Housing Bubble Winners and Losers

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.


About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market.

66 comments:

  1. 1
    biodieselchris says:

    As Calvin said (of Calvin & Hobbes), it isn’t “Why isn’t life fair,” but “why isn’t life unfair in my favor?”

  2. 2

    Good analysis. My only comment is I’m not sure interest on savings is ever a good way to build anything. After taxes you’re probably almost always just breaking even or worse.

  3. 3
    hinten says:

    You forgot about all the entities that made big money as the bubble was inflating and then got out in time.
    You know they are out there.

  4. 4

    RE: Kary L. Krismer @ 2

    Actually, Mathematically It’s Just the Opposite Kary

    If your interest rate is only 5% on savings, after 10 years you made about 2/3s the amout you saved 10 years ago……at today’s 1%, you made about a 10.5% gain…..no exponential growth to speak of.

    Yes, the IRS can get at part of the interest income, but not if it’s tax free. But when you make 4-6% interest mortgage payments, the IRS and Social Security [or equivalent] grabs from your gross pay, then you make mortgage payments out of your butcher-axed net pay. A mortgage payment interest deduction will get you about 10-15% of the 4-6% interest payments; not a reason at all to pay loan shark rates [anything above 3%] to banks, when they give you like 1% [or much less] on CDs and money markets.

  5. 5
    D. in Ballard says:

    I try not to wallow in self-pity. There is no way that I could ever have over-extended myself the way some people did. It’s not in my DNA. So resenting them for doing something that I am incapable of doing is sort of silly. Three years of renting in 4 different locales has been rough, but overall I’m in a better position than I would have been had I purchased right away. So really, I’ve come out on top of most everyone else. Time will tell.

    I sold my condo in late 2007. A mirror unit of that condo just sold for $60,000 less than mine did. Over the last 3 years I’ve saved up more down payment. I’m not religious, but I should really count my blessings.

  6. 6
    DavidB says:

    You missed the people like me who sold their house before the bubble burst but recognized that a bubble existed and decided to rent and wait for prices to deflate before buying another house so they wouldn’t waste their equity and savings.

  7. 7
    deejayoh says:

    I think you need to weight these groups by the % of people who really qualify for each pro/con. For instance, 100% of fence sitters got all the pros/cons – but for bubble buyers and equity addicts – it’s really a small portion of them who are going to actually walk away and turn in the keys. Most of them will still pay their mortgages and try to wait it out.

  8. 8
    David S says:

    I have considered the ‘Black mark on credit after walking away’ as one of the penalties for these people I am not too happy with. In order for this to be a penalty one has to consider how much a black mark on one’s credit can actually cost you. The primary mode of this penalty would be loss of available consumer credit and higher consumer credit rates. These people I am not too happy with would have to either loose opportunities of value due to lack of credit, or the difference in the higher interest versus regular interest consumer credit loans would have have to equal to or add up to a larger value than the money they walked away with! These people I am not too happy with would have to, going forward with the black mark on their credit, spend enormous amounts of money in consumer loans to loose what they gained as Equity Addicts.

    These people I am not too happy with have worked the market, they have made bank on the system. These people I am not too happy with have come out ahead and we should all stand in awe of them and their skill at working the system. They have gotten rich quick.

  9. 9
    David S says:

    RE: deejayoh @ 7 – Sorry the cat is out of the bag. I would make my play and walk straight away before the rules change. This is without argue the best possible play these people I am not too happy with have. We all know this now.

  10. 10
    Dave0 says:

    “Con: Tax money being spent by government to bail out individuals and institutions that took irresponsible risks during the bubble”

    I think this “Con” is a bit overstated, as it’s not really having a long-term impact on our society’s well being. In fact, according to the article below, it was actually a pretty good investment.

    http://www.bloomberg.com/news/2010-10-20/bailout-of-wall-street-returns-8-2-profit-to-taxpayers-beating-treasuries.html

    “Wall Street Bailout Returns 8.2% Profit Beating Treasury Bonds”

  11. 11
    TheHulk says:

    I mostly agree that the Bubble Sitters dont feel like complete winners today. The earnest buyers who put a significant money down (>10%) during the bubble years most definitely feel like losers. And yes, based on everything else I have heard so far (like forgiving the “income” from a short sale) implies the opportunistic bubble buyer and the equity addict are having the most “fun”. The really sad part is the sitters and earnest buyers were probably the most conservative and sensible, trying to do the right-thing kind of people.

