A conversation I was having brought up an interesting thought... how many people who bough during the bubble (and are so underwater now) will actually keep their homes in the long run?

It's not hard to find people to tell you now is the time to buy since houses cost half what they did 3 years ago... but if everyone who bought at the peak simply let their homes go in foreclosure, doesn't that meant that in a few years when this all clears out, those who bought now will really be the ones with the most expensive houses?

Example:

If you bought pre bubble, you may have gotten a decent house for $100k.

If you bought 3 years ago, you probably paid $200-500k for the same home... but you likely got foreclosed on or just ditched on your home since it lost so much value.

If you buy today, you might buy in at $130-200K for that house putting you way ahead of the previous buyer making this the "right time to buy".  But wait... those who bought during the bubble no longer have their homes so no one really has a $500k home... in 3 or 4 years when this hopefully has all blown over, those who paid the most for their homes in the last 20 years (those who buy today at $130-200k) will turn out to be the ones who paid the most for their homes since the ones who paid more no longer own their homes.

And since most who bought during the bubble did so $0 down and on some kind of really low interest loan, they probably really were out of pocket very little in the end.

So does that mean that today, a time during where "it's a great time to buy" is on everyones lips, really is about the worst possible time to buy?

Am I following your logic correctly?

Are you saying that everyone will walk away from their homes and the price of homes will spiral ever downward beyond where it is now?

I take issue with that both ways: First, there are a LOT of people that are not walking away from their homes. Walking away ruins your credit, displaces your family, and is humiliating for those who care about their reputation of financial responsibility. Additionally, foreclosure prevents one from buying another home, so it isn't as though these folks can turn around (for the most part) and buy something else in a year or two. While foreclosure is up, surely, it is still a small minority of homeowners in the county.

Second, while prices may not have bottomed (that is impossible to call, too many factors both locally and nationally), RATES are probably at or near their bottom. So the payment on a 100,000 loan is likely to actually be lower than an 80,000 loan at some point in the not to distant future. For those that are buying to hold, the amout of buying power you get for your buck is unprecedented.

Bottom line, buying a home is about a lot more than the home's market value from year to year. There are tax implications, investment implications, everyday life implications, etc.  And for those that have not bought a home and are looking to do so, rates under 5.5% and a 10% off rebate from the government, furthered by a large available inventory and the lowest prices in the last 5 or more years make it hard to see this as a "bad" market in which to buy.

That's a good point and I really have no idea what percentage of people are walking away from their homes, but of the 4 people I know and work with who are upside down, 2 were foreclosed on, one just stopped paying on her place so she can get foreclosed on and the last one is constantly talking about just walking away.

The ones who got foreclosed on had no choice, they just couldn't pay, the girl who is walking away is doinng so because she is upside down and her boyfriend is not involved with it so they can buy with him as an unforeclosed first time buyer and the last who is almost certainly about to get out is oddly not upside down yet, so she is going to try and buy a new house before dropping out on this one.

Certainly that's a small sample, but it does show there are quite a few who won't be staying in their homes either by force or by option.

As for pride, I certainly understand, but everyones pride must have a price...  if you are paying a 7% on an $800k mortgage when the same house just sold down the street for $450k at 5%... somethings gotta snap and say "I give, I am out and off to rent for way less than my mortgage".

Maybe it's not as bad for everyone, but it does seem to me that anyone who has seen their house depreciated 40% or more pretty much has no reason to stay in... it's going to be so long before prices break even for them that that alone would be hard to swallow not to mention the high mortage they will be paying just to wait.

As for credit, it sure would suck to have your credit shot, but if the majority of peoples credit is shot, doesn't that just mean that lower credit scores will then become the norm?  Aren't we constantly pushing to make lending easier to help the economy?  If bad credit is going to result in a lack of being able to borrow we are screwed...

A few years ago I think 650 was good credit, now it's in the 700's, but if 50% of the population has had their credit ruined and it's down at 400 then creditors have two options: Don't lend to half the market, or start lending to lower credit scores. 

I wouldn't even be surprised if credit ratings systems are altered to be more lenient on foreclosure dings.  A lot of people got into this situation through failure to educate themselves but also in large part due to a everyone pretty much pushing this line of action on them including those who people should have been able to trust to guide them towards good decisions.

I dunno but the bad credit argument seems like it carries less weight than it sounds like...

I would be interested to see some numbers on this ie how many people who bought homes between 2003 and 2007 still have their homes today and also how many still have them come say 2012...  Also I wonder if in 2020 or so if you look at last sales prices of homes, whether the peak prices will have been 2008-2010 and not 2003-2007.

I look around my city (which is of course two small a sample to draw any large conclusions from) and all I see: People being foreclosed on/foreclosed houses - or - people who have owned their houses for a long time and as such are not bubble buyers...

