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0 pointshervature1y ago0 comments

@dreadmorbius already mentioned nonrecourse loans but even recourse loans it should be obvious that if something made your property worth $0 (say Chernobyl real estate) then paying any amount of money to the bank is just a waste. Now, it may not be worth it to declare bankruptcy to absolve yourself of the loan, but the example is meant to illustrate that if the value loss is large enough, the recovery slow compared to other investments, and the payment is large relative to your income, then walking away can be the right choice.

> Whether I'm paying $2,000 to the bank, or $2,000 to some landlord (Really, I'd be looking at $2,800/month for a house like what I have now), I'm paying $2k/month. So why not just keep paying my mortgage, even if the value is less than what I paid?

I think you're missing the point that in a crash like 2008 the market rents would go from $2,800 to $1,400. Also, a reminder to anyone reading this that you cannot compare mortgage payments to rents. The down payment could have gone into another investment (like a tax-advantaged 401k) and so you need to take into account the opportunity cost of not getting S&P 500 returns. In the US, this is normally offset by the fact that the government tries to make mortgage rates very close to the Fed rate and the fact that the system allows you to lever up 4x (20% down) to 99x (1% down) to minimize the opportunity cost of other investments. In general, if you plan to live a house for at least 5 years, you should probably put it on a mortgage.

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BehindBlueEyes1y ago

> if something made your property worth $0 (say Chernobyl real estate) then paying any amount of money to the bank is just a waste.

depends why the value goes down too: chernobyl real estated has a cost on health probably giving it a negative value, whereas if the economic value drops but the place doesn't actually poison you, the house is still the same house to live in. That's not value of 0 regardless what the price tag says.

The problem there is we use housing as an investment which is at odds with basic needs of having a roof over one's head/a safe place to live.

throwaway20371y ago

    > In the US, this is normally offset by the fact that the government tries to make mortgage rates very close to the Fed rate

I assume you are talking about Fannie Mae, Freddie Mac, and Ginnie Mae. To me, there true purpose is the allow US home loans to be predominantly fixed rate. That is exceptionally rare in the world. In most countries, it is hard to get a fixed rate for longer than 10 years. In the US, 30 year fixed is normal. Part of the magic is unwritten gov't guarantees and clear rules that allow commercial banks to sell risky (fixed rate) loans to them. Mind you: This isn't free. It requires expert level interest rate risk management by those big three orgs. As we saw during 2008 GFC, they failed.

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