's going to hurt investors, then let's do it.

skuhn 5y ago
I think you're seriously underestimating the problems a homeowner faces if they purchase a home (with a mortgage) and it later experiences a large reduction in value. This, by the way, is going to happen to a lot of people who have recently bought houses. First of all, buying a house for $1 million that is later worth $700,000 has no bearing on what is owed to the mortgage company. The mortgaged amount has already been paid to the original seller, that money is gone and the buyer has agreed to repay it. Defaulting on the mortgage can be done, but any money already paid will be lost and the borrower won't be able to obtain another mortgage for 7 years. Or the homeowner can continue to live in the home, but there are a few potential problems: 1. They cannot sell the house should their life situation change. Depending on the overall real estate market, they may also not be able to rent the house out for an amount that covers the mortgage payment. 2. Not only did they agree to pay $300,000 too much at purchase time, they also are continuing to pay interest on that amount. $1 million for 30 years at 3.5% is $616,000 in interest; $700,000 is $431,000 in interest. 3. The loan cannot be refinanced, because they don't have at least 20% equity in the house. Say that interest rates drop from 3.5% to 3.0% -- that would save $100,000 in interest over 30 years. But in order to refinance, they would need to pay the mortgage down to the point that they have 20% equity in the house (in this example pay the mortgage down to $440,000). 4. Since they have no equity, they cannot obtain a HELOC to help finance home repairs or life events in an emergency. So yes, investors and speculators will be hurt when their portfolio value drops and those are the risks you take when investing. Homeowners, however, are also hurt by the decline of home values.
- HWR_14 5y ago
  Your points (2) and (3) doesn't apply. In this hypothetical, the price of Bob's house went down because interest rates soared. That means he's never going to be able to refinance. It also means that even if interests rates just went up to inflation in the past year, Bob is paying less interest on his locked in hypothetical 3.5% rate than his neighbor who bought the next day at only 70% of what he paid. (1) and (4) are valid concerns. However, if Bob stays there for a long period of time until prices rise again, he'll sell with less capital gains taxes. So, like in many situations, and how it should work, buying a house works if you stay still for a while, and is worse then renting short term.
  - vineyardmike 5y ago
    > he'll sell with less capital gains taxes. On a house? Most people don't have cap gain taxes on house sales. Only extreme high value homes.
- 14 5y ago
  But what about me a non home owner waiting to get into the market? Why should I care if the market crashes? Why do I care if all those $1mil houses are now $750k? Won’t a market crash be good for those recently priced out of the market trying to get in? I assume if the market crashes it will be harder to get a mortgage in the first place but that is why I am saving a decent down payment. Thanks for your thoughts
  - skuhn 5y ago
    If the market declines, then it may be a good time for you to buy. Over a long enough period of time, the average house price in modern history only increases. The concerns for you in this scenario may be: 1. Has the property been poorly maintained for some time because the previous owner could not afford repairs after buying at a high price? 2. Has the property recently been poorly maintained because the owner knows it will be foreclosed on? 3. Will prices continue to drop, potentially putting you into the same situation as the current owner, or is now the right time? It's generally impossible to time the exact bottom of the market -- and what seems like the bottom may be far from it.
sumedh 5y ago
> and suddenly the value dropped by $300k, I wouldn't care You are saying that now but when it actually happens to you then it becomes real and different people react differently when it actually happens to them.
- puchatek 5y ago
  The point here was that the value is not so important when you're not looking at your home as an investment. This is a very real argument. A house has many functions to the owner who actually lives in it vs am investor. Ofc you might want to sell at dinner point and then the value matters but it's not unreasonable to picture a hike owner who will never sell for as long as they live
dllthomas 5y ago
As someone who just bought a home, I'm with you. If the bubble pops tomorrow and my home price halves, that's fine - I don't plan on selling soon so it's just numbers on paper, and I could get it reassessed and pay less in taxes.
ClumsyPilot 5y ago
"suddenly the value dropped by $300k, I wouldn't care" Imagine you have to move because if job or family, you can't sell the house and buy another - its worth -$300,000