Small sample, as you acknowledged. That is not the norm. In some communities, due to the extreme loss of value, I guess it is becoming ok to say "yeah, I borrowed money to buy something that was overpriced and now I want someone else to take the fall". That, I guess, is a cultural failing in addition to an economic one. I could never, ever do it. Pride would have me paying that 7% loan on that 400K mortgage until the day I died.

SOMEONE paid for that house, no matter what it is worth now. The bank actually shelled out the money in hard cash - so it is a dollar for dollar loss when the home is then sold cheaper at foreclosure. I cringe when people see it as a fair trade. ("I'll just let the house go back to the bank, even steven"). To me,  if you can afford to pay and don't, it is equal to stealing. If we get into the ethics question . . . "How bad off would I have to be before I stole?" . . . a lot worse off than having to ride out a mortgage for a few years. Now, if the loan was truly predatory and written dishonestly, ok, but that is a minority of loans. If I literally couldn't feed my kids, ok. But that girl in your office? She is just getting a clean slate because she is dating someone? Come on! He could move in with her and probably the two of them could handle it.  OR she could rent it and move in with him. But no, she just isn't going to pay anymore.

Is it ok to just say "ooops, sorry, do-over please"? A lot of people just bought at full price with no money down - even with good, fixed loans that they CAN afford to pay - and now don't want to deal with that decision. We will all suffer for their irresponsibility.

Can I just return my car after driving it for a year because someone else's car seems better to me and I want to get a different one? No chance, not if there is a loan on it. I bought it, I agreed to pay for it. A car is underwater the minute you drive it off the lot. Most people actually get that. (Not all, haha, but most). So why is it any different when it is a house?

I don't think it that prices could possibly be higher in 2008-2010 than 2003-2007, in part because mose of the data is in on that already. Prices are lower now, nationally, than they were. How will 2008-2010 stack up with 2011-2013? Better question, I'm not sure.

I can tell you from the front lines that mortages are getting tougher to obtain, not easier. Minimum credit scores are going up. Information is cross-checked, triple verified, etc. It takes us longer to do a loan now than it has since before the advent of computers and faxes. And while the pendulum will eventually swing in the direction of easier guidelines, I think that will HAVE to be driven by an increase in home prices and a robust economy, not the other way around. We are not quite ready to repeat our mistakes in a down market.

A lot of people bought homes in 2003-2007, but it certainly isn't a majority of the population at large. Even if fully 10% of 2003-2007 buyers walk away, that is still a very small percentage of all the adults in the country that will have foreclosures on their records.

Here is one of many articles about the prevalence of foreclosure: http://blogs.wsj.com/developments/2009/08/13/realtytrac-data-foreclosure-filings-up-7/

Nationally, less than 1 in 300 homes received a foreclosure notice. Even if we took the worst state, Nevada . . .at 1 in 56 . . . not "everyone" is losing their home. Of those who receive notice, some loans will still be modified, some will be short sold  . . . some will find a way to pay.

New buyers will emerge (they are teenagers or college kids now, they weren't old enough in 2003, dodged a bullet - or downsizers just shy of retirement that are getting ready for the next stage, or investors who have been waiting with baited breath for this very event that they saw coming years ago . . . or lived through in the 1980s and now have a plan). Just because a segment of the population (2003-2007ers) is taken out of the game for a while, creditors will not be without a borrow-worthy population. They will not have to lower their standards if they don't want to. Making bad lending decisions is never a "have to" - the companies that did that are bankrupt. Surviving companies are not going to be pressured into bankruptcy. They will just raise the cost of lending - the fees, the returns - until they can grow fat off of what is conservatively available. And people will borrow. They always do.

Figure before a few years ago, there were no 100% loans. People had to save for down payments or get it from their loved ones. Period. And there were still enough buyers out there to absorb the housing stock on a grand scale, year after year. Many of the ones willing to walk away now were the 100% buyers, the ones that had no skin of their own in the game. Why don't they care? Not their money. Most people who put down 20% are not walking away until they have tried EVeRYTHING else. So buyers of the "no money down" profile, who did not exist to be counted before this bubble, will not be substantially missed after it.

A smaller percentage of the population will be homeowners, over all. There will be more renters. Larger population of renters = Good market for investors. There will be more real estate investors - those who own multiple properties. Those who do own will own MORE realestate than before. I know a guy who got burned in the 1980s collapse . . . swore he wouldn't let it happen again, been saving his money ever since . . . has bought 25 houses in the past 2 years. That guy only owned 2 houses in 2004. He just made up for 23 "walk-aways" in terms of housing stock, supply/demand. And of those 23 "walk-aways", probably at least 10-15 of them make decent tenants once the housing payment is affordable for them. Some people will never pay their bills, whether they can or not . . . and that isn't going to change, either.

