Have we learned nothing? HELOC rant

[Mjenn]

I'm in the middle of quite an interesting book on the housing crisis - The Big Short - at the moment, which takes a look at who really seemed to be aware of the extent of the housing bubble before it burst - and it really seems like not that many folks in finance really had an inkling of a suspicion.

And it really isn't that easy. Where I live, the bubble hasn't burst & housing prices are up 300% from 2000. Today in the paper there was an article where experts put forth reasons they thought 'yes we are in a housing bubble' and 'no we are not in a housing bubble'.


The thing that I am trying to say is 'hindsight is always 20/20'

But the fact that they are still pushing HELOC is crazy. One of our friends just took one out here - but they had a tiny mortgage on a house that is probably worth 5x that right now. It still made me cringe a little to watch them buy up TVs, video games, a new car - with their new found wealth. The 'we are not in a housing bubble' side of the news article said this type of lending only happens in the US, but I know quite a few folks over here that have done it as well.

[jpg7n16]

Yep, I definitely disagree. I don't think you can compare owning shares of stock to ownership of your primary residence. Those two things just aren't in the same league. I might agree with you if you were referring to an investment property but not in regards to your own personal home. As I've said many times, our home is an asset but it is not an investment. We did not buy our house with the intent or expectation of making a profit. As a result, we won't sell it when the value goes up. We won't sell it when the value goes down. We will sell it, if ever, when it no longer suits our needs.

In my view, they are.

Stock and real estate are assets. If you know they're going down in value you shouldn't own it. And since a house to me is just shelter, just about any house will do. Though I can see liking a house to be "just what I wanted" making it a bit more valuable.

But houses can be replaced. Your family can move to a new home.

You can't replace family and friends. Those are what make a home to me. And they'd visit me no matter which house I live in.

So yes, if I owned a home and felt it would drop substantially in value in the near future, I would sell, just as I would with a stock.

[disneysteve]

Stock and real estate are assets. If you know they're going down in value you shouldn't own it.

In that case, you shouldn't own a car because it is an asset that you know is going down in value.

You are leaving out an important piece of the discussion that distinguishes houses and cars from stocks and bonds and that is practical use. A share of stock serves no useful purpose other than making money. If it isn't making money, why keep it? My house and my car, however, serve very useful purposes. They weren't bought with the purpose or intent of making money. In fact, I knew for certain that my car would lose money from the moment I bought it.

Regarding my house, one other factor that would make me sell it if the price was dropping would be the reason for the drop. If the neighborhood was going downhill, unsavory folks were moving in, crime rates were rising, etc., I would certainly be looking to sell and I'd be thrilled to take the 150K offer under those circumstances.

[cjscully]

I haven't looked at this thread for a while, feeling like I said everything I had to say on the subject.

First, let me clarify my previous statement that anyone who cared to look knew the bubble would burst. I live in California. At the time when real estate here peaked less than 15% of the population of this state could afford a mortgage on a home. Houses in my neighborhood were selling at nearly double what they were when I bought my house four years earlier. Those numbers just don't work. I knew the bubble was going to burst. I didn't know whether the bust would be nationwide or just in CA. I didn't know when or how far prices were going to fall when it did but I knew that it would happen. The numbers said so.

To chime in on the debate about when to sell and when not to, I lean in the direction several other posters have mentioned in that a home is not purely an investment. Most of us can't think about it in the same way as we do a stock portfolio and sell to "cut our losses". The truth is if someone is emotionally invested in the property as most people are with their primary residence, they'll stay as long as they can afford to make the payments. That said I would also guess that they would probably sell and move if they got an offer that's compelling enough. Different people would have different requirements as to what that offer would need to be.

[jpg7n16]

In that case, you shouldn't own a car because it is an asset that you know is going down in value.

Which is why we suggest avoiding the purchase of a new car. Because we know the value is about to substantially decline, with no added utility.

Cars are more of a necessary expense that you should try and limit. And owning a car helps reduce certain transportation expenses (rail fares, bus fares, car rental fees, etc.)

But yes, if you know a car will shortly fall 50% in value, you should not own it. ("Buy used and let someone else take the depreciation hit")

You are leaving out an important piece of the discussion that distinguishes houses and cars from stocks and bonds and that is practical use. A share of stock serves no useful purpose other than making money. If it isn't making money, why keep it? My house and my car, however, serve very useful purposes. They weren't bought with the purpose or intent of making money. In fact, I knew for certain that my car would lose money from the moment I bought it.

