The Housing Situation: People "Up-Side-Down" on Their Home Loans

[competentone]

From this Bloomberg article:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a5kwcrH_LWro&refer=worldwide

Home values fell 7.7 percent in the first quarter to the lowest level in almost three years, according to Zillow.com, an online real estate data provider. Zillow also estimates that almost 52 percent of owners who bought homes in 2006 now owe more on their property than it is worth.

What is going to happen in our economy with so many people becoming "up-side-down" on their home loans?

I know owing more than their cars are worth, has been a situation for years for large segments of the population, but the dollar amounts with cars have normally been limited to just being up-side-down by a few thousand dollars, at most.

How are people, and our economy, going to handle situations where large numbers of people are up-side-down by tens of thousands of dollars (or more) on their home loans?

[Gogar]

You're not upside-down unless you try to sell.

[Porsche-O-Phile]

Or the place burns down. . . or you end up in foreclosure and on the hook for the difference (IIRC in most states you can't be for the first, but the second is another story. . . and the bank can send you a 1099 for the portion they end up eating. . .)

[turbo6bar]

Originally Posted by competentone

How are people, and our economy, going to handle situations where large numbers of people are up-side-down by tens of thousands of dollars (or more) on their home loans?

I think the last number thrown around was ~3.5 million homes with negative equity at the end of 07. If that trend continues, the number spirals to ~8+ million by the end of 2008. Those are significant numbers considering ~55 million households are mortgaged. Families that are content to stay put and can afford the payments will be fine. The ones who are forced to move for various reasons; those are the ones we should be studying. It can/will have a terrible effect on the market and overall economy. There's really nothing we can do, either.

[red-beard]

How many "cashed out" on a long held property? When I lived in San Diego, we had secretaries driving new BMWs because they refinanced and bought new cars with the $100K in cash they took out. They also took cruises, etc.

What about those who bought properties they couldn't afford? No one held a gun to the head of these people.

If the WSJ is correct, we are nearing the bottom.

[Seahawk]

Originally Posted by red-beard

What about those who bought properties they couldn't afford? No one held a gun to the head of these people.

Perfectly stated. Many people abandoned sound personal fiscal management betting on the fantasy of ever-increasing house prices.

I never exceed time-proven guidelines on any house or property I have or will purchase.

[Joeaksa]

Originally Posted by Seahawk

Perfectly stated. Many people abandoned sound personal fiscal management betting on the fantasy of ever-increasing house prices.

I never exceed time-proven guidelines on any house or property I have or will purchase.

Correct and it was like a feeding frenzy. Those of us who did things the conservative old fashioned way are still doing fine.

[Porsche-O-Phile]

It's okay. The next administration is just going to run the old printing press double-time, get more dough$ into circulation and inflate the hell out of the dollar. By doing this, they'll help to offset some of the price declines and claim to be "actively involved in helping people stay in 'their' homes" (*cough* *cough*). Or other similar politically-spun garbage that really serves to help reward greedy wall street bankers and bond ratings agencies that promulgated this. Of course the fact that they're wealthy campaign contributors and "politically connected" has nothing to do with it, right?

Scenario:

If a house that your banker buddy is on the hook for $200k for (he extended a $600k loan to some schlocker who works at Taco Bell for $8.50-an-hour three years ago and it's now "worth" $400k), just inflate the currency 60%. Now the home is "worth" $640k, the buyer is "right side up" again and less likely to walk away and stick your banker buddy with the difference, right? PROBLEM SOLVED!

Point is, double-digit inflation is coming - and perhaps sooner than y'all think. And it's deliberate.

Welcome to 1975 all over again.

[Rot 911]

Originally Posted by Joeaksa

Correct and it was like a feeding frenzy. Those of us who did things the conservative old fashioned way are still doing fine.

And we are the ones that will be penalized in higher taxes to bail out the idiots who thought they had their own printing press for money.

[Tobra]

Originally Posted by Joeaksa

Correct and it was like a feeding frenzy. Those of us who did things the conservative old fashioned way are still doing fine.

True, abut there are a lot of stupid people out there, hence the big numbers.

My buddy has a house that he has been in about 10 years, paid 180K, with 160K mortgage. Did his refi, paid off all the car notes he had, got a note at 2 % less than the original note because of his sterling(more like platinum) credit rating. He only took out 11K, his home mortgage payment went down a few hundred a month, no car payments, 5 cars(including a pair of Cutlasses, BB '70, SB '70 convertible, he is an olds guy) 4WD truck he has had for 18 years that he bought new, and a pair of honda commuter rides.

He is teaching his son sound financial principles too. Kid is rolling in an Acura that is nicer than mine and he is 19, building his credit.

His home is worth 425K, and he owes less than 150K, after 10 years. He is looking at renting that to his son while he is in college and buying a second home while the market is down. If there are multiple millions of losers, there have to be a few winners/not stupid people.

[einreb]

If you are seriously upside down in a mortgage, whats the downside to walking? A knock to your credit score? a 1099 bill that's small change compared to your equity loss? I can imagine a lot of people leaving the keys in the door and walking.