In 5-10 years, there will be a chunk of walk-aways turned renters ready to get back into the game. Not all will make it, but some will. They will have saved some money, hopefully rebuilt their credit profile with some better investments, become a little older and a little wiser for the experience. And all of a sudden, a lot of people will need to buy houses. A wave of housebuying = higher real estate prices = more greed on behalf of lenders = loosening of standards as house prices climb and mistakes (bad loans) are less visible and less costly because they are absorbed by rising prices  = short term memory lapses from international investors = big googly eyes and short term profit minded middlemen = here we go again.

This isn't the apocalypse. This is a cycle. What makes this cycle more drastic (like a full moon tide vs a regular one) - securitization and 100% lending followed by a lot of new housing stock and EXTREMELY, artificially low mortgage rates. But pretty soon we'll be right back in the thick of it.

Housing prices ebb and flow. It isn't a steady rise - it is a roller coast, a pendulum. Anyone who has the expectation of - who feels entitled to - constant, economy-outpacing real estate appreciation should never buy real estate to begin with. That just isn't how the game works.

That, I guess, is a cultural failing in addition to an economic one. I could never, ever do it. Pride would have me paying that 7% loan on that 400K mortgage until the day I died.

I hope you are in the majority but I think even if you are, that majority is rapidly shrinking.  The honor and pride you seem to have a respectable amount of is not as common today as it was in years gone by.  I think the sentiment on a wide scale is no longer that it's dishonroable or a pride issue but a business risk and a gamble.  In business you take risks, when they pay off you profit, when they don't, hopefully you have set enough of your profit aside to offset the loss.

I think people more and more often look at it less like a pride and honor thing and more as a business thing.  The bank is in a business, they planned and if they didn't plan well, well then they lost money.  It's how business works.  The very idea of "leveraging" (which I heard so much of in the last few years) is based heavily on the gamble.  Bet as little as you can so that when things go well you come up big, but when things go poorly you limit your losses.  The idea of a 100% loan I think in many peoples mind is an agreement to gamble between the bank and the buyer.  The buyer agrees to pay for the right to risk less in the form of higher rates or fees, the bank agrees to accept the risk of the person going belly up in return for those higher risks and fees. In the end, whatever happens, I think the common feeling is, both parties went into the situation knowing what the possibilities were and if one side didn't hedge their bets well enough, then that's just tough cookies for the business, afterall had things gone the otherway and the gamble turned out in their favor, a hefty profit would have been made.  And that's business.

So while I see what you are saying about not being able to walk away due to pride and honor, I think a lot of people will be able to just walk away because they see it as neither... they see it as a business deal they entered and a risk that was taken jointly between themselves and the bank.  They willl loos money and so will the bank.

It's kind of like cancelling a cell phone contract early, sure you said you would go 2 years, but now 5 months in you want out, you pay your penaltys and you are out and free of that commitment.  Is there anything wrong with that?  No... and I think many people see walking on a mortgage the same "I paid my penalty, my downpayment and my mortgage are gone to the wind, so that's my punishment." 

I can't count how many people suggested I buy a house and go 0 down so that in a bad caase I could do just that.

As for the car analogy... I think people defaulting on loans or walking away from cars they can't get ahead on or even selling them off in parts or to chop shops is more prevalant than we want to imagine. 

In short, I think your ideals are ethically positive, but I think you give too much benefit of the doubt to your fellow man, especially in a time of difficulty.

SOMEONE paid for that house, no matter what it is worth now.

Yes, someone did, and that someone is the bank.  But when the bank may fail over their loss, then the debt gets passed on to you and I indirectly as a taxpayer funded bailout.  Such is the way of the economy we have.  We trust the banks to take the gambles that pay off and keep our economy churning and growing.  When they do, it's great... when they don't... ultimately we take the brunt of it. 

And while SOMEONE paid for that house, the sentiment and guilt that comes with defaulting when that someone is not a person but a bank, or when the eventual someone is indeed people but LOTS of people, then the guilt is much more easily ignored.  After all, taking $1 from everyone in the country isn't so bad is it?  If the choice is "I loose $300k or eveyrone in the country looses $1" what's really so bad about loosing $1, anyone can handle that.  I can't handle $300k loss now can I?

I don't think it that prices could possibly be higher in 2008-2010 than 2003-2007, in part because mose of the data is in on that already. Prices are lower now, nationally, than they were. How will 2008-2010 stack up with 2011-2013? Better question, I'm not sure.

I am not saying todays prices will be higher, (although I see that can easily be taken from how I said it) I am saying that in 2020, if you look at every house out there and pick their highest last sale, where will that fall?  It probably won't be in the 90's because prices are not likely to drop and stay that low, one would think it would be in the 2003-2007 range because that's when houses cost the most... but if they all get foreclosed on and resold as foreclosures, then the highest last sales will probably be 2008-2011...

Think about it, house sold for $100k in 1990, sold for $500k in 2007, foreclosed on and sold for $300k in 2009.  Last sale was $300k in 2009.

