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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
by 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 agoYour 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 agoBut 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 agoIf 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.