Third of recent buyers owe more than home's value
 

I saw this story, and it got me thinking -- is the access to "easy" credit allowing or even encouraging people to make unwise purchases? Not just buying more they they can afford, but paying more then something is worth. It's kind of like what you see on Ebay when bidders suffer from the "red-mist" end up bidding more then the house/car etc. is even worth based on the alternatives.

Not that the Boston area is that cheap, but whenever I hear about real estate values in CA, I can't help but think that everyone suspects that they've overpaid, but kind of has their fingers crossed that the market will hold up by finding one more sucker to pay a little bit more then the current owner has. Kind of like 911s as collectibles - where every new buyer believes that their 911 is worth $10K more then they bought it for just by virtue if them owning it.

I think the answer is 'yes.' The 'housing bubble' is really the result of a 'credit bubble' that has inflated asset values of homes, among other things (including collectors cars)

Americans have been spending more than they earn for years (negative savings rate), most recently by borrowing against falsely inflated asset values.

An adjustment to sustainable levels of spending will be painful for all. Gov't and banks are trying very hard now to keep the illusion of wealth going (trying to put a floor in housing, stocks). It remains to be determined whether or not they will succeed

Easy credit and the illusion of easy money. In markets where appreciation was 20-30% per year, I think people felt they could just ride the wave. So what if it's expensive, I'll just buy with this ARM so I can afford the payments, then sell in a few years and make thousands! Unfortunately for them, those values were not sustainable. Everyone forgot about "buy low, sell high", they all hoped to buy high, sell higher.

Homeowners with negative equity numbered 5-6 million at the end of 2007. That's 1 out of every 10 mortgaged home in America. If prices continue to slide, expect it to get much worse. I presume the Federal Reserve will take future drastic measures to salvage asset prices.

That's a well-known phenomena known as "The Greater Fool" theory.

Apparently that's me :D

but I prefer "greatest" fool if you don't mind.

I believe when we purchased our home that I was mostly prepared to weather a correction. We purchased in early 2004 if I recall correctly. I felt the house was over priced then but the circumstances were right. I had hoped for about 10 years in the home, now it maybe closer to 15 but that really isn't a huge deal I guess. As time progressed we received our quarterly statements from the bank eventually showing a nearly 100% increase in value from our purchase price. I never considered that 'money in my hand' primarily because I've been to my house and I know it isn't worth that much. Nobody in their right mind would purchase my house for twice what I paid for it...maybe I should have checked that out...

Anyway, we have a fixed at just over 5%. We also have a small second that is adjustable but fixable, we're watching that for the right time to fix. It's never been above 7% and right now it is adjusting down. We will fix it soon enough...

So, I feel that I can weather a 40% correction and be back at square one. I'm okay with that though obviously I would prefer a better scenario. We've also done some minor upgrades that might also affect the price but we shall see. We don't need anything 'bigger' as this house is big enough but I would like a 'better' house as this one simply has built in limitations that I can do nothing about. If we were to go down below that 40% mark it would be depressing...

Oh, and in case it wasn't obvious I'm in Southern California.

Close to 100% of people that finance their cars owe more than what the car is worth.

I never owed more on a car than it was worth in my life. If I can't afford it, I don't buy it. A rather quaint policy, but I am an old fashioned kind of guy. Spent a lot of time driving crap box cars and living in crummy little apartments too.

If any commodity is inexpensive, it becomes more attractive. This is true of money, cars, real estate, practically anything. The answer to your question is yes, obviously yes to me.

That makes sense to a point, but the first time you miss a client meeting because your beater broke down on the way, the value of having something a little newer/better becomes clear.

Yes, I learned the hard way. Once. Like you, the "newest" car I ever owned prior to buying my M.B. was a 1988 GMC pickup. And I got it in a trade for my '86 Dodge Daytona - in 1995, so it wasn't exactly "new" then either (and I kept it for almost 10 years).

Shoot, the M.B. I'm driving today cost me less than a new Honda Civic costs with only 50k miles on it, so I guess I did okay. It's never left me stranded and is a great DD. Point is, there's reasons for things and even though some things might not make sense at first glance or on the surface, they might possibly be well thought-through and/or have good and legitimate reasons for them. . . :)