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Comment by muninn_ | Hacker News Reader

It depends on the circumstances. I have a great paying job and good job security and just bought a condo. Had I waited to have 20% down, I would have had to wait at least 10 years, and in the meantime still pay rent somewhere. So I can either go in with very little down (in my case I actually walked out with a check) so that I can pay extra each month toward the principle, or I can save that down payment and essentially pay for somebody else's property. Many of my friends simply can't afford to save for a house because rent is so high that they just don't have savings. You can argue that they should move to cheaper housing (and they did) but at some point the balance between cheap and safe will tip away from safety.

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What would you do if property values declined such that you were underwater 20% on your condo? It seems like some minimum amount of equity is a stabilizing force in turbulent markets, the lack of which contributed to some of the unpleasantness in 2008.

walk away

Just remember - state matters heavily in that decision! If I had lived in a non-recourse state, I would have gladly performed a strategic default a couple of years ago and left the bank to pay the loss in value of my place.

Then you can't sell (without taking a financial bath). But you can still live in the condo, and the payments don't go up.

Or you can try to walk away in some fashion and leave the bank with the problem. As you say, that contributes to instability.

People walking away from houses wasn't the problem. People walking away from houses they were underwater on was the problem. Besides, if you were underwater and could still afford the payments there is no reason to walk away. I am currently underwater on my car, but I can still, you know, drive it.

yes, but you make the assumption that you don't have to sell the house due to factors such as sudden job loss, unplanned events such as accident/injury causing disability etc. The point of 20% down is that you have enough equity even for a turbulent market and if you do need to sell quickly due to possible factors above, you still should be ok. Otherwise, you are assuming that nothing bad will happen and you can continue paying the mortgage.

To your point I think that you just always have that risk. But I'd rather have that 20% I would have spent either invested in a 401k or a retirement fund or even using it for other things like getting another degree. Now I'm not saying those are necessarily the wisest options, but I like the opportunity. I mean this in the kindest way but all you're arguing against here is the risk/reward. In the same token, what I'd home values appreciate 30% in 10 years and all the while I'm renting the place and having somebody else pay the mortgage? Just different risk factors is all. If I find it impossible to get a job as an engineer doing the work I do, than the entire country is probably in another depression. I'm just betting against that.

I think together my fiance and I had about 8% down. Thing was, to rent our current house would be about $1600/month. Even a shitty 2 bedroom was $1200, mortgage with insurance and taxes is $1100. For some people it's not a matter of can we afford to, it's can we afford not to. Even if rent dropped 10% (that has never happened in my area, they were still going up in 2008-2009) it would be a better deal to have a mortgage.

"can we afford not to"

Bubble alert!

Rents have to fall a lot to put us in a situation were that's a bad thing (we aren't moving for a long time), and then at that point we can just let the bank foreclose and move into a $500 a month 2 bedroom.

Your mortgage is temporarily low because interest rates are low.

http://www.bankrate.com/finance/mortgage-rates-history-0112....

If your interest rate doubled, could you afford to? Do you know how much you'd have to pay?

If you get a fixed-rate loan, you don't have to worry about that.

Interest rates go up, your home value goes down.

Sure. That's a real risk. There are probably much bigger risks to worry about, like the market crashing again or losing your job. The risk of interest rates going high enough to significantly push home prices down seems really small for the next several years.

Historically both real estate prices and interest rates are procyclical. Central banks raise rates when inflation becomes too fast (which is closely correlated to house price appreciation).

But of course you can sometimes have a local economic decline while the currency area is experiencing overheating and high inflation.

Agree, but as long as Chinese money is seeking sanctuary as quickly as it is, I don't see any sign of SFBA real estate cooling off.

Fixed rate loans are only fixed for very short periods like 2-3 years, so how is this relevant? And they then usually turn into really bad interest rates when they expire, and you'd have to remortgage in a bad market.

You have to pay lawyers fees, surveying fees, taxes, realtor fees, etc. when you buy a house, if you only have it for 2-3 years you have to factor all those into the monthly costs too.

No, you can get fixed loans that are fixed for the life of the loan. And you usually should when interest rates are low, because ARMs in that case usually have little room to adjust down and a lot of room to adjust upward when indexes riser, which they are nearly certain to significantly when you buy near the historic bottom, so even with the premium on the starting interest rate, fixed rate loans are better in the long run.

Where do you live? 15-year and 30-year fixed rate mortgage loans are available pretty much everywhere in North America.

30 year fixed rate.

Cars and houses are not the same thing. Cars depreciate in value from the moment you drive them out of the parking lot of the dealer. House values generally stay the same or go up.