skuhn 5y ago

I think you're seriously underestimating the problems a homeowner faces if they purchase a home (with a mortgage) and it later experiences a large reduction in value. This, by the way, is going to happen to a lot of people who have recently bought houses. First of all, buying a house for $1 million that is later worth $700,000 has no bearing on what is owed to the mortgage company. The mortgaged amount has already been paid to the original seller, that money is gone and the buyer has agreed to repay it. Defaulting on the mortgage can be done, but any money already paid will be lost and the borrower won't be able to obtain another mortgage for 7 years. Or the homeowner can continue to live in the home, but there are a few potential problems: 1. They cannot sell the house should their life situation change. Depending on the overall real estate market, they may also not be able to rent the house out for an amount that covers the mortgage payment. 2. Not only did they agree to pay $300,000 too much at purchase time, they also are continuing to pay interest on that amount. $1 million for 30 years at 3.5% is $616,000 in interest; $700,000 is $431,000 in interest. 3. The loan cannot be refinanced, because they don't have at least 20% equity in the house. Say that interest rates drop from 3.5% to 3.0% -- that would save $100,000 in interest over 30 years. But in order to refinance, they would need to pay the mortgage down to the point that they have 20% equity in the house (in this example pay the mortgage down to $440,000). 4. Since they have no equity, they cannot obtain a HELOC to help finance home repairs or life events in an emergency. So yes, investors and speculators will be hurt when their portfolio value drops and those are the risks you take when investing. Homeowners, however, are also hurt by the decline of home values.

HWR_14 5y ago
Your points (2) and (3) doesn't apply. In this hypothetical, the price of Bob's house went down because interest rates soared. That means he's never going to be able to refinance. It also means that even if interests rates just went up to inflation in the past year, Bob is paying less interest on his locked in hypothetical 3.5% rate than his neighbor who bought the next day at only 70% of what he paid. (1) and (4) are valid concerns. However, if Bob stays there for a long period of time until prices rise again, he'll sell with less capital gains taxes. So, like in many situations, and how it should work, buying a house works if you stay still for a while, and is worse then renting short term.
- vineyardmike 5y ago
  > he'll sell with less capital gains taxes. On a house? Most people don't have cap gain taxes on house sales. Only extreme high value homes.
14 5y ago
But what about me a non home owner waiting to get into the market? Why should I care if the market crashes? Why do I care if all those $1mil houses are now $750k? Won’t a market crash be good for those recently priced out of the market trying to get in? I assume if the market crashes it will be harder to get a mortgage in the first place but that is why I am saving a decent down payment. Thanks for your thoughts
- skuhn 5y ago
  If the market declines, then it may be a good time for you to buy. Over a long enough period of time, the average house price in modern history only increases. The concerns for you in this scenario may be: 1. Has the property been poorly maintained for some time because the previous owner could not afford repairs after buying at a high price? 2. Has the property recently been poorly maintained because the owner knows it will be foreclosed on? 3. Will prices continue to drop, potentially putting you into the same situation as the current owner, or is now the right time? It's generally impossible to time the exact bottom of the market -- and what seems like the bottom may be far from it.

sumedh 5y ago

> and suddenly the value dropped by $300k, I wouldn't care You are saying that now but when it actually happens to you then it becomes real and different people react differently when it actually happens to them.

puchatek 5y ago
The point here was that the value is not so important when you're not looking at your home as an investment. This is a very real argument. A house has many functions to the owner who actually lives in it vs am investor. Ofc you might want to sell at dinner point and then the value matters but it's not unreasonable to picture a hike owner who will never sell for as long as they live

dllthomas 5y ago

As someone who just bought a home, I'm with you. If the bubble pops tomorrow and my home price halves, that's fine - I don't plan on selling soon so it's just numbers on paper, and I could get it reassessed and pay less in taxes.

ClumsyPilot 5y ago

"suddenly the value dropped by $300k, I wouldn't care" Imagine you have to move because if job or family, you can't sell the house and buy another - its worth -$300,000