It'll arguably end even worse if they keep going up though.
Of the two scenarios, I consider the deflationary one "worse" in terms of its impact on more people.
You just need to pay taxes and mortgage but not utilities for your empty house.
I had coworkers who wanted to find a new but were now $200K under on their house.
The mobility renting offers can't be understated.
Maybe, but probably not at the same rate.
Broadly speaking, rents are tied to incomes, house prices to the availability and cost of credit (i.e., interest rates). Average income places an upper bound on rents because renters can only pay rent from income (since no bank will lend you money to pay rent).
I'm currently benefiting from this phenomenon myself as I rent a house for ~$25k/year (in Melbourne, Australia). Buying that same house would cost me ~$45k/year.
I'm pretty sure every bank will do this, in the form of a credit card.
>I'm pretty sure every bank will do this, in the form of a credit card.
I’ve never seen an option to pay rent with a credit card. Cash, check, money order, or cashier check have been options I’ve seen.
Mind citing a source for this? I've seen a situation where rents and house prices didn't both rise together. Maybe not precisely the same rate, there may be some noise from other factors, but within a few percentage points of each other.
Rents may be somewhat related to the incomes of the people who are renting in the area, but these people are not necessarily the average population. In a housing shortage the people with high paying jobs rent decent places, everyone who makes less is forced to live with roommates or commute from further away and many leave the area altogether.
And then in your example, that's not necessarily so crazy. Some of that $45k goes towards the mortgage interest which is tax deductible (in the US, not sure about Australia), and of course over time more and more of it goes to the principle so effectively paying yourself.
> Rents may be somewhat related to the incomes of the people who are renting in the area, but these people are not necessarily the average population.
By definition renters must live in the are where they rent, and must work within commuting distance of where they rent (even if it's a very long commute).
Landlords, however, can live anywhere, provided they have someone to manage their rented properties. E.g., my landlord lives in Singapore, but I pay my rent to a Melbourne based property management agency. But since I live (and work) in Melbourne my rent is set by the market rate in Melbourne, not the (much higher) rate in Singapore.
Unfortunately for non-techies in SF, their rents have been pushed up massively due to the much higher tech salaries. But that only proves the strong correlation between rent and income.
BTW, mortgage interest in not tax deductible in Australia. Somewhat crazily, however, rental losses on investment properties are tax deductible ("negative gearing").
Prices (values) are based on that market willingness to pay divided by the cost of capital. If the cost of capital goes up, all else equal, values will fall while rents are flat.
I did a more thorough review of historical inflation, and the implications for investments here - cheers:
they can always sell the house and take the loss.
In such cases, "forgiven" debt is taxable as regular income in that year, which adds another layer of problems.
How is your situation improved by sticking around to pay $400,000 + cost of financing for a $300,000 house? That just loses you a second $100K (plus cost of financing).
Your premise assumes housing values never go back up. The value is not necessarily gone forever.
The house that declined to $300k can climb back to $400k or $500k.
You can continue paying the mortgage, do absolutely nothing else, and watch as the property value climbs back to where it was due to economic factors (whether a hot economy or low interest rates fueling value recovery).
Over five years, from Jan 2010 to Jan 2015 you pay $120,000 in mortgages payments on the $400,000 mortgage. You get back to 2015 and the housing market has recovered your property back to over $400k (from the low of $300k). You continue making your mortgage payments. By Jan 2018, thanks to hot asset prices, your house is now worth $550,000. You're now solidly above water, you've paid off ~26% of your mortgage term (eight years of payments), and you're sitting on maybe $200,000 in equity value vs your original $500k purchase price. The value of the property recovered, and you didn't lose your $100k down payment from walking away.
Depending on the circumstances, you may very well have been better off holding on to a property in 2009-2010, rather than selling at a loss. The housing value recovery has been extraordinary over the last six or seven years. Certainly some property scenarios were extreme, where owners were perma-buried. The worst hit states, such as Arizona, Nevada, Florida, etc. saw rapid value recoveries.
Or you could rent, but that's not just an economic decision.
I will take people declaring bankruptcy over people being unable to afford to live in a home ANY day.
If you're underwater on a mortgage, it's still the same payment month over month that you were expecting when you took out the mortgage. It'll recover eventually if you hold on. When you're paying rent month to month, that number changes on you as prices rise and you can't just hold on.
The market can remain irrational for longer than you can remain solvent.
Additionally, your statement is false under many conditions. It is not close to a proven fact that it is true "eventually," no matter the time horizon.
If that were true, the purchase price to rent ratios would all be the same. They aren't.[1]. There are some places in the US (looking at you SF!) where renting is cheaper than buying and vice versa.
[1] https://www.mashvisor.com/blog/best-real-estate-markets-pric...
Not if the supply of rental units is increasing. One apartment building can put 100 - 500 units on the market versus perhaps 10 single family houses in that same space.
A good example of this in action right now is Sunnyvale, which has had rising home prices over the last three years but flat rents because the number of rental units coming online has greatly exceeded the available housing inventory.
It would be accurate to say that house rents go up with rising housing prices, but it is not true that all rents go up with rising housing prices. What it does is re-factor the ratio of renters to owners in favor of renters.
I've seen the argument you present used frequently, and I can understand where it is accurate in many markets.
In Seattle, a very similar argument is being made as a cure for the lack of affordable housing -- greater density of construction will lower costs through greater housing supply.
What I see happening in actuality though is that one house that would have fetched ~$900,000 today (and maybe $400,000 just a few years ago, post-recession) is torn down, and four condos put up in the same footprint. Ok - so supply increased, right? Not exactly, because if each unit is priced at ~$700,000, it's still above affordability for most people. So then those units get swallowed up by speculators and investors, the same as what's happened NY, Paris, London, and Vancouver.
I also recall in Seattle there is some building regulation where new apartment buildings get a tax rebate or some similar incentive that lasts 5 years - and then after that the units get converted to condos (or maybe its the other way around). In any event - my point is that there can be a lot of shenanigans that get in the way of the market.