Question about home prices and foreclosures

[Recursion]

So I was listening to Marketplace this afternoon and whatever analyst was on said,

"As home prices continue to fall, you will naturally see more foreclosures..."

and, like I normally do when I'm listening to NPR, I nodded in an attempt to look wise. But then I had one of those double take moments and I realized that doesn't make sense at all.

Why would the amount someone is currently willing to pay for a house more or less like mine have anything to do with my ability to make my mortgage payment?

[bluerum]

1. People will stop paying on mortages when there is no chance of ever

seeing home values appreciate to more than what the mortgage is. Technically this is a default but hey, it's NPR.

[Recursion]

3. Crap. So the "bum homeowner" thing has some truth behind it? NT

[Oregone]

5. WTF is a "bum homeowner"?

You mean someone who makes a sound fiscal decision? They are a bum? A lowlife?

Poor banks.

[Recursion]

10. It *can* be sound, or it can be the same groupthink that made you buy too high

Losing all your equity in most cases is not going to be better than holding on to a place to live (saving on rent), your credit, and the possibility of reselling for more in a decade or so.

[Oregone]

14. "Losing all your equity"

You are presuming a homeowner has any. :)

They may not, at all.

[Recursion]

18. Everyone without an interest-only loan has *some* equity

I mean, assuming you've made at least one payment that ate into principal at all. It's just not enough to cover your debt with after the house is liquidated. But it's something, that can eventually turn into something more, particularly when the next housing bubble rolls around.

[Oregone]

20. "particularly when the next housing bubble rolls around"

I assert that keeping an underwater home in the hopes of selling it in the next bubble is insane. To each their own.

[Lil Missy]

Actually, people making over a million a year are the one most likely to walk away.

[Curmudgeoness]

2. Many people are trying to hold on long enough to be able to sell

their house, but are really struggling with their mortgage payments. At some point, these people will either have to give up or will feel hopeless. The longer this goes, and the farther the prices fall, the less hope these people have to get out without going to foreclosure.

[Recursion]

19. See, I've only ever been able to afford to rent

So I guess the idea of expecting to get anything out of what I pay for housing seems so incredibly privileged to me that I can't imagine being upset about that being shut off for a few years.

[Curmudgeoness]

31. I can understand your view, but there is more to it. Home ownership

comes with home maintenance costs, and if you have not had a raise in years, and other expenses keep going up, or if you have lost a job (or lost a second income), you just keep putting all you have into the house (and still don't keep up with all that is needed). People are not even looking to get anything out of the house today, but if you will end up having to pay tens of thousands of dollars just to sell the house because that is what you still owe over the value of the house, you just have to walk away.

[Oregone]

4. Why would your ability to make the mortgage payment have much to do with...

the fiscal sense of doing so (on the other hand, I understand your inability would come into play in that decision)?

If you are upside down, you are upside down.

[Recursion]

9. You're upside down on your car the second you drive it off the lot

What does that have to do with anything?

[Oregone]

13. If your car has value beyond the sticker price (such as work transportation), its to be considered

If you can ride a bike to work and to the store, by all means....


Just as such, a home has value beyond its market worth, but that same utility can be found in a rental. Part of the fiscal equation should include the cost of renting compared to the cost of paying a mortgage on an upside down piece of real estate. People aren't just paying down principle they can recoup later perhaps, being that it will be equity. They may be paying interest on a value far exceeding the real worth of the home (And perhaps more than what itll ever be in some reasonably finite period of time). Paying interest on $600K when your home is only worth $300K may be ridiculous. By the time the loan is paid off, you may pay over $700K in interests, and you may have no idea if the home is even worth $600K again at that time.

[Lil Missy]

6. Because the value of the house is less than what they owe.

[Recursion]

8. And?

By that logic nobody should pay for their cars.

[Vincardog]

24. You would keep paying off a $1M loan on a car that is worth $250,000?

[Oregone]

29. Id ride a bike

[jtuck004]

7. A large number of people have been spending a lot of their income

to sustain more bills than they can now pay. As average income has dropped, sometimes losing the $5K a year job and picking one up that is $20K, sometimes losing the second income in the home, and 30+ million people found themselves unemployed they have turned to their assets to get money - such as a 2nd mortgage or refinancing their home. But that money is no longer there, because there are so many homes available, which has dropped in price, credit is tight, their credit rating is no longer what it was, etc. There are also those who are upside down, a separate issue.

Then they kill their 401K or the small amounts of stock or cash they have.

So in a convoluted way that drop in home value is causing some people (not you, perhaps)to no longer be able to afford their bills, and they lose their home.

This is happening to thousands of people because of an interesting quirk of human nature. They resist change, even when it is slapping them across the face. The day things change they should divest themselves of all the liabilities they can and get their home on the market - but they don't. They keep thinking things are going to get better, bolstered by the crap being put out by talking heads and the government, and when things finally cave in, they still don't believe it.