    The bubble sitters shouldn’t lose hope though (at least not yet). I still see YOY drops that exceed the amount I pay in rent annually. Heck, a couple of friends purchased houses goosed up by the tax credit only to see that “equity” vanish in 4 months. From a personal perspective I have little to lose by waiting out this madness.

  12. 12
    LA Relo says:

    Bubble sitter here…

    In hindsight the message from our gov’t is that you should have bought a home you couldn’t afford with a just plain stupid mortgage and never made a single payment.

    That said, I can’t say I wish I had done that but maybe I am just hoping for sort of retribution to come on both sides of the fence.

    Having rented the better part of the last decade I can say that I am up overall. Maybe not as much as I could have been had I bought in 2000 sold in 2007, then short sold the entire financial and housing industries for a few months, but I’m okay with that.

  13. 13
    kfhoz says:

    RE: Dave0 @ 10

    I read that article and the last line sums it up:
    …. Prins said. “So the TARP gains touted by the Treasury are only true if you ignore all the other costs.”

    And the real loser appears to be grandma, quoting again from the article:
    “The huge wealth transfer from fixed-income pensioners to the banks has helped the banks repay TARP,” Petzel said.

    Sounds like a pretty big Con (word play intended) to me!

  14. 14
    Basho says:

    I don’t know a single equity addict or opportunistic bubble buyer. I know plenty of earnest bubble buyers whose houses are worth much less than what they paid. They’ve been working hard, making their payments, and are still underwater.

    I would speculate that the equity addicts and opportunistic bubble buyers are a minuscule portion of the people facing foreclosure. Focusing on them distracts your readers from the suffering of the vast majority of people facing foreclosure.

    The bankruptcy and debt laws that “[reward] irresponsibility and [punish] prudence” are some of the wisest on the books. It doesn’t benefit society to have good people enslaved because of yesterday’s mistakes.

  15. 15
    Cheap South says:

    You forgot many cons for those that bought and are struggling: sleepless nights, health issues, divorce, embarrassment (I know many in this situation and nobody brags about it; and they all look like crap). Of course, we like to use the “system abuser” we read about as the poster child, even thought it represents the minority.

  16. 16
    EconE says:

    I know plenty of the “Equity Addicts” down here in California.

    I don’t envy them a bit.

    A friend of mine in Citrus Heights, CA inherited a house free and clear about 10 years ago. I visited him in early 2007 and found out that he had HELOC’d, in his words, “about 200k”. I advised him to quit spending and pay his debt down. He poo-poo’d me and yammered on about how his house was still worth about $350k and at the peak it was 400k so I should just “shut up and quit spending so much time reading bubble blogs”.

    Records show that he hit up the HomeATM again in late 2007.

    In 2008 his wife popped out kids #3&4…twins.

    Houses around him are currently selling for 120k-150k.

    When I pull records on people I know, I haven’t found ANYBODY who didn’t extract a ton of equity or do some crazy “move up” with a toxic loan at the top.

    These people are STRESSED AS HE## with some even taking benzodiazapenes. So now, not only will they have the debt to deal with, they’ll have an addiction that’s harder to kick than cigarettes.

    In light of that…why would I feel like the loser?

  17. 17
    godwin says:

    Thie biggest problem I have seen from the more ideologically committed is that there is a tendency to divide people into “deadbeats” and “everyone else”. Might I suggest that the array of situations are a little more complex then these categories. It is a sad say in America when we have to assume that everyoone is out to screw us, and that anyone who is so naive ,to believe in the good faith of the person on the other end of the deal, is some kind of deadbeat or otherwise deficient. When banks and brokers and investors want to speculate, we can it genius. When it is your average bloke, we call them everything but.

