- This topic has 27 replies, 13 voices, and was last updated 18 years, 5 months ago by powayseller.
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July 19, 2006 at 1:41 PM #28877July 19, 2006 at 1:58 PM #28878bob007Participant
what is the consequence of getting a huge home loan and defaulting on it ?
July 19, 2006 at 1:58 PM #28879bob007Participantwhat is the consequence of getting a huge home loan and defaulting on it ?
July 19, 2006 at 3:44 PM #28885partypupParticipantIf you have re-financed or taken out a home equity line of credit, the consequences are severe. The lender can seek a judgment against you and pursue recourse in all of your other assets, including stocks, savings, other real estate and wages. This is precisely why I believe that 1 out of every 3 homeowners could be royally screwed.
July 19, 2006 at 4:14 PM #28888DaCounselorParticipant“I am simply advising to take your equity while it is still there, then pounce on the bargains that will inevitably present themselves when the factors I listed in my last post come into serious play.”
_________________________Doesn’t this advice conflict with the position that using a home as an investment/retirement/ATM is unhealthy and is part of the reason why the sky is about to fall? And why pull out of the game now, when interest rates are at the very low end of a 40 year spectrum? When money is at its cheapest, shouldn’t that be taken advantage of? Why not lock into a low fixed rate now? Especially if interest rates are indeed going to “skyrocket”?
If you like your home, would like to stay there if you can, are not intending to use it as an ATM, have built up a cushion of equity and can lock into a fixed rate loan at historically low levels, why sell? You will be disembarking from an environment where you know the variables into the great unknown if you do so. Is this really the smart play?
July 19, 2006 at 5:14 PM #28893partypupParticipantIf you sell your home and take the equity while it’s still available, that’s not using your home as an ATM; that’s just prudent when you’re sitting on equity gains that have no place to go but down.
Those who use their homes as ATMs actually keep their homes, draw out cash and steadily increase their debt. So no, my advice doesn’t conflict with the position I took because I am advising that homeowners reduce their debt by selling, not that they incur more debt by taking out a home equity loan.
You may be one of the very few So Cal homeowners that doesn’t steadily draw cash out of their homes; kudos to you. But even so, the price of your home will nevertheless be affected by those who have chosen to use their homes as ATMs, and if you decide to stay you run the risk that as they fall behind on their payments and become despereate enough to bail, your home value will be affected by their price reductions. Do you really want to be in the position of having to stay in a house for 10 years in order to recoup your equity? That’s what happened to me in 1992.
As for skyrocketing interest rates, think of it this way: if the price of a home falls far enough — and it will in the next 3-5 years — 9-1/2% won’t be as punishing. If a 750K home falls to 300K, your payments have been reduced from $5K/mo to $2500/mo. Do the math. Meanwhile, you’re looking at the neighbor who refused to sell — who owes twice as much as you do on a house that’s worth half of what he paid for it. It’s all about timing. And it is the smart play IF you believe the market is headed for a steep decline.
Which brings me to the question: do you have any response to the other points I made in my last point, because that really will determine what the smart play is. If, based on the points I made, you really feel like we are in for a soft landing, then by all means sit tight and don’t make a move. If, however, you are disturbed by the signs we are already witnessing — price declines of $25 – $50K/per month on the same house — and you are compelled by the evidence I presented about the future of this economy, in general and the housing market, in particular, then I believe the smart play is clearly to get out while the getting is good and wait on the sidelines.
July 19, 2006 at 6:26 PM #28899AnonymousGuestChris Johnston
As a trader it would be hard for anyone to convince me that selling my home last year for a $1.2 million dollar profit and going into rental mode was a bad trade. I have no idea how far prices will fall, but the potential is certainly there for a nasty illiquid drop. Now even on an after tax basis, I am much lower in monthly cost renting a home.
For someone who loves their home, and is content to live their forever regardless of what happens, there is no reason to sell. I felt I could make a much better return on the $1.2 investing it, than what it would return staying in the house. For someone who has the above stated opinion, I am not sure why they would even be in a blog like this. Why would you care if you have no plans on selling.
For of us here are of the belief that prices are going to fall, and feel it has begun. So we visit here to bounce ideas off of each other.