Continuing to make payments on a house when you're underwater on the basis that you can still live in it is a really bad idea. Even if you can afford the payments, why would you want to overpay for something? That's why so many people walked away from their houses during the real estate crash: when you have no guarantees that the asset you're paying for will appreciate in value back to the original value, it's a much more financially sound decision to ignore the sunk cost and cut your losses ASAP.

you borrowed money and already made the purchase, just like a loan for a car. Car's depreciate quickly but people don't default on the loan because they are underwater based on ltv.

The debt is collateralized by the house - give up the house and let the bank pay for the risk they took on you. You're under no obligation to the bank to overpay for housing when things change - you're just not likely to get another mortgage either.

> You're under no obligation to the bank

Yes you are. You signed a contract. This gives you an ethical if not a moral obligation. You have a legal obligation to pay in all states, which is why the lender can foreclose on you if you fail to do so. In some states, you also have a legal obligation to make the lender whole if they can't recoup their loss with the foreclosure sale.

I think it depends on your risk tolerance and world view. I think the world is just going to get more wealthy and property prices, even when there are downturns, will eventually always appreciate if you buy in the right area. I'm not saying I can predict that, but in the area I live in there were houses in the $600,000 range that sold for far less than that during the downturn, and now they're right back at the pre-recession value.

On the other hand there are areas that have never recovered. I think as a general rule if you buy a place in a mixed-used development neighborhood you'll be able to weather the storms. At least that's my opinion (and take that for what it's worth).

Well, unless I lose my job keep paying for it. There are always risks with every financial decision. I'm just accepting those risks right now and I feel like that's a good decision for me. It might not be for somebody else.

Yes, you personally are much better off with no money down (0% equity) and a long-term, fixed rate, tax deductible, low interest and non-recourse mortgage loan. You control the asset (the condo) but have very little downside risk. If prices fall 20%, even if you kept your job, even if you won millions in the lottery, it might be in your self-interest to walk away and let the bank foreclose. I don't think there's a moral dimension to that decision; it's a matter of contract law. But I am pointing out that this is a tragedy of the commons in that millions of people acting this way creates an environment in which downside risk is hugely amplified in the event of significant price declines in the housing market, which is what we saw in 2008 - the system beginning to feed on itself in a vicious downward spiral. When I read things such as your initial comment a little voice in my head says ''here we go again''.

The unpleasantness in 2008 onward was a conscious decision by the Obama administration to not bail out underwater home owners.

Banks were bailed out. Large businesses were bailed out. Ordinary homeowners caught up in a massive housing bubble, reviled and sent down the river.

> The unpleasantness in 2008 onward was a conscious decision by the Obama administration to not bail out underwater home owners.

You might be able to make an argument that the unpleasantness in 2009 onward (or, more specifically, late January of 2009 onward) was the fault of some conscious decision of the Obama administration, but as popular as it has been with the Trump campaign recently, pretending that the Obama administration is responsible for things which occurred before his inauguration is indefensible without some kind of strong evidence for the extraordinary claim of retrocausality.

(Also, factually, the administration decided to bail homeowners out in a variety of ways, though perhaps not as direct, universal, and significant of a bailout as some advocates -- myself included -- would have preferred.)

I consider tax free discharge of defaulted mortgage loans to be a bailout of ordinary homeowners.

>The unpleasantness in 2008 onward was a conscious decision by the Obama administration

Bush was president for 100% of the year 2008.

Same position as I was in 2006. My decision was either waste money renting a one bedroom, or just buy a house for a mortgage of about the same. Twenty houses, and two week later, I moved into a house, with zero money down. Granted 20% was in a HELOC, and the other was a 30 year. Five year later, refinanced to 15 year loan, and now I'm racking up $1000 equity every two months. 20% down is great if you can, but early on, I don't see how that's possible unless you're SERIOUSLY making bank.

Also side note, just got done watching The Big Short, as well as reading the book. So depressing what happened to all these people.

If everyone had to pay 20% down, house prices would be lower.

Probably, but from an economics perspective, i'm not sure who will push that position. There seems to be plenty of Lenders willing to take a chance with someone offering a lower down payments and in turn charge them a higher rate.

Because the mortgages are backed by the US government.

For conforming loans, yes. For jumbo loans, no.

I'm in the same boat right now - I'm paying >$2k/mo in rent. I could certainly wait to get the full 20% down payment, but it makes more sense to me if I buy a condo now, build the equity, and down the road I can keep saving for a nicer place once I outgrow the condo.

Sure I'll be mostly paying interest to start, but this way I'm at least seeing some sort of investment if I have to spend that much per month on living. I could certainly have found a roommate or a cheaper place but frankly, I've gotten used to what I'm paying now and I still have plenty leftover to contribute to a 401k, savings, and enjoy myself.

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