    That is the big fraud perpetrated; that would be homebuyers were conned into the great Ponzi scheme of the RE market into being a speculator. And we call them deadbeats because they lose–their homes. Most people have been kept blind about finance and then we poke their eyes out for it.

  18. 18
    Sniglet says:

    Determining the winners and losers of the bubble really depends on whether we have hit “bottom” or not. If prices are going to keep dropping a LOT from where they are now, then those bubble-sitters (like me) will start to feel better and better. If prices start rising (or don’t fall), then the list Tim puts together is pretty accurate.

    If we end up in a long protracted deflation like Japan experienced, where prices slowly deflate for 20 years, then we’re all ruined. The Bubble Sitters will continue to have stayed out of the market for most of their professional lives (when many will have liked to have actually owned a home) and anyone who actually bought a house will feel like they are caught in a slow vice.

    If one were to ask this same question of a person in Japan, I wonder what their answer would be after 20 years of falling real-estate prices? Would anyone in Japan feel like a “winner”?

  19. 19
    Buford says:

    Your use of the terms “responsible” & “irresponsible” are pure opinion.
    I think most of the “irresponsible” risk takers and the “sub prime borrowers” that pretty much kicked this thing off were out of the picture a while ago.

    While I agree that many people over the last couple of years fit into your descriptions, there are just as many folks that are truly victims of the economy and I say that unapologetically.

    Everyone wants to define people that have lost or are losing their homes as “deadbeats” or “scammers”.
    I don’t get it.

    One day you may be the one looking in the mirror wondering what went wrong.
    For sure, life isn’t fair.

  20. 20
    BubbleBuyer says:

    Call me an earnest bubble buyer then. I believed that housing was overpriced somewhat (I had the number 10% floating around my head), but did not realize that the US economy was teetering on the edge of collapse and that decline would be closer to 23% – 30%. I am down about $100k on my house if we tried to sell today plus taxes and commisions. Funnily enough I don’t lose any sleep over it. I live in a neighborhood I love and live in an old house with a lot of character (and all the baggage that comes with that). Today, for the same price I could buy a fully renovated home in the same neighborhood versus one with a 70’s kitchen and bathrooms.

    We planned to plow $100k into the house when we bought it but gave up on that idea when the economy imploded and the federal and state goverment started trying to increase taxes. Some contractor in King county is out $100k of my business due to the actual or planned goverment grab of my income.

    Instead, I have refinanced twice, with my interest rate going from 6.25% to 5.5% to current level of 4.5%. I have also paid down my mortgage (mainly because it gave me a better rate of return than investing in the stock market and got me under conforming limt and better interest rate). I now owe around $490K on my mortgage which still scares the hell out of me but I figure, my wife and I can pay the thing off in 7 -10 years if nothing disasterous happens. My mortgage payment went from around $3,600 when I first bought to $2500 today.

    I don’t think in terms of fair or unfair, win or lose. To my mind, I was one of the fools that paid 20% down when I bought instead of using a suicide loan which would have provided me the option today of walking away and sticking taxpayers with the loss. Having put down 20%, it make financial sense to pay off my mortgage. Life goes on.

  21. 21
    alex says:

    How about the bubble sitter who loses his job because he was indirectly (and unknowingly) working for the Real Estate industry?

    For example: the bubble sitter with all of his cash, works for a company that creates graphics software. People using that software were mostly advertisers, writing publicity campaigns. These advertisers got half their revenue from the ever-growing real estate market during the bubble. You get the picture…

  22. 22
    Andy says:

    We recognized what the future will be and sold our house in San Diego in 2006 (that we had bought in 1993), moved to Portland, waited for the collapse and bought a new REO house in 2009 (twice the size mortgage free) with our gains. Not everyone is a loser in this bubble burst. People who read the writing on the wall made it like bandits.

  23. 23
    Dave0 says:

    I wouldn’t say bubble sitters are really the losers either. While sitting and waiting, I’ve saved a significant amount of money that has continued to grow. I don’t think any of the other three categories you summarized could say the same thing. In fact, the other three are probably sitting on either no net worth, or mountains of debt, as a result of their choices during the housing bubble. As a result, I’d say the bubble sitter is the biggest winner, since they are the only ones who can say that their net worth has been growing this whole time.