There are other things you can do with stock, vote for corporate leadership, feel satisfaction of owning a piece of a profitable company, live off the dividends, own a piece of history, etc. If you own enough stock, you can actually run the entire company.

There are people who are emotionally attached to stocks (think GM stock) just like others are to a home. When GM was going under, they refused to sell for emotional reasons and wound up paying a big price.

Regarding my house, one other factor that would make me sell it if the price was dropping would be the reason for the drop. If the neighborhood was going downhill, unsavory folks were moving in, crime rates were rising, etc., I would certainly be looking to sell and I'd be thrilled to take the 150K offer under those circumstances.

Yup. Those would deteriorate the emotional reasons you'd have for living in that neighborhood (good friendly neighbors, safety, etc.) All of which legitimately add value to a location for property.

I don't deny that the emotional factors do add value to a home, but I am surprised at just how much value people will place on that home (when a different home in the area could have very similar factors).

[jIM_Ohio]

I haven't looked at this thread for a while, feeling like I said everything I had to say on the subject.

First, let me clarify my previous statement that anyone who cared to look knew the bubble would burst. I live in California. At the time when real estate here peaked less than 15% of the population of this state could afford a mortgage on a home. Houses in my neighborhood were selling at nearly double what they were when I bought my house four years earlier. Those numbers just don't work. I knew the bubble was going to burst. I didn't know whether the bust would be nationwide or just in CA. I didn't know when or how far prices were going to fall when it did but I knew that it would happen. The numbers said so.

To chime in on the debate about when to sell and when not to, I lean in the direction several other posters have mentioned in that a home is not purely an investment. Most of us can't think about it in the same way as we do a stock portfolio and sell to "cut our losses". The truth is if someone is emotionally invested in the property as most people are with their primary residence, they'll stay as long as they can afford to make the payments. That said I would also guess that they would probably sell and move if they got an offer that's compelling enough. Different people would have different requirements as to what that offer would need to be.

I agree with different factors, and ultimately I think 2 factors trump all the others.

Factor 1 is the amount of profit relative to the value of the house and value of the seller (net worth)
Factor 2 is the availability of real estate in the area for repurchase

If either of those factors is negative, then selling makes little sense.
If both of those are positive, the other factors matter less, but still might prevail (like kids changing schools or how a move affects certain kids).

If a house in a HCOL area is appreciating fast, the only way to "lock in" gains is to sell. The only way most people would sell is if they could live somewhere else (close by) for a similar price.

A 150k profit on a $900k house is also a much different situation than a 150k profit on a 300k house. If a person has $2 M in investments (other than the house) the 150k means less than if person only had 200k in assets plus the 150k coming from the house sale.

[littleroc02us]

You sell your house when you A: have to move for a job or when you want to move either up or down in house and have more than 20% equity in it. Whether the housing market is up or down in pricing doesn't really matter, because if you sell when things are getting better, the next house you buy will cost more. If you sell when it is low, then you should be able to get a deal. If you are underwater you will have to wait it out and pay down your mortgage. It's all based on how you manage your own dealings in life, not the market all the time.

[nick__45]

Some of the smartest people I know bought their house for twice of what it is worth now. The sneakiest of them all is now doing short-sale even though they don't have to. They are working the system just like they use their slime ball tactic at work. The banks aren't looking closely who can short-sale and who can't. For me, if you decide to move your job then you can't short sale. No one make you move, you move voluntarily. And you pick the most expensive apartment and car at the new place so it shows that your income can't cover it. Well tough, rent your house out if you decide to move some where and rent someone else property. No one force people to move. These people are doing strategic default which hurts house price.

And these slime balls are getting 3% interest rate on their ARM now while the responsible folks pays more than that. It should be a jail-able offense to strategically default on your loan. Technically, no loan should be forgiven, from CC and mortgage. Pay your debt even if it takes you all your life.

[nick__45]

You sell your house when you A: have to move for a job or when you want to move either up or down in house and have more than 20% equity in it. Whether the housing market is up or down in pricing doesn't really matter, because if you sell when things are getting better, the next house you buy will cost more. If you sell when it is low, then you should be able to get a deal. If you are underwater you will have to wait it out and pay down your mortgage. It's all based on how you manage your own dealings in life, not the market all the time.

That's common sense but it is too inconvenient. People should not be able to buy without 20% down. Pass some law that says you can't buy without 20% down and you can't be foreclosed on because you have to pay for that house or go to jail. People will work 3 jobs and pay things off while living on the street and renting it out.