All the houses that didn't get sold during the bubble still carry their 1990 prices.  The 2003-2007 prices are basically erased from the books as last sales becuase they were foreclosed on, 2009 prices still remain because if the market goes down still in 2010 and 2011  it might well not get back by 2020 so in that case, the highest prices that people paid (and are still in their loans on) would be 2009.

It makes sense in my head but it's hard to explain... basically it doesn't matter what prices were at any point in time if no one road out those prices.  No buyer actually PAID $500k for that house, they paid $30k of the mortgage maybe but got out.  Those who stick with their mortages in 2009 may effectively be paying the most for their houses of anyone in recent history.

Basically let's say ketchup is $1 a bottle in January, then it's $30 a bottle in feb, people buy it up but then realize, they can't afford $30 bottles of ketchup so they start returning them and stores have to sell them at huge discounts for say $10 a bottle. 

Hey Ketchup is 1/3 what it cost a month ago!  It's a deal! Buy!

You would think people who bought $30 a bottle were the suckers right?  Nope... they didn't pay $30 for a bottle of ketchup, they paid nothing or maybe a minor restock fee to get rid of that ketchup. 

The guys who paid $1 a bottle sure aren't the suckers, they got a decent deal.

The ones who paid $10 are the suckers, they paid the most of anybody.  And as the price of ketchup falls back in line say to $2 over the next year, historically the people who paid the most weren't the ones who paid $30, it was the ones who paid $10...

Basically who would you rather be (not ethically or emotionally but financially):

Person who bought during the bubble and got foreclosed on.

or

Person who bought post bubble and still has that house?

Well person who bought bubble probably put down a few grand and paid mortgage for a few years.  Let's say they are out $30k total.

The person who bought post bubble has a house that is probably now about what they bought it for (when I say post bubble I mean now and I believe prices will still drop, so once prices level and rise again, todays buyers will have some waiting to do just to break even) so they are essentially also down money, but come time to sell, those who bought say 2010-2013 where the real bottom was, and those who bought shortly pre bubble are the ones setting the price to sell.  They bought for less than the 2009 buyer and can thus sell for less and still get a decent profit.  The 2009 buyer must now take a hit on profit (or take a loss) to sell becuase the competition can sell for lower.  But the 2009 buyer has no similar upper hand on anyone... the 2009 buyer is actually the one who bought at the top essentially as the ones who really did buy at the top are no longer in the game, so 2009 is now the defacto top.  Thus the worst place to be and thus the sucker...

Just because a segment of the population (2003-2007ers) is taken out of the game for a while, creditors will not be without a borrow-worthy population.

 They won't be without, but they will be with far less than was projected to sustain their business.  Sure new borrowers will grow of age and some will still exist, but if a significant percentage drops out of credit worthiness for 7 years... that's not something that can just be made up for.  And if raising rates and making it harder to borrow is the creditors solution, it is a spiral of doom. 

No one to lend, too: Charge more to borrow and make it harder to borrow.  This means less people to lend to, thus charge more to borrow and tighten standards to reduce risk again.  It's like cutting the training budget to save costs...

Nationally, less than 1 in 300 homes received a foreclosure notice. Even if we took the worst state, Nevada . . .at 1 in 56 . . . not "everyone" is losing their home.

Remember I am not talking about everyone loosing their home, to be the new suckers, you simply have to be the one to buy at the highest prices that actually gets followed through on.  So lets say of those 300 homes, the 299 aren't being freclosed on, those are likely pre bubble homes. They didn't pay outrageous prices.  What bout that 1?  Well that guy isnt really paying outrageous prices, he is just getting booted and loosing what he put in (probably not too much).  So who is left paying the highest price?  The guy who buys the house that got foreclosed on at way less than the previous buyer (deal!) but still WAY more than those pre bubble people who are still in their homes.

Basically this is what I am thinking:

Go 10 years into the future.  Housing market has stabilized and recovered somewhat.  Prices have climbed back up to 2001levels.  If in that day you sell, who is making the LEAST money?

People who bought pre bubble are still doubling or trippling their money at least.

Those who bought bubble are foreclosed on and not selling because they don't own those bubble priced houses.

Those who but 2009 are selling possibly at a break even point after maintaining their home for 10 years...

Who got the worst deal?  Not the bubble buyer, not the pre bubble buyer... the post bubble buyer...

That is why I ask if the post bubble buyer is the real sucker.  The bubble buyer looks on the face to be the sucker because he bought highest... but the post bubble buyer is probably the real sucker as his price is the highest of anyone who actually pays the price. 

Quick reply this time, working . . .

Two thoughts:

First, due to the way that servicing and securitization works, I'm not sure you you are considering "The Bank". In most cases in 2003-2007, the lender that made the loan is not the one that actually held the mortgage.

