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You nailed it...and on top of that nobody lost anything....only on paper, unless you sold your home!
It still amazes me how people whine about losing value when they didn't pay a dime down! What did they loose...their dream and bubble of owning a home that was paid by some one else and they basically paid rent for...
Owning something means you paid it off....
Bingo!
People haven't lost a dime until they decide to sell the house. Yes, market is saying that the house cost less, but the house is worth as much as you think it's worth. If someone paid 400K for a house, to them it's worth 400k, and it does not matter that market says house is worth 250k unless they sell the house. Yes they might be upside down on the loan, but they have a roof, they have place they can sleep, relax, watch TV or spend time with the family. If they have enough money to pay off 400k mortgage, i see 0 reasons why they should whine and cry that price dropped.
Bingo!
People haven't lost a dime until they decide to sell the house. Yes, market is saying that the house cost less, but the house is worth as much as you think it's worth. If someone paid 400K for a house, to them it's worth 400k, and it does not matter that market says house is worth 250k unless they sell the house. Yes they might be upside down on the loan, but they have a roof, they have place they can sleep, relax, watch TV or spend time with the family. If they have enough money to pay off 400k mortgage, i see 0 reasons why they should whine and cry that price dropped.
I agree. We bought our modest home here in Sarasota in 2008, after prices had dropped significantly, however they have dropped some more since then (in my neighborhood) We don't really care because we LOVE our home, are not planning on selling anytime in the near future, have a low mortgage payment and still have equity even though we have spent a lot to improve it and value has dropped some. The upside is our taxes have gone down a LOT. And I figure that even if we wanted to sell and had to take lower than we paid, it's all relative, we would just get a better deal on the next purchase.
I also agree that in this market anyone who has their house priced right will sell. Again, just going by my neighborhood, there has been significant activity in the last year in both lower and upper priced homes. Those who priced too high are just sitting. My foolish neighbor put her house on the market at $150,000 and got and offer within 2 weeks at $140,000 (which is the TOP END of what her house is worth) and would not come down even a dollar! so he walked away and now NO ONE is even looking at it, and I doubt they will. Plenty of better homes around than hers for the same or less. I figure she just doesn't really want to sell!
I am pleased to see that others are thinking the same way I have for years.
Quote:
Originally Posted by tewas
Bingo!
People haven't lost a dime until they decide to sell the house. Yes, market is saying that the house cost less, but the house is worth as much as you think it's worth. If someone paid 400K for a house, to them it's worth 400k, and it does not matter that market says house is worth 250k unless they sell the house. Yes they might be upside down on the loan, but they have a roof, they have place they can sleep, relax, watch TV or spend time with the family. If they have enough money to pay off 400k mortgage, i see 0 reasons why they should whine and cry that price dropped.
How do you avoid housing expenses? Is this person going to go live under a bridge? The only people who would be negatively impacted would be those who choose to move to a region where prices are not falling or were buying it as a speculative investment, and those are entirely different economic decisions. For a vast majority of homeowners, stagnant or negative prices are beneficial.
I recently sold and took a loss on my (inexpensive) condo, and simultaneously purchased a much more expensive house, which was also knocked down about 50% in price. Five years ago there would be no way I could afford this place. I am hoping that prices fall another 50%, and I'll upgrade yet again.
I still don't see how "declining prices are bad for a person who has taken a significant long postion". If your mortgage is locked in at a rate you can afford, declining prices are good because they will lower your cash outlay for property taxes and provide you with a free option to upgrade in the future.
That significant long position is also a long and leveraged position on the costs of home ownership, which rise when market prices rise. In the long run, the costs to an owner due to rising prices outweigh the benefits of rising prices (unless, of course, they are cashing out to go live under a bridge or in a cemetery).
I’m not sure how you don’t understand that declining prices are bad if you’re long in an investment. It’s pretty simple. Losses are bad. Here, we’re talking about a significant investment: an average American has about half of his wealth tied up in his house. So a 50% decline in housing prices, across the board, means our every-man loses a quarter of his wealth. That’s not a good thing on a national level. Now, maybe our every-man doesn't transfer the property until he dies, so it's an unrealized loss as to him. But that's still not a good thing. Further, if our every-man is leveraged, it means a third party may be able to force him to sell, leading to a realized loss. And declining prices coupled with a recession made this a big problem for millions of Americans.