I still don't think we've hit the 'capitulation' point yet... this could get even more interesting.

[onewhippedpuppy]

Many of these people made a fortune selling homes at inflated prices. Now that the bottom falls out, we're supposed to feel sorry for them? I don't think so.

Unfortunately, as usual those of us that made wise choices will pay for the idiots. Guess I should have gotten a Countrywide Jumbo ARM instead of my 20 year fixed.

[Rick Lee]

Originally Posted by einreb

If you are seriously upside down in a mortgage, whats the downside to walking? A knock to your credit score? a 1099 bill that's small change compared to your equity loss? I can imagine a lot of people leaving the keys in the door and walking.

I still don't think we've hit the 'capitulation' point yet... this could get even more interesting.

But why walk away unless you just have to move somewhere else and can't sell? Some people can't sleep at night knowing they're upside down on a house. But the alternative is moving, which sucks, trashing your credit and possibly getting a 1099, which sucks or staying put and just keep making your payments. Maybe things will pick up, maybe you'll end up losing less in a few years. You gotta live somewhere.

[the]

Originally Posted by Gogar

You're not upside-down unless you try to sell.

No, you are upside down the minute you owe more than the house is worth.

It's not just a sale situation. When you are upside down, for instance, you can no longer use the house as security for a loan. You can no longer pull equity out of it. It is a general indicator of people's financial strength and security, as a whole. People who previously had large equity in their homes who are now upside down likely now have a negative financial net worth. People who go deeply upside down are less likely to continue to struggle to make payments, when they realize they "own" nothing and have no equity to protect.

[Wickd89]

Originally Posted by the

No, you are upside down the minute you owe more than the house is worth.

It's not just a sale situation. When you are upside down, for instance, you can no longer use the house as security for a loan. You can no longer pull equity out of it. It is a general indicator of people's financial strength and security, as a whole. People who previously had large equity in their homes who are now upside down likely now have a negative financial net worth. People who go deeply upside down are less likely to continue to struggle to make payments, when they realize they "own" nothing and have no equity to protect.

A position is only realized when you actually sell it (basic rule of investment). This debate only really matters if you actually "loose money." Ever investment has its cycle and looking at this years downfall in your home price that will likely recover in a few years, is short sighted. If you get upset everytime a stock or investment takes a hit, you will have ulsers!
I am sure over time, things will be fine.
I guess most of our parents that bought homes in the 60's and 70's are fine; and we will be as well as long as you look long term.

[kstar]

In some ways this situation reminds me of the dot-com bust in 2000 as it relates to "losses".

In the .com bust, trillions of dollars were "lost", but in most cases that money lost was just air to begin with - the losses were against paper profit.

I remember taking some big hits, but I actually ended up making more net money than I started with. But, I did lose a significant amount of paper profits. I spent and bought a house in SoCal with some of the profits.

I think there are many parallels with that bust and this current housing bust. Losing money, even if it came quick and was largely on paper, is still emotionally difficult. I don't know how much of the current amount in "losses" can be considered "real" and not just big losses against funny money.

2˘

[Tobra]

Originally Posted by einreb

If you are seriously upside down in a mortgage, whats the downside to walking? A knock to your credit score? a 1099 bill that's small change compared to your equity loss? I can imagine a lot of people leaving the keys in the door and walking.

I still don't think we've hit the 'capitulation' point yet... this could get even more interesting.

how about a bill from the mortgage company to make up the difference, or seizure of your other assets

[einreb]

Originally Posted by Rick Lee

But why walk away unless you just have to move somewhere else and can't sell? Some people can't sleep at night knowing they're upside down on a house. But the alternative is moving, which sucks, trashing your credit and possibly getting a 1099, which sucks or staying put and just keep making your payments. Maybe things will pick up, maybe you'll end up losing less in a few years. You gotta live somewhere.

Rent?

I know what you are saying, forclosing, walking and moving is a hassle but there have been some huge drops in value (hundreds of thousands of dollars in many cases). Thats a real knock to a net worth and possibly worth the hassle for some.

Lets say the timing or numbers were a little worse with your condo out east (if I recall your situation correctly). What skin is it off your back if you were to get a loan on a new place where you are now and then just stop payin on the condo if it was under water. Surely for second and investment homes its not much of a hassle to walk. I know its not the 'honorable' thing to do, but it the numbers certainly might make it worth it.

[einreb]

Originally Posted by Tobra

how about a bill from the mortgage company to make up the difference, or seizure of your other assets

Thats what I was asking. I didnt know if they could do that (depends on the state?)

[Scuba Steve]

If the WSJ is correct, we are nearing the bottom.

If that's the case, Seattle won't be much better off than we were beforehand. Prices are still unaffordable for the most part, unless you're cashing out of an existing home that appreciated like crazy, are willing to have a ton of roomates, or want a crazy loan (though they're extinct now). Pay doesn't seem to match home prices.