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If you're buying a house to live in, being underwater doesn't really matter as long as you can make payments. It's not great, obviously, but if you made the pur

If you're buying a house to live in, being underwater doesn't really matter as long as you can make payments. It's not great, obviously, but if you made the purchase to live there for a couple of decades, not as an investment, then the paper value of your home isn't especially meaningful. Being underwater became an issue in the last mortgage crisis because people couldn't afford their home payments (especially when they had ARMs that were about to adjust) and needed to refinance, which is not an option if you're underwater. They then got foreclosed on, which put more homes on the market, yada yada yada death spiral. Today, the percentage of people with ARMs is drastically lower than it was then, and lending standards are much higher. Unless people lose their jobs, they generally aren't forced to sell. That's why, despite there being low demand in the market, prices have only moved down slightly. Because there's also no supply - people are locked into 30 year fixed mortgages at 3%, and in the current interest rate environment they have no incentive to sell (barring job loss, death, divorce, etc.). For that reason, I strongly doubt we're going to see the kind of downward spiral we saw last time. Home prices may continue to decline slowly as people who are forced to sell must do so at less than they'd like, but the lack of buyers should keep a floor under the market.

touchpadder 4y ago
- dang 4y ago
  We ban accounts that post like this, so can you please make your substantive points thoughtfully in the future? It's necessary regardless of how wrong someone is or you feel they are. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
MontyCarloHall 4y ago
>If you're buying a house to live in, being underwater doesn't really matter as long as you can make payments. It's not great, obviously, but if you made the purchase to live there for a couple of decades, not as an investment, then the paper value of your home isn't especially meaningful. Except for the whole part about never being able to move. Even people who intend to stay in a house forever sometimes have unexpected life circumstances (both good or bad) that cause them to reconsider their long-term plans.
- toomuchtodo 4y ago
  Yes, those people will be selling at a loss, performing a short sale, or learning what it’s like to be a landlord.
  - MontyCarloHall 4y ago
    In many cases, people would not be able to afford this. Suppose I have $200k of equity in a $1M house. It depreciates to $700k. I now owe the bank $100k simply to be able to sell the house. Furthermore, if home prices depreciate that much, it’s likely rents would too, so it would be impossible for rental income to cover my mortgage payment, not to mention upkeep.
cjbgkagh 4y ago
How much would people pay to not be underwater? That's a measure on how bad it is to be underwater. Just because you're not forced to sell and 'crystalize' your losses doesn't mean they're not real.
- toast0 4y ago
  Paying extra principle payments to get out of being underwater probably isn't economically rational, unless it's a prerequisite for something of value. If you're underwater and have an ARM, maybe you want to refi to a fixed rate if today's rates are under your rate cap, etc. Maybe it looks bad on your security clearance, or impacts your ability to get other loans. Otherwise, wouldn't you rather have $30k in your pocket and a debt of $30k than having $0 in your pocket and no debt? Especially if your mortgage loan is non-recourse. I get that it feels bad to owe more than your home is worth, but that's usually the lender's problem more than yours.
  - twelve40 4y ago
    Paying with one's principles sounds terrible. But, fun aside, there is actually a segment of people for whom this might be pretty bad news, now that i think about it. > 56% of Americans can't cover a $1,000 emergency expense For these folks (56% of the entire country), equity is one of the very few sources of cash if anything happens. If they even have it. Also, for the reckless subset of them, it's also a potential source of bling like iphones or maybe cars they couldn't afford otherwise. Both good and bad will have their life changed once the equity disappears. Note: clearly far from all 56% are homeowners, but googling "house poor" doesn't bring up numbers that are too much better.
  - cjbgkagh 4y ago
    I should have been clearer with the hypothetical; there is a value between zero and however much the property is underwater that people would be willing to pay to no longer be underwater. The max of that value is equal to how bad it is for that person. Being underwater is really bad and will be life destroying for many people, even if they never have to sell they will be far worse off on average than if they didn’t buy a house that lost value. Historically maxing out on debt and buying property has been a winning strategy, in such an environment those who are underwater simply have to wait to be bailed out by high inflation and loose monetary policy. In my view there is a lot of change in the economy and we’re going to see some new things we haven’t seen before.
boopboopbadoop 4y ago
This is the kind of thing a real estate agent will tell you before they suggest you raise your bid. The fact is that it does matter - you could have bought a better house with the difference, your monthly payments could have been lower, etc.
- boopboopbadoop 4y ago
  Recent homebuyers and real estate agents downvoting me