And in a cruel circle of fate, the inverse of the statement above, that foreclosures are dropping home prices, is also true. And may well be what the reporter should have said.

[Recursion]

12. I totally understand that, but I don't see how a lower home price affects the situation

My home price doesn't change my income or my obligations, as far as I can tell.

(Now, I know there are some mortgages where the interest rate gets jacked way the hell up if you're underwater, that obviously makes sense. But I had thought those were very very rare even in the old days.)

[jtuck004]

17. But if one's job changes, and they turn to their home for money, and

the price is down so they can't borrow (as millions of Americans have done for the past 20 or so years) they can lose their home.

Maybe not you. But all around you. And as that happens, it might change your income one of these days. You might be adept enough to change, (if you can, some debts are not all that easily changed), but time will tell.

Maybe you could email the NPR reporter and get a better explanation.

[Recursion]

21. Not me? Buying a house has never been remotely in my league

And the idea of actually getting to keep even some of the money I spend on housing, even if it's years in the future, seems like such a good deal I get a little pissed off when people complain that their magic spigot of money is shut off for a few years.

[jtuck004]

33. Pissed off at who?

The little guy with the 130K, or 200K home who can't make enough to have a little extra money to send the kids to college, or who finally thinks they deserve a nice car after 20 years of putting up with his jerkball boss, or to pay for the operations that the health insurance company won't cover, or to pay for his parents who are trying to live on $1300 a month after the county raised their taxes on their home and they had to move, and the only rentals available were $1300 a month, food not included?

Or the 1% of the population that has 83% of the assets?

[flvegan]

11. I'm going to actually answer your question:

It doesn't. Your ability to pay your mortgage has nothing to do with how much someone is willing to pay for a home like yours.

To explain what was stated on NPR, as lenders foreclose many are taking far less than what is owed once they take possession because the market is flooded and at times the abandoned/vacant homes are gutted. Short sales aren't helping either. Then, because people are generally idiots in instances like this, someone sees the house next door just like theirs sell for $60,000 post foreclosure but they owe $175,000 on ultimately the same house, they figure they'll walk away because they're upside down on their loan. You know, the same folks that are upside down on their car loan, the shoes they charged, etc. They walk away, lender forecloses.

[Recursion]

15. So it's the kind of groupthink that ensures you'll buy high and sell low

I hate this species sometimes...

[Oregone]

25. You are welcome to buck this trend by paying a hefty sum for my home I have for sale.

[flvegan]

26. There's a lot of "suggestion" out there to do just this.

I've read articles and posts right here on DU telling folks to walk away from their mortgages for this reason. What's moronic, is that people are doing it based on what the neighbor pays. Most folks would be really depressed if they knew that their neighbors who bought 20 years ago (as opposed to 20 days ago) paid $30k for the same house.

Moronic part #2, home values will eventually spring back. Might take 10 years, might take 15. Fact is, God's not making any more dirt, but we're sure upping the population.

As I said, if you didn't pay cash, and it's not an investment of some sort, you're upside down the minute you bought it.

[TwilightGardener]

16. I always wonder what the "walkaways" from underwater houses (the ones

who can still swing the payments without trouble) are walking TO. A better house? I assume most of them are the better-off who have options, own second homes and rental properties, etc.

[Oregone]

23. Perhaps a rental that costs far less monthly

[TwilightGardener]

27. Why do that when the mortgage payment is affordable? I'm not talking

about people who can't afford the monthly payment without a lot of cutting back, I'm talking about strategic defaulting because the investment has lost value. I have not actually known anybody who did that, but apparently it's all the rage.

[Oregone]

28. The capital you saved can be invested to appreciate faster than the said property

It all gets a bit complicated when you consider in one scenario you are paying rental payments and potentially saving a lot that could be invested, and in another, mostly interest (depending on the length of time you are examining).

[notadmblnd]

22. an empty home on the block brings down the property value of the occupied

Also, as more people lose their homes, there is more on the market to sell. A glut of available housing means lower prices. I'm sure these are not the only reasons. But these are the first two off the top of my head.

[EmeraldCityGrl]

30. During the bubble something like 20%

of the homes sold were bought as investment properties. I would like to
know how many of the homes people are walking away from are not
their primary residence.

[haele]

32. Probably quite a few, considering how many renters have reported they were locked out of homes

when the place they were renting was sold out from under them.

Problem with that is that in some states, if your second property gets forclosed on, they'll put a lien for the balance on your primary residence when they sell for under the value of the loan and forclose on that property, too. I read where a couple people with second or investment property in Florida had that happen to their paid for primary residences - one in another state.

Haele

[yella_dawg]

34. If you bought using some kind of insane ARM

If you bought using some kind of insane ARM, with the goal of refinancing as soon as the market produced equity in your house, you are massively screwed now. The whole sales gimmick on these hideous gotcha loans was that you could refinance before the reset. But now you can't because you owe more than the house is worth. And the same problem is moving in to commercial real estate. Fun, fun, fun.