    As a bonus, I was able to take the money I’ve saved as a result of not buying, and due to my close following of the real estate market, make a bet on a publicly traded REIT at just the right time. I bought a REIT in April 2009 at the height of the financial crisis scare, and it’s quadrupled in price since then.

    I don’t ever regret not buying in the bubble. Even if those who did get away without paying off their debts, they have lived with a lot more stress, anxiety and worry for years, and are probably going to come out with a lower net worth than they started with.

  24. 24
    wreckingbull says:

    By Kary L. Krismer @ 2:

    Good analysis. My only comment is I’m not sure interest on savings is ever a good way to build anything. After taxes you’re probably almost always just breaking even or worse.

    Don’t tell that to my 98 year-old grandmother. The Fed’s assault on savers of late has been hard on her, but I think you would be shocked on what she did build by simply saving and riding the compouding interest wave.

  25. 25
    pfft says:

    By wreckingbull @ 24:

    By Kary L. Krismer @ 2:

    Good analysis. My only comment is I’m not sure interest on savings is ever a good way to build anything. After taxes you’re probably almost always just breaking even or worse.

    Don’t tell that to my 98 year-old grandmother. The Fed’s assault on savers of late has been hard on her, but I think you would be shocked on what she did build by simply saving and riding the compouding interest wave.

    it’s not just the fed. people saved during the recession and since few were borrowing money interest rates went down. demand for money was not there.

  26. 26
    pfft says:

    considering that home prices fell only 1% YOY last month you guys are going to be wainting a long time.

  27. 27
    Jason says:

    As a fence sitter since 2002 I am happy. The dollar may be plummeting (personally I feel that is now over), the market may still be overpriced, some of my friends are now jumping in for the second time like sheep to the slaughter. But, I am still OK renting. It doesn’t hurt that my savings account is larger than ever. But I am also traveling frequently, eating out at reduced rates, and my entertainment schedule is booked. In short, I have found that life has much more to offer than trying to bury my roots and head in the sand as far as I can in hopes that I keep up with the Jones.

    Dave0,

    Sure, any investment looks good when painted through the rose colored glasses of political pandering and propaganda. But, we should take a look at “total net” profit for a second.

    The tarp program by itself may have had 20 billion returned on the 360 billion invested. But can we really judge these complementary programs in isolation? And if we can not isn’t it really a “3 trillion” dollar investment? In context, isn’t 20 billion pissing in the proverbial lake? Read more.

    http://money.cnn.com/news/storysupplement/economy/bailouttracker/index.html

  28. 28
    D. in Ballard says:

    RE: pfft @ 26 – Can’t deny that things are moving rather slowly for the type of place I’m looking for.

  29. 29
    Aaron Smothers says:

    RE: Dave0 @ 10

    According to the Bloomberg BusinessWeek print edition of Oct 4-10,2010 (page 30), the TARP funds went into the following major programs:
    – bank bailouts: $250B went in. Expected profit out of this is $16B
    – auto bailouts: $82B went in. Expected loss is $27B
    – AIG bailouts: $70B went in. Expected loss is $10B to zero
    – Public-private partnership investment programs: $22B went in. Expected loss is $0.5B.
    And last but not least:
    – housing bailouts: $30B went in. Expected loss: $30B !!! That is, (quoting Bloomberg), the funds were never intended to be repaid. They are meant to bail out homeowners by encouraging banks and loan services to refinance troubled mortgages.

    So, on the whole, the TARP bank bailouts are turning a profit, and TARP overall may cost about $50B. A substantial improvement over the original estimate. The original TARP allocation ($700B) of Oct 2008 was shrunk by law in July 2010 (to $475B).

    The housing bailout component of TARP ($30B) is a complete writeoff, has been known so right from the start, and constitutes more than half of the total estimated cost of TARP to the administration.

    AS

  30. 30
    One Eyed Man says:

    RE: wreckingbull @ 24

    The devil giveth and the devil taketh away. It can happen to both borrowers and savers, just with opposite timing in the cycle. I believe the Bible presents a similar theme from a more heavenly perspective, but I got more out of the lesson presented while taking hallucinogens and listening to American Beauty.