You seem to welcome losses for two reasons: (1) others will take larger losses, allowing you to "upgrade"; and (2) declining prices means lower costs. This thinking isn't without merit, but I think you take it too far.
First, the average American is an unsophisticated investor who also lacks sufficient capital and/or credit in this recessionary market to make a play. You and I can capitalize on that, and good for us. No pity party here. But I don't think that situation is a good thing as a general matter. We're talking about a "free option to upgrade" caused by a bunch of bad things: massive declines in disposable income, forced sales by creditors, etc.
Second, costs are down for the short term: property taxes, mortgage rates, and transaction costs (i.e., realtors) are all down. But this is correlated to the price decline, not caused by it. Tax and monetary policy (property taxes, mortgage interest rates, income tax deductions, etc.) are not necessarily tied to any economic reality. For example, it is possible that the PMI and/or mortgage interest deductions will go away. In addition, factors other than the housing price decline, and in particular the recession (and disposable income decline), seem more responsible for today's low costs. Had disposable income increased over the past five years, it is doubtful that property taxes, interest rates or transaction costs would have gone down, irrespective of how housing prices moved during the same period. Of course, de-coupling housing prices and the recession is impossible, since the housing market was a major driver of the recession (which perhaps means your argument reduces to recessions are good...?).
I have been out home shopping and it is amazing the many different things that are going on right now. This has been my experience in the last couple of weeks.
Short Sales: There are sellers who are putting their homes on the market as a short sale. They have no real intention on selling the home, they are merely doing so to appease the banks so they can get more months of free rent.
Short Sales: Those sellers who are putting their homes on the market as a short sale have not spoken to the bank whether their asking price is something the bank would even consider.
Market Values: We looked at a house that was purchased in 2005, brand new for $420,000. Asking price for this home today, $165,000. All this house needs is some new floor and paint. Amazing.
Non-Short Sale/Foreclosure Properties: Very hard to find a property that is not in distress at fair market value. Or perhaps my thinking is backwards. Those that are not in distress and these distressed properties are below market value. Although.... if there are more properties that are in distress on the market than those that are not.... would it be fair to say the distress properties set the market value for everyone?
My Prediction: We will continue to see prices decline, especially as more inventory comes on the market. My agent has said that she has many buyers but non of them are finding properties they are interested in. This tells me, buyer's are not finding properties at the price that think they should be (will result in housing values to decline before they are purchased). For a housing recovery to occur and for prices to continue to stop declining the following needs to happen... IMO.
- Interest rates must remain low
- Companies need to continue hiring
- Government needs to get some first time home buyer programs rolling again. Especially at the federal and state levels.
- Media needs to begin stating that the housing market has hit bottom and is beginning to stabilize.
- Builders need to stop building new homes.
I’m not sure how you don’t understand that declining prices are bad if you’re long in an investment.
This is where our opinions fundamentally differ. Housing is not an investment - it is an expense. No other investment will cost you 10% or so of your initial "investment" every year.
If your house costs you $25,000 a year but its value appreciates by $10,000 a year, are you making money or are you incurring an expense? You say profit, I say expense.
True investments, like stocks and bonds (and investment properties) can provide dividends and can be sold at a profit. You can eat dividends and capital gains.
The whole "home equity" fallacy pushed by the real estate community misses two important points: 1. you can't eat home equity, and 2. for 95% of the time, housing prices do not gain more than the 10% annually that it will cost you to own the house.
People get themselves into big trouble when they do not understand this "investment vs. expense" concept. They end up incurring much larger housing expenses than they can afford, because they think that they are making an investment, when in fact they are doing the opposite -- flushing more dollars away on interest, property taxes, insurance, maintenance, etc that will never be recaptured by the housing appreciation. [I purchased my home as a bank foreclosure previously owned by a realtor that had a couple of good years and then took on a mortgage about 10 times the size of their annual income. That's what happens when you drink the kool-aid.]
The only way you can avoid housing expenses is if you voluntarily give up paying housing expenses (be homeless, live with Mom & Dad, etc) or you die.
Declining prices are good if you are long an expense.
Bingo!
People haven't lost a dime until they decide to sell the house. Yes, market is saying that the house cost less, but the house is worth as much as you think it's worth. If someone paid 400K for a house, to them it's worth 400k, and it does not matter that market says house is worth 250k unless they sell the house. Yes they might be upside down on the loan, but they have a roof, they have place they can sleep, relax, watch TV or spend time with the family. If they have enough money to pay off 400k mortgage, i see 0 reasons why they should whine and cry that price dropped.