"The Bank" could be taken to mean Fannie Mae or Freddie Mac, or the private servicers that  bought the loans as fast as the lenders could make them . . . or it could mean the private and international investors who bought securities or pools of loans based on the promise that they were well underwritten and would perform according to their risk grade . . . the loser in this "gamble", the "bank" in your example is most certainly not the same party that was making the agreement with the homeowner. Those were middle men/women. They made their profit in a month or two and they are long gone. And yes, then we as tax payers dollar for dollar had to bail out the last ones holding the hot potato. So we DID pay, and we ARE paying. The lenders made their money, and they still have it (or they spent it or leveraged it and went under). The lenders were never "the bank" to begin with.

The idea that signing an agreement to repay money at defined terms is a "gamble" makes no sense to me (though I think you are right that some undereducated people may see it that way). When one gets a personal loan (unsecured), they are agreeing to pay. There is no gamble - they borrow, and then they pay back. I guess the lender is taking a bit of a gamble on the worthiness of the borrower . . . but there is no gamble from the borrowing end. Borrow, then pay back. If you don't, you are in default. Period. Just because a bank tries to protect themselves a little by having the right to take back the collateral of a mortgage doens't make it ok to trade - if this is the way that the majority views lending and borrowing, we will have to reinvent the entire industry. But I dont think the majority thinks this way - just a select small population that got caught up in the "me too, me too" buying and unprofessional lending of recent years.

Sure some people scrap cars, and some have them repo'd. Credit reporting helps to make sure they don't repeat perform, at least not right away. But it is still a small portion of the population - it it wasnt, there wouldn't be car loans.

The more that people default, secured or unsecured, the more it costs to borrow the next round, because the lenders just charge more to make up for the losses. If they don't, they lose - and go out of business.

I am not naive, and I am not unaware of the selfishness and shortsightedness of some people. I know some people dont care if they default. Just as some people don't care if they steal, don't care if they violate others, don't care if they litter, don't care if they pollute, don't care if they lie, etc. Some people just don't care. These people drain the rest of us. They more of them there are, the quicker a society fails. Our culture allows for this entitlement and this sense of "do whatever it takes to get yours" . . . this is what I meant by a cultural problem as well as an economic one. I like to think that however quickly that sociopathic population is growing, the pro-social population still outnumbers them. I'm pretty young. I have "old" ideals. I get that a society has to have rules to function. There are more like me. A primarily  sociopathic society doesn't survive long term - it crashes and burns in a flaming wreck a thousand times worse than this one.

As far as your "high price" bit - you are talking about two things. You are either talking about the "last price on record" OR the "highest price paid". So you cant have a category for "last highest price" if, in fact, the last price isn't the highest. They are mutually exclusive in anything but a rising price market. You can talk generally about the last "buyers market" of relatively low prices and high supply, and the most recent "sellers market" of high demand and high prices. 2003-2007 was the most recent sellers market. 2008-2011 is the most recent "buyers market".  By suggesting that prices paid now are going to be higher than any prices paid between now and 2020, you are suggesting that the current "buyer's market" will last for the next 12 years . . . that prices will spiral ever downward or stay stagnant, making 300K the highest price paid for a certain category of home between now and 2020. Possible? I guess so. But with inflation, life turn over (usually a home or loan serves for 5-7 years, and then people move up, down, or on), the number of current foreclosed folks that will clean the slate in that time . . . unlikely. People will buy. Mortgage rates will dictate how much they can spend, in many ways . . . so we will need to watch rates as much as we need to watch price to see how quickly the market may turn around.

Wow you guys like to write!  Lots of good points though.  One thing I'd like to add is about how Jason thought banks would start to ease up on score requirements and foreclosures in someone's past.  While it may get a little easier then it is now, they're not going to go back to lending to people with scores as low as they were a few years ago, maybe not even what they were doing a year ago.  People with sub 600 scores going all the way down to 500 were not always allowed to get financing.  But with the rise of sub-prime mortgages, as long as you were breathing you could get a loan.  Statistics have shown those people are more likely to go into default then someone with a score above 680, 720, etc.  The banks will not start lending to those people again just because they want more business, since it would be like giving money to a bum on the street and expecting them to pay you back when they ask for your address and say they'll send you a check in the mail. 

one more thing about the sucker theory . . .

you are saying that the 2003-2007 ers walk away and are limitedly hurt . . . but then you assume that the 2008-2011 ers suffer silently in the same situation (where they are left with an asset that under performs). Why would the 2003 ers walk away and the 2008 ers stay? By your logic, and your lesser view of humanity (haha), the 2008 ers will walk away just as fast if the 20012 price is half of 2008. So no one has any responsibility. I'd say the jerk buyers  that walk away from 2008 made out better - they got 8K as a tax credit. So if they only put 5% down on a 100K house (5K), and they made 8K in tax credit, and then they walk away - they aren't suckers at all. They were irresponsible jerks and they actually made money at it.