    As the Greatful Dead said in Friend of the Devil:

    “I ran into the Devil, babe
    He loaned me twenty bills
    I spent that night in Utah
    In a cave up in the hills

    I set out running but I take my time
    A friend of the devil is a friend of mine
    If I get home before daylight
    I might get some sleep tonight

    I ran down to the levee
    But the Devil caught me there
    He took my twenty dollar bill
    And he vanished in the air”

    I’m sure a lot of people consider the Fed somewhat less than godly so perhaps the Dead’s version is more apropos in this instance.

  31. 31
    D. in Ballard says:

    RE: EconE @ 16 – I’m from Citrus Heights myself. My mom sold her house in the late 80’s for 100k plus change. She told me the house is now worth only 150k.

  32. 32
    Notorious ART says:

    On the equity addict. I was reading in the Wall Street Journal that the IRS is going after people who took money out on their house and just simply walked away when they couldn’t pay. Since the loan was never paid off, the IRS counts the cash out as earned income. This allows the IRS to come after the equity addicts for unpaid taxes. I read this a month or so ago, I’ll see if i can find the article. Perhaps, the “Fun” the equity addicts had is going to come back the haunt them….

  33. 33
    Notorious ART says:

    Here is the article
    http://online.wsj.com/article/SB10001424052748703686304575228783947789118.html

    For those of you without a subscription…..

    “The upshot: anyone weighing whether or not to seek a mortgage modification—or debating whether to abandon a house that is worth less than the mortgage—should consider the tax treatment carefully before making a move. The same holds for any form of consumer debt that a bank ultimately cancels, including credit-card balances or an auto lease.

    Federal and state tax laws have long viewed canceled debt as income because consumers who borrow money to buy a house—or who pull money out of their house to buy cars and such—and then don’t pay it back “wind up ahead of where they were,” says an IRS spokesman.

    Thus far this year, Michele Knight, a CPA with a high-end clientele in Keystone, Colo., has had five clients owe taxes tied to houses and another five tied to credit cards and auto leases. “They’re calling me in tears and saying, ‘What do you mean I owe taxes?'” she says. “I never would have expected it.”

    Dianne Corsbie, a White Plains, N.Y., financial planner, says about 5% of her 200-client practice owes taxes because of a foreclosure, most tied to investment properties. In Napa, Calif., Duane Carey, owner of a Ranch Tax Service, says every fifth person he sees “comes in angry, holding one of these 1099s.”

    There is no free lunch….

  34. 34
    Lurker says:

    By pfft @ 26:

    considering that home prices fell only 1% YOY last month you guys are going to be wainting a long time.

    Yes, we could be in for a long slow bleed.

  35. 35
    Polly says:

    Call us BubbleBuyer Too. We live in a house we like in an area we love; may be underwater, but don’t care. We plan to live here 30+ years. Brought our kids home from the hospital here. Finally threw away all those cardboard boxes from the years of renting. Actually entertained the thought of moving in the past few months, but after looking at 50+ houses, we couldn’t find anything we like more than what we have now. Just going to pay the house off in the next couple of years, sit back and enjoy life.

  36. 36
    Lurker says:

    RE: Polly @ 35

    Huh? You are going to pay off your underwater house in the next couple of years?

  37. 37
    wreckingbull says:

    RE: One Eyed Man @ 30 – How did you know that I am a recovering hippy? I have about 100 Dead shows under my belt. One can learn more about economics by walking through the parking lot, pre-show, than any university could ever teach.

  38. 38
    EconE says:

    RE: D. in Ballard @ 31

    Another friend paid $250k for a house at the end of 2003. Was probably pretty excited in 2005 to see the house next door go for $400k. That house recently sold as a foreclosure for $80k.

  39. 39
    WestSeattleDave says:

    RE: wreckingbull @ 37 – What kind of a “hippy” are you if you can’t even spell HIPPIE!

    “American Beauty” (from which comes Friend of the Devil) is an excellent album. It’s mostly acoustic playing, and has a great mellow vibe.