Well, perhaps you should put yourself in their shoes, and you just might understand where they're coming from. You keep whining and crying about people that have damn good reason to whine and cry...they've taken a big financial loss. What's YOUR excuse.
This is where our opinions fundamentally differ. Housing is not an investment - it is an expense. No other investment will cost you 10% or so of your initial "investment" every year.
If your house costs you $25,000 a year but its value appreciates by $10,000 a year, are you making money or are you incurring an expense? You say profit, I say expense.
True investments, like stocks and bonds (and investment properties) can provide dividends and can be sold at a profit. You can eat dividends and capital gains.
The whole "home equity" fallacy pushed by the real estate community misses two important points: 1. you can't eat home equity, and 2. for 95% of the time, housing prices do not gain more than the 10% annually that it will cost you to own the house.
People get themselves into big trouble when they do not understand this "investment vs. expense" concept. They end up incurring much larger housing expenses than they can afford, because they think that they are making an investment, when in fact they are doing the opposite -- flushing more dollars away on interest, property taxes, insurance, maintenance, etc that will never be recaptured by the housing appreciation. [I purchased my home as a bank foreclosure previously owned by a realtor that had a couple of good years and then took on a mortgage about 10 times the size of their annual income. That's what happens when you drink the kool-aid.]
The only way you can avoid housing expenses is if you voluntarily give up paying housing expenses (be homeless, live with Mom & Dad, etc) or you die.
Declining prices are good if you are long an expense.
This isn't a matter of opinion, your argument is severely flawed:
We agree that everyone pays housing expenses. Everyone who buys, everyone who rents, and everyone who lives with mom and dad (a non-cash expense, though significant....). When considering buying a house, your baseline includes very, very significant housing expenses.
A house is not a housing expense. It's an asset. Like any asset, a house has associated maintenance and transaction expenses. And, because it's a house, these expenses are housing expenses. The house, itself, is an asset, and that asset has a market value.
An average homeowner expects that buying puts him in a better long-term financial position than renting, i.e., that buying will provide him returns relative to his baseline. This means he's making an investment. (You created a term "true investment" which appears to be defined arbitrarily and used inconsistently. Any time you purchase something with the expectation of future returns, you have made an investment. And plenty of investments have recurring expenses higher than upfront costs: anything that's highly leveraged, education, leases, employees, etc.)
By purchasing a house, our average buyer expects to transform a part of his normal course monthly housing expenses into deferred income. Some of this deferred income is expected to be paid during the life of the investment (tax benefits, rent, etc.) and other is expected to be paid when the house is sold (principal payments, improvements, appreciation, etc.).
Purchasing a house does not necessarily eliminate or reduce normal course housing expenses and may raise them. This does not make it a bad investment decision, depending on how much deferred income is reasonably expected to be realized: all our homeowner needs to do is beat the baseline over the life of the investment in order for it to be a good investment.
When house values decline, the deferred income benefit of home ownership is reduced or eliminated, and, if house values decline far enough, the investment loses money relative to the baseline. That is a bad thing for homeowners. This is, of course, an unrealized loss until the property is transferred.
Because most homeowners lever up to buy houses, they do not have full control over when property must be transferred, i.e., whether losses will be realized. In our case, mortgages were extended to subprime populations who could not afford them, which led to forced transfers and realized losses, which triggered a deep recession, which led to massive job losses, which led to more forced transfers and realized losses. This reduced home values and was generally a bad thing.
All that said, it is theoretically possible that house (asset) values decline, but (the present value of) that decline is eclipsed by a contemporaneous decline in housing expenses. In that situation, without more, our average homeowner benefits. But that is certainly not what happened in the bay area (or anywhere else as far as I can tell). House values dropped 50%, and associated expenses did not drop nearly that far (on a pre- or post-tax basis). Moreover, job losses led to forced transfers and limited credit, reducing the number of homeowners who could take advantage of housing expense reductions.
This is all really basic stuff: if you lever up to go long on an asset, and its value drops, that's typically a bad thing. The present housing market is no exception, notwithstanding that some of us were poised to take advantage of the market (as is the case every time a bubble pops).
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and it's not like they are not lying right now
