Reply #27: Why do they have to?

[dmallind]

Not only have few markets seen that kind of decline - and only from highs that were fleeting indeed, but it doesn't even matter for most homeowners.

Those who bought between say 2003 and 2007, with hardly any equity or downpayment, in overheated markets that have now collapsed like Arizona or Florida or parts of CA, may indeed be looking at 200,000 in negative equity. But even for that small minority, it is irrelevant unless they have to sell their house.

Let's say their monthly payment on a $500K mortgage (100% no down payment or equity - most extreme possibility) is about $3500. Presumably to them the house was worth $3500 per month. As long as they continue to pay $3500 a month they are in no different a situation than they were in the housing bubble. So you have to posit a family who bought at the highest price in the very recent past, with very low or no downpayment, and is now unable or unwilling to continue paying. Do these people exist? Certainly. Are they representative of most mortgage holders (fewer that 10% of whom are in default let alone in default on upside down mortgages)? Not at all.

Now as long as these unwise borrowers still pay that $3500 and still retain the income that allowed them to (again unemployment even in the most histrionic overestimation on DU does not approach 50% so this would be the majority) they still have EXACTLY as much discretionary spending to consume as they had when the house was worth $500K on paper when it was worth $300K. No loan company cares about their upside down equity (unless of course they want a home equity loan) so they can buy a car if they were going to, or new furniture on store credit if they were going to. Nothing really changes until they default or have to sell their house. Now their perception or confidence may change, and indeed much of the slowdown is based on such subjective emotions, but their financial position in objective terms, absent the default/sale options already ceded, certainly doesn't.

I move a lot. I'm in my third state and fourth house in the last five years. I lost about 12% (nowhere near the 40% suggested) on my last house that was bought at the height of the house price boom and just sold a couple of months ago. Now that 12% was entirely out of equity because like MOST mortgage payers I didn't get a zero down loan. Sure it means my cash cushion is a bit reduced, but what all the doom and gloomers seem to ignore is that falling house prices mean somebody who sells low also buys low too. This was an upper middle class house in a not particularly thriving undiversified town with very few major employers. I currently reside in a suburb of a contracting, economically depressed, major rust belt city. The house I bought just as the bubble was bursting is worth, according to local experts and comparables (since I will almost certainly be moving yet again soon), about exactly what I paid for it. No bubble = no burst.

Your horror story applies to recent, unwise, buyers in overheated markets with atypical mortgages and STILL assumes they are unable or unwilling to continue paying the mortgage they did. Again I have no doubt hundreds of anecdotal examples can be found. But there are tens of millions of homebuyerts out there, and most of us are nowhere near that kind of situation.