  40. 40
    wreckingbull says:

    RE: WestSeattleDave @ 39 – The kind that prefers soundboard recordings over studio albums!

  41. 41
    mukoh says:

    RE: Lurker @ 36 – Is that a bad thing for someone to do?

  42. 42
    Polly says:

    RE: Lurker @ 36

    Yes. I’m a little confused by your question…should we *not* do that? We bought 5 years ago and the husband’s job situation has improved substantially. That is why we considered moving to something bigger, but in the end, we love our house, we can pay it off, save for college, retire early and live happily ever after. THAT is the American Dream, IMHO.

  43. 43
    anonimaniac says:

    RE: Notorious ART @ 33

    I wish there were solid stats on how many folks in this area did the HELOC and MEW thing but I would bet that it is quite a lot more than you would think. Almost everyone I know who had a house before mid-aughts cashed out at some point. Usually, more than once. I think this area has yet to see the impact from the underwater HELOC/MEW. It will be ugly. Everyone knew that home prices in Seattle always go up and this is a special place. Never have to pay back the money.

  44. 44
    Jonness says:

    “It turns out my parents were right. Life isn’t fair. Go figure.”

    Sure you could have had a couple hundred grand free money to party like crazy for a couple of years. But the cost of getting that is to have an IQ at least 40 points lower than you currently have.

    Life is completely fair. So rejoice at your good fortune. :)

  45. 45
    Jonness says:

    By TheHulk @ 11:

    The bubble sitters shouldn’t lose hope though (at least not yet). I still see YOY drops that exceed the amount I pay in rent annually. Heck, a couple of friends purchased houses goosed up by the tax credit only to see that “equity” vanish in 4 months. From a personal perspective I have little to lose by waiting out this madness.

    You are being rewarded in gold for sitting this mess out, especially if you are living frugally and saving as much as possible. We’ve all seen this game play out in Japan but with less aggressive government intervention. The bottom is nowhere near; thus, one needs to pick and choose the price he’s comfortable paying. Is it one year out, three years out, or never?

    As for me, I’ll probably pick off another free $100K in price drops and then use the large down payment I’ve been saving and jump into the pool. I don’t need to catch the absolute bottom. I’m more concerned with the rate of decline. When downward prices approaches the asymptote, I don’t care what direction it’s pointed. The goal is the miss the relatively large drops between now and then.

    Most likely, prices will decline to AT LEAST 2003 levels in most Puget Sound areas.

    http://www.clearcapital.com/company/pr_details.cfm?position=30686&ts={ts%20%272010-10-25%2020%3A13%3A30%27}

    “Special Release: Clear Capital™ Reports Sudden and Dramatic Drop in U.S. Home Prices

    Most recent data shows a two-month 5.9% price decline representing a magnitude and speed of decline not seen since March 2009; similar declines for September and October expected to appear in other industry indices in coming months.”

  46. 46
    OrangeCrush says:

    i rent.

    my net worth (not just income) has increased well over six figures this year.
    the better my investments perform, the less i want to “waste” money on a house.
    when i do buy, it will be with an expectation that at best i break even but probably will lose 20% or more over 10-20 years.

    as long as i’ve got my health, friends and family, i’ve got no complaints.

  47. 47
    ray pepper says:

    WOW…So much to say but one post stands out far and away Superior to anything I have read here on Seattle Bubble in a very long time:

    Post # 17 Godwin (not sure who you are) but I hope you stick around. You are spot on with everything you stated.

    http://www.snotr.com/video/2327

    The incompetent nature of so many that continue to point fingers at the homeowners continues to amaze me.

  48. 48
    Hugh Dominic says:

    Even this blog continues to underreport the damage done to the innocent bystanders, the bubble sitters.

    I have been shut out of the market for five years by inflated prices and strained SFH rentable supply. Even as my family grew and my home became more cramped and cluttered I was unwilling and unable to move. At the close of all this when I was supposed to be claiming my prize – a big down payment and lower cost housing at low interest rates, the whipsawing economy shed my job and left me out of work and unable to buy.

