I’ve been hearing a lot of frustration vented recently in exchanges on this site and conversations I’ve had with friends and acquaintences about the end game we’ve been experiencing recently as a result of the housing bubble and subsequent bust. I thought it might be interesting to consider the different ways that people have been affected by the bubble, how things are panning out for them during the bust, and who is getting the short end of the stick.
The Bubble Sitter
Thought about buying during the housing bubble, but realized that prices were severly detached from the underlying economic fundamentals and decided to hold off. Saved a lot of money by renting during the housing bubble, often at half the cost of a mortgage on a comparable home.
Pros and cons for bubble sitters today:
- Pro: Large down payment saved up
- Pro: Home prices fallen and still falling to reasonable levels
- Con: Crazy low interest rates makes it hard to grow savings
- Con: Tax money being spent by government to bail out individuals and institutions that took irresponsible risks during the bubble
The Earnest Bubble Buyer
Bought a home during the housing bubble. Didn’t really realize that homes were overpriced, possibly because they believed real estate agents and the media when they were told that home prices never go down, housing is always a great investment, a home is a forced savings account, etc. Got a mortgage they could afford, but probably didn’t buy the home they really wanted or in the neighborhood they really wanted.
Pros and cons for earnest bubble buyers today:
- Pro: Able to enjoy the benefits of home ownership with a mortgage payment that is still affordable
- Con: Mortgage payments much higher than people buying the same homes today
- Con: Still paying high mortgage while strategically-defaulting neighbors live rent-free
- Con: Tax money being spent by government to bail out individuals and institutions that took irresponsible risks during the bubble
The Opportunistic Bubble Buyer
Bought a home during the bubble despite having no money saved for a down payment and not really having an income high enough to pay back the loan under any sane amortization schedule. Basically bought a home as a get rich quick scheme, fully believing the bubble hype about the riches waiting to be made through home appreciation.
Pros and cons for opportunistic bubble buyers today:
- Pro: No money down means nothing to lose by walking away
- Pro: Overwhelmed banks taking so long to process foreclosures allows rent-free living for a year or more
- Con: Black mark on credit after walking away
- Con: Foreclosure on record may make renting harder
The Equity Addict
Bought before the bubble at a reasonable price. Proceeded to refinance every year or two, extracting tens of thousands in home equity each time. Eventually ended up with a mortgage twice as large as when the home was originally purchased, and probably now has a mortgage payment that is no longer affordable.
Pros and cons for equity addicts today:
- Pro: Able to spend hundreds of thousands of dollars cash with no strings attached
- Pro: Nothing to lose by walking away since all possible equity has already been extracted
- Con: Black mark on credit after walking away
- Con: Foreclosure on record may make renting harder
Winners and Losers
By my accounting, despite making the more responsible decisions during the bubble, the bubble sitters and earnest bubble buyers don’t feel much like big winners today. The opportunistic bubble buyers and the equity addicts were able to live it up during the bubble, and hardly seem to be experiencing any negative consequences during the bust.
As a bubble sitter myself, I definitely empathize with other bubble sitters and with earnest bubble buyers who lament the way things are panning out during this bust. Maybe it’s just my bias showing through, but it does seem pretty screwed up that our system is basically rewarding irresponsibility and punishing prudence. Screwed up, but unfortunately not unexpected.
It turns out my parents were right. Life isn’t fair. Go figure.