I'd like to think that some of that tax credit money goes into the housing stock and improves it . . . increasing its eventual value . . . or gets reinvested in the economy . . .but assuming the worst, there is even MORE incentive to just call it quits now than there was. The gov't paid them interest on their down payment, just  to walk away.

Westy I am indeed a bit long winded.

As for banks not lending to those with poorer credit... I guess it's a wait and see game, but I never underestimate the ability for business to somehow rationalize or finagle a bad decision if it looks like more profit at least in the short term or if some manager will get a bonus from it.  After all, no one works in a job forver so get the bonuses you can when you can and just be gone when the fallout hits.

You might be right and credit scores might still as stringent as they are today, but I just look at the people who get pre approved Visas in the mail... sure they are 23% APR Visas, but they are still gettin em, and I assure you their scores are not nice and healthy... Now that's been happening for years, years when there are plenty of people with good credit to lend to, plenty of market to make money off of even if you ignore the poor scoring folks.

I just don't see how they are giong to stop marketing to poor credit scores when the market of good credit scores suddenly shrinks significantly... I mean if they are greedy enough to do it when times are good, when times are tight I just don't see them saying "oh it's ok, we'll just make less money this year".  They may start sending out credit cards with 30%APR or something, but I think creditors will still find a way to do business with less desireable customers.

Look at bakrupt businesses.  Their suppliers now have to eat all the back bills and basically take losses on anything outstanding.  You would think that would send them scurying awyay from this recently bankrupt business right?  Not so much... most of the time the same supplier stays around, takes the hit but hey, going forward any business is better than no business.

We have given billions to those who contributed heavily to the bad decisions that put us where we are today in the name of saving the economy right?  Do you think we won't see some kind of magic tinkering behind the scenes to keep the creditors making money by lending even when there are far fewer to comfortably lend to?

Kelcey I think the 2003-2007ers got out limitedly hurt one way or another.  If they were foreclosed on, they really didn't have a choice and those who just walked did so because things became so DRASTICALLY worse there was just no rationality to any other action.

2008-20011 buyers are not in the same boat... if the housing market tumbles to the point that current buyers are entirely screwed (let's say a house sold for $500k in 07, $300k in 09 and will sell for $100k in 2015) then yes it could happen again that the 2008-2011 buyers indeed do just walk or get forced out again.  But in that case we will be hiding in the hills with shotguns and eating roadkill to stay alive as the economy and the whole country will have fallen like some apocolyptic novel.

But I think far mroe likely, the boat the 2008-2011 buyers are in is that they bought at the highest point that DOESN'T make sense to walk away from.  They will be sitting in a world of hurt... not bad enough to get foreclosed on or totally screwed over, but pretty bad and by far worse than anyone else.  Again the only ones in worse situations are out already due to foreclosers and walking away...

When you buy your house at $500k and it drops to $300k, you really don't stand any chance of breaking even again.  IF you can keep making your mortgage payments and actually carry through, there really isn't a reason to do so as the chances are that even if you wait the entire 7 years for your credit to clear you can STILL buy that same house for less than your loan is for now.  I mean you are sitting in your $500k house thinking, if I walk now, in 7 years this house will probably have recovered to about $400k so I can buy it then for less than I owe now. 

However if you buy at $300k and it drops to $200k you probably think along the lines of "Crap I wish I could get out of this, but in 7 years this house will probably be close to it's current value today so I really won't gain anything but a lot of headache, I might as well ride it through."

Result is that you ride it through, however for the next 4-6 years, no one pays as much as you did for that house, and for the years prior to you buying, no one paid that much (again accept for those forclosed on who don't count).  So when you go to sell your house, you are up against a lot of people who paid less for their houses and therefore can sell for less and still come out on top whereas you are in a position to barely break even or loose money.  Remember housing prices aren't just set by what people are willing to pay, they are set by what people are willing to sell at also...

This is where my highest last prior sale (sorry if wording is wrong) comes in.  Basically on any given day, look at all the houses out there and look at what the people who are in them right now paid for them.  Those who paid the least can sell for the least and still come out ok, those who paid the most are kind of screwed becuase those other people are able to undercut you so you have to take a hit to break even.

This really comes into play when selling a house you haven't cleared the mortgage no (which I would venture is most houses for sale on any given day) so when it's time to sell, if you paid the highest price out of everyone, you are probably going to have to actually loose money on your sale. Example:  I bought for $300k and want to sell in 10 years.  Well everyone around me bought for $200k (either before the bubble or after I did) so they can all sell for $200-250 and walk away even or with a little profit.  So I have to price accordingly and guess what?  I have only paid off $40k in principle and when I sell for $240, just to get away from my house I have to shell out the remaining $20k difference... ouch.

That is what I mean but the new suckers... current buyers are putting themselves in a position to be surrounded by people who only bought lower than they did.