touchpadder 4y ago

dang 4y ago
We ban accounts that post like this, so can you please make your substantive points thoughtfully in the future? It's necessary regardless of how wrong someone is or you feel they are. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html

MontyCarloHall 4y ago

>If you're buying a house to live in, being underwater doesn't really matter as long as you can make payments. It's not great, obviously, but if you made the purchase to live there for a couple of decades, not as an investment, then the paper value of your home isn't especially meaningful. Except for the whole part about never being able to move. Even people who intend to stay in a house forever sometimes have unexpected life circumstances (both good or bad) that cause them to reconsider their long-term plans.

toomuchtodo 4y ago
Yes, those people will be selling at a loss, performing a short sale, or learning what it’s like to be a landlord.
- MontyCarloHall 4y ago
  In many cases, people would not be able to afford this. Suppose I have $200k of equity in a $1M house. It depreciates to $700k. I now owe the bank $100k simply to be able to sell the house. Furthermore, if home prices depreciate that much, it’s likely rents would too, so it would be impossible for rental income to cover my mortgage payment, not to mention upkeep.

cjbgkagh 4y ago

How much would people pay to not be underwater? That's a measure on how bad it is to be underwater. Just because you're not forced to sell and 'crystalize' your losses doesn't mean they're not real.

toast0 4y ago
Paying extra principle payments to get out of being underwater probably isn't economically rational, unless it's a prerequisite for something of value. If you're underwater and have an ARM, maybe you want to refi to a fixed rate if today's rates are under your rate cap, etc. Maybe it looks bad on your security clearance, or impacts your ability to get other loans. Otherwise, wouldn't you rather have $30k in your pocket and a debt of $30k than having $0 in your pocket and no debt? Especially if your mortgage loan is non-recourse. I get that it feels bad to owe more than your home is worth, but that's usually the lender's problem more than yours.
- twelve40 4y ago
  Paying with one's principles sounds terrible. But, fun aside, there is actually a segment of people for whom this might be pretty bad news, now that i think about it. > 56% of Americans can't cover a $1,000 emergency expense For these folks (56% of the entire country), equity is one of the very few sources of cash if anything happens. If they even have it. Also, for the reckless subset of them, it's also a potential source of bling like iphones or maybe cars they couldn't afford otherwise. Both good and bad will have their life changed once the equity disappears. Note: clearly far from all 56% are homeowners, but googling "house poor" doesn't bring up numbers that are too much better.
- cjbgkagh 4y ago
  I should have been clearer with the hypothetical; there is a value between zero and however much the property is underwater that people would be willing to pay to no longer be underwater. The max of that value is equal to how bad it is for that person. Being underwater is really bad and will be life destroying for many people, even if they never have to sell they will be far worse off on average than if they didn’t buy a house that lost value. Historically maxing out on debt and buying property has been a winning strategy, in such an environment those who are underwater simply have to wait to be bailed out by high inflation and loose monetary policy. In my view there is a lot of change in the economy and we’re going to see some new things we haven’t seen before.

boopboopbadoop 4y ago

This is the kind of thing a real estate agent will tell you before they suggest you raise your bid. The fact is that it does matter - you could have bought a better house with the difference, your monthly payments could have been lower, etc.

boopboopbadoop 4y ago
Recent homebuyers and real estate agents downvoting me