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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

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.
  - vineyardmike 4y ago
    > will be life destroying for many people, even if they never have to sell Why?
  - toast0 4y ago
    > 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. It's hard to play along with such a unrealistic hypothetical. Sure, I'd pay $5 to rid myself of $10 of debt, but lenders generally won't be willing to accept that, so around we go in circles. Generally, mortgage lenders are willing to accept short sales when they reflect market realities though. > 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. I get you lose some optionality, but for a lot of people, the market value of their house went down at the same time as mortgage rates went up. Monthly payments on a 100% financed home would be pretty similar, so I don't see how it's life destroying to be underwater when you have a similar payment to keep your house as your neighbor. Yes, if you have a forced sale, it's not great, but it's not significantly worse to be tens of thousands underwater than if you were simply at $0 equity; again, most of the time you don't end up needing to pay the underwater portiom back. Yes, if you made a large downpayment, that's no longer accessible; there's risk there, but a smaller downpayment and PMI was usually an option, and sometimes PMI isn't that expensive. Yes, it reduces your willingness to move, and that's negative in a lot of ways, but there are ways to move anyway, you mostly have to set up the new housing first before defaulting on the old housing and commit to the new place for a while because it will be harder to move going forward. Otoh, you have leverage over the lender in a way that most borrowers don't. If the lender forecloses, they realize their loss; that makes them somewhat reluctant to foreclose. You may be able to miss more payments before foreclosure proceedings begin or get other concessions. It's definitely a different story, IMHO, than in 2008-2009 when people were underwater and rates went down. In that case, being underwater prevented accessing lower rate financing, so people in that situation were missing out on useful services.
vineyardmike 4y ago
> How much would people pay to not be underwater? Huh? Can I pay some (smaller) amount to the bank to have them lower my loan? Why would people pay anything but their normal loan payment? > That's a measure on how bad it is to be underwater. Not everything has to be spun into a free-market money-quantifies-everything definition.

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.
- vineyardmike 4y ago
  > will be life destroying for many people, even if they never have to sell Why?
- toast0 4y ago
  > 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. It's hard to play along with such a unrealistic hypothetical. Sure, I'd pay $5 to rid myself of $10 of debt, but lenders generally won't be willing to accept that, so around we go in circles. Generally, mortgage lenders are willing to accept short sales when they reflect market realities though. > 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. I get you lose some optionality, but for a lot of people, the market value of their house went down at the same time as mortgage rates went up. Monthly payments on a 100% financed home would be pretty similar, so I don't see how it's life destroying to be underwater when you have a similar payment to keep your house as your neighbor. Yes, if you have a forced sale, it's not great, but it's not significantly worse to be tens of thousands underwater than if you were simply at $0 equity; again, most of the time you don't end up needing to pay the underwater portiom back. Yes, if you made a large downpayment, that's no longer accessible; there's risk there, but a smaller downpayment and PMI was usually an option, and sometimes PMI isn't that expensive. Yes, it reduces your willingness to move, and that's negative in a lot of ways, but there are ways to move anyway, you mostly have to set up the new housing first before defaulting on the old housing and commit to the new place for a while because it will be harder to move going forward. Otoh, you have leverage over the lender in a way that most borrowers don't. If the lender forecloses, they realize their loss; that makes them somewhat reluctant to foreclose. You may be able to miss more payments before foreclosure proceedings begin or get other concessions. It's definitely a different story, IMHO, than in 2008-2009 when people were underwater and rates went down. In that case, being underwater prevented accessing lower rate financing, so people in that situation were missing out on useful services.

vineyardmike 4y ago

> How much would people pay to not be underwater? Huh? Can I pay some (smaller) amount to the bank to have them lower my loan? Why would people pay anything but their normal loan payment? > That's a measure on how bad it is to be underwater. Not everything has to be spun into a free-market money-quantifies-everything definition.