As for the bank, you and I know where loans really go but I would venture a bet your average joe has no idea how it works.  I bet the average person on the street really thinks when they get a loan from BofA, it really is between them and BofA.  They sign the paper and BofA goes to it's huge vault of cash, busts out a chunk and hands it to the seller.  And that's all there is to it.

Fannie and Freddie?  I am sure people have heard of them but probably really don't have much understanding how it works, and hey, even if Fannie and Freddie are understood, who cares?  Bank or Fannie or Freddie?  It's all a big, faceless, filthy rich business out there, I am not hurting any "one", a business is just taking a ding, it's the way business works, sometimes you profit, sometimes you take a ding, nothing personal and nothing to be ashamed of right?

What about secondary markets and private investors?  How many people understand that?  How many people even think that far?  I would guess very few and of those who do, again, it's all business.  You invest, there is an inherent risk.  Besides any one persons loan is spread over thousands of investors, you aren't ruining anyone, you are just dropping their yield a little.  Again, it's business, it's the risk you take when you start investing.  After all, when you buy stock in a company, does the company shed a tear for you when profits are down and they don't pay promised dividends?  No... you knew the potential risk when you invested.

I have watched my stock portfolio drop 50% in 2 years... is anyone ashamed or dishonered by my loss?  I don't know... no one is stopping over to console me or tell me how guilty they feel...

I think average joe see's it all as a big casino and those who choose to play know the risks.  If I walk into a casino and accept their free $10 slot play for joining their casino club, turn it into $1000 and walk away, that probably hurts the casino but hey, that's the gamble they took.  Same with borrowing and defaulting, when you agreed to lend to me, you agreed to take on the risk of my investment for a percetage profit.  Sorry you didn't calculate right but that's how business goes!

Yes. Unless you are buying a "Home"---you're a sucker.

Hey Bob... I assume you mean investment vs fulfilling a dream with that comment? 

I can see there is a difference, and certainly the home buyer will get more out of a purchase now than an investor, but since I believe most home buyers move about once a decade, doesn't that leave them in the same situation, at lesat financially, when it comes time to move?

BTW Bob, I believe you are a broker, may I ask what your feeling is on the issue of how people view defaulting on a loan?

John,

I don't think you are wrong about people's misperceptions about banking and the like. This is a personal pet peeve for me - I try to do as much financial education as I can, as I think that to which most folks are exposed in school and their daily lives is sorely, sorely lacking.

And we clearly have a different idea about how the quickly and to what degree the market will recover. As I assume we are in different markets, we may both be right on a local level.

You draw a big line between a 40% decline (500 to 300) and a 33% decline (300 to 200) - I don't see that as too different, honestly. And I think that "not being the first group" to walk away (everyone knowing of someone else that has done so and survived) makes it actually easier on the second group.

I would challenge you this - since you seem so aware of the ignorance of those around you, you clearly have a little extra time and you have an understanding of some of the complexities - change things. Educate people. Volunteer. Make sure that everyone you know doesn't just exist as a "victim", at least in their own eyes, of "the system". An educated population has the power to prevent so much of what is happening now from happening again. Not completely, sure, but in part. A few more people stepping up and your outlook becomes mine - or better, pretty quickly.

Hehe my spare time is at a desk between phone calls and I type fast :) Suffice to say I can't do much educating in place of my typing. 

Even so I don't necessarily think I could educate people in the way you are suggesting, mainly becuase I don't see what there is to educate?  I mean if it's "learn about the economy so you can be responsible" that's great but heck even people who's jobs it is to deal with the economy are woefully undereducated, I am not sure it's reasonable to educate average joe about it very much.  The school of hard knocks is educating quite a few right now, I think for the next decade a general sense of cautiousness will prevale in place of actual education, but what more is there really that an average person can take on in their life?

If you mean educate them to feel guilty about walking away from a loan, hard to do when I would probably do the same.  Actually I recently bought (and got a horrible deal but that's aside) and while I thought I was being smart at the time, I am starting to wonder if a year or two down the road I will be watching my credit score take a hit.  I understand the ethics and morals of it, but there is a point where you only live once, and you gotta watch out for number one... which would make me feel more guilty: I walked away from a loan obligation - or - I am hosed financially for the next 10-20 years and when I finally do climb back out of this I will be WAY behind everyone who did walk away from obligations? 

I mean it's one thing to say your house will rebound and catch up eventually, but that's essentially like putting a ton of money in the bank and then paying for the privelege of not having it gain any interest (and possibly never recover it's original value in your lifetime - which is possible if things are actually worse than they look).  If I can make the call to bite the bullet and take the hit financially what about my kids who won't have a college fund, who will have to grow up living on a shoestring budget?  What about my parents who need medication and are in an every decreasing medical coverage society? What about emergency needs that I won't be able to pay for?  At exactly what point is staying ethically and morally true worth the quality of life sacrifices I would face?

