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0 pointsrefurb11y ago0 comments

Here is my take....

1. People think they can afford to buy a place at $X

2. People find a place at $X+Y and say "it'll be tough, but I love this place"

3. People find out actually owning a house costs $X+$Y+$Z and they can barely make their house payments and supporting costs

4. Eventually (after enough mortgage payments) your principal payments become large enough to take on the form of "forced savings"

I think this might work for some, but there are plenty of examples where people lose their homes because they underestimated the costs. Someone get sicks and goes on LT disability at 60% of their salary and end up missing mortgage payments.

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7 comments · 3 top-level

Cherian11y ago· 3 in thread

Even in this case, isn’t there a reasonably good chance the person could have sold it for 10% more than ($X+$Y+$Z)[1] at the time of the crisis? The lender and the loaner will part with the equity based on the mortgage payments over the years.

Based on cursory look into Redfin data, homes in the Bay Area are vanishing in 5-12 days, selling at 100-300K above the listed price.

[1] I hope we don’t cite recession here.

refurbOP11y ago

In the bay area over the last 5 years? Sure.

Across much of the US? Probably not. Don't forget the average cost of selling a house is 6%. Buy a place for $500K and if the value of the house doesn't go up by at least 6% you've lost money.

That doesn't include all the other costs associated with buying a new house (moving costs, etc).

JamesBarney11y ago

Not to mention loan origination fees, appraisals, and inspections costs.

Cherian11y ago

Forgive me, I was very biased toward Bay Area.

branchless11y ago· 1 in thread

This is just nuts.

ha47011y ago

Agreed, this is an insane (and insanely stressful) way of saving.

snowwrestler11y ago

This is not the reality for the vast majority of homeowners. Banks are very good at estimating these costs, and they will decline loans that are too large for the homeowner to maintain a financial margin of safety.

I anticipate the objection that the financial crisis proves me wrong. Well, even at the worst of the crisis, annual foreclosure rates were under 10% (i.e. 90+% of mortgages were stable). And, banks have certainly further tightened up their underwriting since then.

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