    The collateral damage of this bubble to the righteous and innocent has been huge, and Tim your description of the bubble sitter’s lot is wholly inadequate.

  49. 49
    redmondjp says:

    I, too, think that the house-as-ATM practice was much more prevalent in our area than we want to believe. My neighbor did it multiple times, on a house he originally purchased for $85K in 1983, too many times to keep track of. He probably owes close to $400K on it, and by all rights he should have had it paid off by now. The cash went to pay off credit card debt, with the remaining balance used to buy new vehicles for himself and his son. Then cash is gone, lather, rinse, repeat (profit)! All fine and dandy until the equity well goes dry.

    My other friend was doing this 10-15 years ago before I even owned a house and knew that it was possible to do such a thing. Every few years he had a chunk of cash, and then it was gone again. Needless to say, he doesn’t own that house any longer and moved back in with his mom (who is a snowbird and stays in CA for most of the year).

  50. 50
    Hugh Dominic says:

    You neglected the earnest bubble buyer’s biggest loss. We can assume that they responsibly put at least a 20% down payment into the home. This may have been the family’s nest egg or life savings.

    It has been completely wiped out by the declines over the 3 years.

    I don’t have as much sympathy for near-retirees who lost their retirement this way. Why a 50 year old would take (or be allowed to have) a 30 year mortgage is beyond me.

    And while I’m fired up, the whole 30 year mortgage concept is rooted in this antiquated belief that showing two recent pay stubs = evidence of 30 years of future employment. In the real world we change jobs every three years now, with voluntary and involuntary breaks in between. Mortgage qualification and products should be based on this more realistic model of a modern career.

  51. 51
    BillE says:

    By Basho @ 14:

    I don’t know a single equity addict

    I find that hard to believe. You may know some and not know it.

  52. 52
    ray pepper says:

    Personally I know of families who suffered divorce and one suicide due to this inability to sell, short sale, and embarassment of foreclosure that wrecked their marriages. One wife tells me of her husbands horrible investment in their home for 218k in Phoenix that went up to 300k+ and is now worth 70k. She wanted to sell to be closer to her parents but the husband said no, became unemployed, house value dropped to under 100k, and shot himself. Yes, there were probably many more problems with this individual mentally but I’m here to tell you I have seen and lived this collapse and saw what it has done to familes in Arizona, Nevada, and now here in Washington.

    Yes, Tim…your parents were right…Life is NOT fair…..But, we only have 1 life to live. We all have different aspirations and goals at different times in our lives. Everyone has a different story to tell and I have heard so many and thats why I continue to state: Going Forward: take care of yourself and your family first because nobody else will. Walk away from the bashers and support others with their hardships and the decisions they are forced to make.

  53. 53
    ChrisM says:

    RE: Dave0 @ 23
    Dave, can you at least give us the symbol? I got crucified on SRS!!! Thanks! :-)

  54. 54
    Cheap South says:

    By Hugh Dominic @ 50:

    And while I’m fired up, the whole 30 year mortgage concept is rooted in this antiquated belief that showing two recent pay stubs = evidence of 30 years of future employment. In the real world we change jobs every three years now, with voluntary and involuntary breaks in between. Mortgage qualification and products should be based on this more realistic model of a modern career.

    This is what I’ve been saying for years. “Buy the most house you can afford” they tell you. Who in hell can guarantee 30 years at the current income level? Antiquated model indeed.

  55. 55
    wreckingbull says:

    RE: Polly @ 42 – Nothing wrong with paying off your home if you want to. Good for you for even having this decision to make. With that being said, you might want to sit down and consider if keeping a fixed mortgage at ~3.6% is a good hedging strategy. That is cheap money.

  56. 56
    Lurker says:

    RE: Polly @ 42

    Ha, no I was shocked that someone could pay off an underwater mortgage so easily. I guess not everyone is as poor as I am :)

    On a side note, as far as the topic of this thread of winners and losers go, “Winning” never felt so crappy.

  57. 57
    JJ says:

    It seems like there should be a category for frugal existing homeowners that bought before the bubble, never cashed out any equity and have now taken advantage of the gift of 4% interest rates. My mortgage is now lower than equivelent rent I will plan on renting this house out in the future. I also notice the advantage of cheap labor – I have multiple construction type people wanting to work on my house because they are unemployed.