Basically I hope people don't exist as just victims, but I honestly think many are victims.  Victims of circumstance perhaps, but victims all the same.

BTW I draw the line at 40% loss vs 33% loss because thse who have already lost 40% are facing loosing ANOTHER 33%.  Those who buy now and loose 33% are looking to only loose that 33%.  Remember the sucker isn't the one who bought at the highest price, the sucker is the one who bought at the highest price it doesn't make sense to walk away from.

Basically the way I see it, the housing market can maybe take 30% more damage before all hell breaks loose and we are looking at a HUGE meltdown (I am talking grab guns and run for the hills) due to the fallout from it.  The people who are walking away today are doing so becuase it's finally gotten so bad that they just can't hang on anymore (ie it's fallen 40% and looks to do more) so I consider 40% without hitting bottom to be about the cutoff point.

If the market drops 30% more, we won't be at the next cutoff point (ie people buying now ready to walk) so current buyers are the suckers because they will have to ride it out as bad as it can get without it getting so bad you can rationalize just getting the heck out of dodge and cutting your losses.  Essentially people like me will be throwing good money after bad for a long time wishing that bad money would get just a bit worse so we could at least decide to stop throwing good money at it.

John Last:

Hey Bob... I assume you mean investment vs fulfilling a dream with that comment? 

 

I can see there is a difference, and certainly the home buyer will get more out of a purchase now than an investor, but since I believe most home buyers move about once a decade, doesn't that leave them in the same situation, at lesat financially, when it comes time to move?

BTW Bob, I believe you are a broker, may I ask what your feeling is on the issue of how people view defaulting on a loan?

Hi John- Yes I believe that for the majority of people that are buying homes they should be viewed as that- homes.I think the CA. average was 5-7 years before people moving. Even at that, I still belive that thinking of your purchase as a home, it would have  greatly lessened the impact of the mess we are currently in.

I am a Broker. Your question regarding how I feel on the issue of how people view defaulting on a loan is too broad for me. For the customers I have, one has let their home become foreclosed upon.  I only do loans in CA.

I still feel that the majority of people buying homes now will become the "suckers" in the next 3-5 years if that house is not viewed as a home.

Thanks for your input Bob. 

Interestingly I just talked to another friend last night who is actively looking to let his house slip because it "just doens't make financial sense to keep it".

It will be interesting to see how it plays out, especially for people like me who made first time homebuyer (and then some) mistakes and the house they bougt as home is now the place they are looking to get out of as soon as possible.  I would assume that despite my intentions going in, that will make me the sucker when it comes time to get out at a huge loss...

One thing nobidy seems to be considering here is the potential crushing blow from inflation over the next decade.

I will be entirely happy to pay off my mortgage at 5% fixed with inflated dollars if and when this happens. This possibility might make the folks that lock in now look pretty good.

Moreover, when you see year over year declines in the 15% range now, (Based on last month's Case Schiller #'s) understand that this is largely driven by the bubble areas. Fully 60% of the country was not effected in nearly the same way as places like Fl, AZ, CA, and NV. Us folks here in the heartland have witnessed our home prices fall, but back to something close to 2004 levels. We did not have the crazy run-up and in turn have not had as far to fall. Thus the "walk away" factors in places like OH, PA, MI, IN etc are much more tied to the local economy and much less to a feeling of despair over lost equity. When the economy picks up (at some point it will) these pressures will be removed.

So the "head for the hills" scenario you discuss, while unlikely, would largely be contained to the bubble states and fortunately these are places that are pretty desirable to live. So what you see statistics bearing out is that homes that are priced right in these areas are being snapped up at breakneck pace by new buyers who were priced out of the market or folks who have moved to these areas because of the afore mentioned desirabilty factor. Investors scavenge the rest. Yes the pricing decline hurts, but it is simply supply and demand coupled with values based on actual income levels beginning to adjust the market accordingly.

The increase of real estate value in our country has historically been based on population growth and income growth. For a few years we got away from that and in some areas we are certainly paying a price both systematically and on a personal level. But once these good old fashioned supply and demand numbers get in line...things will sort themselves out.

Good point about inflation... it's really sad to say that inflation might be the saving factor for a lot of people... but rampant inflation over the next 5 years or so might actually do us good as those inflated home prices will suddenly be balanced out.  Considering how fast we seem to be printing money I actually wouldn't be surprised if inflation jumped into the picture for a while.

But isn't the government trying to spurn spending by doing everything they can to quash inflation for the foreseable future?  Also if inflation comes crashing in on us too fast before the job market has a chance to solidify won't it do more damage than good by pushing a lot of people below the minimum income needed to survive?

I have been looking at the case schiller indexes for the country but also been trying to keep up with local markets.  Sadly I am in one of the expensive parts of CA :)