4 ms·

If somebody bought early this year, they may be trapped in their home with negative equity for a decade, like many were after 2008. Your advice is mostly sound

If somebody bought early this year, they may be trapped in their home with negative equity for a decade, like many were after 2008. Your advice is mostly sound, but buying in a bubble can have severe and very real ramifications on you, even if you can afford the monthly payment. You may not be able to move without writing the bank a large check, and many won’t have the cash on hand

awa 4y ago
However, they would have a loan between 3-4% which seems to 1-2% lower than current rates.
- adam_arthur 4y ago
  If housing collapses, rates will go down significantly. You’re not missing anything on rates by waiting
sytelus 4y ago
Exactly. Buying is not always a good financial decision either. In current environment, renting makes far better financial sense than buying.
- Karupan 4y ago
  I wish it was that clear cut. Here in Australia there is an acute shortage of rentals and rents are going through the roof [0]. As with everything, there is always a caveat. [0] https://www.macrobusiness.com.au/2022/05/australias-rental-crisis-a-disaster-in-the-making/ https://www.macrobusiness.com.au/2022/05/australias-rental-c...
ryathal 4y ago
Very few houses were underwater for a decade, most markets were already above 2008 levels after 10 years.
- adam_arthur 4y ago
  Many regions were underwater for a decade, yes. All of Florida, Vegas, Phoenix among others. Some markets were down 60% peak to trough (Florida). The ones that rose the most also tended to be the ones that fell the most
c7b 4y ago
You seem to be looking at buying a house as an investment. I'd argue otherwise: your first piece of real estate is a necessity, not an investment - you always need a place to live. So, in financial terms, you're closing a short position, not opening a long position. Of course there is non-negligible friction if you need to move, so you do want to be mindful of not buying right at the peak, but in general I think you're overstating how much you need to worry about prices: you don't profit when prices go up, since you'd also have to pay more for a new place, and as long as you can afford the payments, your home moves in line with the market and don't need to sell, you also don't need to let falling prices affect your sleep. Your position is market neutral, you are mostly giving up flexibility.
- spiffytech 4y ago
  While I think you're right in ordinary times, this doesn't work during a bubble. You could be totally blocked from moving if your home is worth a fraction what you owe on it, no matter how necessary the move is (job, school district, family).
  - c7b 4y ago
    Even then there are some mitigants: you could try to rent out your first home and rent or even buy a new one. Tax-wise that would work against you (usually, in most places), but it probably wouldn't bankrupt you. I agree, of course you don't want to have bought right before a dip. But if you sketch out a few scenarios and look at the overall and your individual situation (eg, Would rental income cover credit payments, even in an adverse scenario? Do you have expenses you could claim in years when you're renting out? Do you have other uses for the property, eg within a family?), you might find that you can manage the risk (or not). It's definitely not risk-free, but there's also significant upside potential if you can make a long-term commitment.
  - andsoitis 4y ago
    > this doesn't work during a bubble. You could be totally blocked from moving if your home is worth a fraction what you owe on it Do you actually mean after the bubble has burst? Because during the bubble, why would your house price be a fraction of what you owe on it?

awa 4y ago

However, they would have a loan between 3-4% which seems to 1-2% lower than current rates.

adam_arthur 4y ago
If housing collapses, rates will go down significantly. You’re not missing anything on rates by waiting

sytelus 4y ago

Exactly. Buying is not always a good financial decision either. In current environment, renting makes far better financial sense than buying.

Karupan 4y ago
I wish it was that clear cut. Here in Australia there is an acute shortage of rentals and rents are going through the roof [0]. As with everything, there is always a caveat. [0] https://www.macrobusiness.com.au/2022/05/australias-rental-crisis-a-disaster-in-the-making/ https://www.macrobusiness.com.au/2022/05/australias-rental-c...

ryathal 4y ago

Very few houses were underwater for a decade, most markets were already above 2008 levels after 10 years.

adam_arthur 4y ago
Many regions were underwater for a decade, yes. All of Florida, Vegas, Phoenix among others. Some markets were down 60% peak to trough (Florida). The ones that rose the most also tended to be the ones that fell the most

c7b 4y ago

You seem to be looking at buying a house as an investment. I'd argue otherwise: your first piece of real estate is a necessity, not an investment - you always need a place to live. So, in financial terms, you're closing a short position, not opening a long position. Of course there is non-negligible friction if you need to move, so you do want to be mindful of not buying right at the peak, but in general I think you're overstating how much you need to worry about prices: you don't profit when prices go up, since you'd also have to pay more for a new place, and as long as you can afford the payments, your home moves in line with the market and don't need to sell, you also don't need to let falling prices affect your sleep. Your position is market neutral, you are mostly giving up flexibility.

spiffytech 4y ago
While I think you're right in ordinary times, this doesn't work during a bubble. You could be totally blocked from moving if your home is worth a fraction what you owe on it, no matter how necessary the move is (job, school district, family).
- c7b 4y ago
  Even then there are some mitigants: you could try to rent out your first home and rent or even buy a new one. Tax-wise that would work against you (usually, in most places), but it probably wouldn't bankrupt you. I agree, of course you don't want to have bought right before a dip. But if you sketch out a few scenarios and look at the overall and your individual situation (eg, Would rental income cover credit payments, even in an adverse scenario? Do you have expenses you could claim in years when you're renting out? Do you have other uses for the property, eg within a family?), you might find that you can manage the risk (or not). It's definitely not risk-free, but there's also significant upside potential if you can make a long-term commitment.
- andsoitis 4y ago
  > this doesn't work during a bubble. You could be totally blocked from moving if your home is worth a fraction what you owe on it Do you actually mean after the bubble has burst? Because during the bubble, why would your house price be a fraction of what you owe on it?