  58. 58
    Buford says:

    RE: ray pepper @ 52 – I think you’re one of the few here that actually “gets it” at this point in the game.

  59. 59
    Polly says:

    By wreckingbull @ 55:

    RE: Polly @ 42 – Nothing wrong with paying off your home if you want to. Good for you for even having this decision to make. With that being said, you might want to sit down and consider if keeping a fixed mortgage at ~3.6% is a good hedging strategy. That is cheap money.

    That is actually what we keep debating. We go back and forth on it. Thanks for weighing in. I guess the ability to pay off the mortgage at any time is nearly as good as actually doing it.

  60. 60
    Godwin says:

    @47. I’ve been a lurker here since 2006. I’m on a credit committee at a local credit union, and I’ll be the first to say that there are *a few* people out there that loaded up on as much credit and debt as they could (we see the applications for consolidations and refis as empirical proof, along with those deteriorating FICOs). On the other hand, no one was twisting the arms of lenders to hand over the loans, ignore credit reports, steer people into deceptive loan products, and ignore other basic information like debt ratios to assess risk. When you can capitalize on your commission today and pass the risk onto some anonymous pension fund, who needs to talk about the moral hazard built into the system? Many of these lenders were high pressure sales people, not individuals making rational investment decisions for their/any institution.

  61. 61
    Joe says:

    Earnest Bubble Buyer here, with a question for you:

    I’m looking to sell my house and buy a larger one (now I have a family of 5 in a 950 sqft. cottage…life might not be fair, but it’s been very good to me).

    Should I be rooting for home prices to rise (so I can get more for the home I’m selling), or fall (so I can buy more home for the dollar on the home I’m buying)? Or am I screwed either way?

    Thanks,
    Joe the EBB

  62. 62
    alex says:

    RE: ray pepper @ 52

    Ray, I’m really disappointed at this post. No mention at all to the GEMS!

  63. 63
    Drone says:

    RE: Joe @ 61
    Depends on relative pricing. Assuming that you stay in the same area, the bigger house will be worth more than the smaller one. They may rise or fall together, but the bigger one will probably remain more expensive by a roughly constant percentage. That means that your ideal world would include falling prices, then a swap. Your current house would lose nominal value, but the bigger house would lose more nominal value, making it cheaper to move up in absolute dollar terms. Plus the sales commisions, also measured as a percentage, would be cheaper.

    However, this ignores your ability to sell if you currently owe as much as the house is worth. If prices fell then you would have to bring money to the table, or be stuck. In this case guaranteed mobility might be worth the extra $.

    If you were really really certain of price drops, then you could sell now, rent, and buy later. But if you were that certain then maybe you could tell me all about inflation over the next several years… what if house values drop, but the nominal prices don’t? What if they both change at different rates?

    End conclusion is that this thing is complicated, nobody’s got it completely figured out, so you should do what’s best for you and your family.

  64. 64
    ARDELL says:

    RE: Joe @ 61

    You win either way…if you are careful to keep the discount consistent on both ends.

    If you sell for $300,000 and buy for $500,000 and the discount is 20% from peak, then you are saving roughly $10,000 and losing roughly $6,000 = a $4,000 gain.

    It’s the move down buyer who loses, not the move up buyer, generally speaking.

  65. 65
    Joe says:

    Drone and Ardell: Thanks for the info!

  66. 66
    Jonness says:

    By Joe @ 61:

    Should I be rooting for home prices to rise (so I can get more for the home I’m selling), or fall (so I can buy more home for the dollar on the home I’m buying)? Or am I screwed either way?

    If you buy now and prices slide another 20%, you will lose $100K compared to losing $60K had you stayed put. Add to that, higher seller fees for your existing house and any additional interest incurred on money borrowed to buy at the current bubble price.

    In short, if you buy and prices go up after you switch homes, you win. If prices go down after you buy, you lose. Thus, you should be rooting for home prices to fall like crazy right up until the day you buy. Then you should begin rooting for them to go up.

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