I would not be so sure of myself that whatever equity one has cannot evaporate. When this drops, it is going to happen painfully, and who knows how far it goes. I can tell you that I have studied parabolic price moves in asset classes for years. I have yet to see one correct sideways. It could “be different this time.” However, it never has been different the last time those arguments were thrown out.
July 19, 2006 at 9:14 PM #28913powaysellerParticipantpartypup and theplayers – great posts!
partypup wrote “Do you really want to be in the position of having to stay in a house for 10 years in order to recoup your equity? That’s what happened to me in 1992.” My neighbor said she doesn’t care if her house price falls in half, because when she sells, she would buy a bigger house and that house would be 1/2 off also. That made sense to me. What do you think?
chris, did you see edna_mode’s posts, about a new paradigm shift than can move the ratio of income to house prices permanently higher, just as global warming is causing a new median temperature, some other unknown factor could cause a new median home price. I told her not to compare biological systems to asset bubbles, and that Grantham challenged 2400 professional investors to find just one exception to an asset bubble reverting to the mean; no one could think of one, and Grantham has shown that all asset bubbles returned to mean. Do you want to add to this?
Foreclosure: you will owe the IRS taxes at your tax rate, NOT your capital gains tax rate, on the forgiven amount. Lender gives you a 1099. If you refinanced or took out a HELOC, you cannot avoid this. Only if you kept your original mortgage you are safe. Google recourse loan and non-recourse loan for California.
July 20, 2006 at 8:37 AM #28963partypupParticipantThis makes sense at first blush, Powayseller. But think about it: if we are in the midst of a housing depression, buyers will be few and far between because no one wants to catch a falling knife. We will see much more of what we are starting to see now: a glut of homes on the market.
Your friend is fooling herself if she thinks she will be able to easily unload her home during a crisis. What makes her home so much more special than the many others that will be on the market in her neighborhood? I stand by what I said: when the hammer falls, you will want to be a buyer with no existing property to unload.
July 20, 2006 at 8:38 AM #28964partypupParticipantThis makes sense at first blush, Powayseller. But think about it: if we are in the midst of a housing depression, buyers will be few and far between because no one wants to catch a falling knife. We will see much more of what we are starting to see now: a glut of homes on the market.
Your friend is fooling herself if she thinks she will be able to easily unload her home during a crisis. What makes her home so much more special than the many others that will be on the market in her neighborhood? I stand by what I said: when the hammer falls, you will want to be a buyer with no existing property to unload.
July 20, 2006 at 8:43 AM #28966powaysellerParticipantShe will have to discount her house heavily to sell it, but the other people will be discounting heavily too. As long as you buy/sell into the same market, whether it was on the way up or on the way down, you should be ok.
What is more of a concern is whether her husband will still have a job in 2 years. Is his company real estate dependent, or MEW-dependent? I don’t know the answer to that. If he is laid off and forced to sell, then they will wish they had sold at the top of the market and not the bottom.
But as Bugs said, we can’t have everyone escaping the market. We can’t have all 1.1 million homeowners in SD bailout out to escape the housing bubble. So only a few win.
Of course, none of this matters if we start another war in the Middle East. We could all be dead by September.
July 21, 2006 at 9:01 PM #29217partypupParticipantI still think she will be facing a problem when she is competing with others who are also discounting. What will put her at an advantage over other sellers? As yourself this: if you were in the Great Depression, would you want to be in the position of trying to unload a house to the masses of unemployed and destitute? An extreme example, but you get my drift. Not the market a seller wants to be in…buy low, sell high. NEVER sell low….
July 22, 2006 at 8:31 AM #29267powaysellerParticipantLet’s say she tries to sell in 2 years, and her current $500K attached home will be worth $400K, or 20% less. She undercuts to $360K, 10% lower than market.
Then she turns around and buys a $640K home that is listed 10% below market by a motivated seller to $576K home. Assume this huose in today’s market would be worth 800K, so she has the same ratios of discounts on the new house as the one she is selling.
So today the price difference in moving up is $300K, and in 2 years it is $216K. So if they want to own, and plan to move up, it is better to wait to do it. They don’t want to rent, as they are attached to their home, and they believe in the logic I just outlined. After all, the move-up home will be cheaper too.
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