Real Estate

Home Owners: How much % crash before you're upside down?

  • Last Updated:
  • Mar 20th, 2017 10:14 pm
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Poll: How much of a % drop before you're upside down on the value your paid?

  • Total votes: 109. You have voted on this poll.
5% Drop
 
5
5%
10% Drop
 
3
3%
20% Drop
 
14
13%
30% Drop
 
14
13%
40% Drop
 
14
13%
50% Drop
 
24
22%
60%+ Drop
 
20
18%
I bought my house for $100,000 in 2011 and is now appraised at $1M+, bring on the RE crash!
 
15
14%
Deal Fanatic
May 1, 2012
5602 posts
1710 upvotes
Markham
If the market crashed 60%, I would sit at even.

I wouldn't sell even if it went below what I paid. I'll just pay it the same or I'll rent it out.

People keep thinking that homeowners are forced to sell when their homes are worth less than what they paid. What these "people" don't realize is that as long as people have jobs, they will not sell. If a black swan event happened and everyone lost their jobs, then perhaps... but until then... no one is going to sell their home, especially not their low rise. The constant thinking is that in the long term, it will go back and even further ahead.
Deal Addict
Dec 5, 2006
3761 posts
287 upvotes
Markham
Anikiri wrote: If the market crashed 60%, I would sit at even.

I wouldn't sell even if it went below what I paid. I'll just pay it the same or I'll rent it out.

People keep thinking that homeowners are forced to sell when their homes are worth less than what they paid. What these "people" don't realize is that as long as people have jobs, they will not sell. If a black swan event happened and everyone lost their jobs, then perhaps... but until then... no one is going to sell their home, especially not their low rise. The constant thinking is that in the long term, it will go back and even further ahead.
How can you sure people have jobs? US didn't need 20% unemployment rate to get home prices crashed .
Deal Addict
Feb 9, 2009
2453 posts
490 upvotes
Anikiri wrote:
Mar 9th, 2017 10:03 pm
If the market crashed 60%, I would sit at even.

I wouldn't sell even if it went below what I paid. I'll just pay it the same or I'll rent it out.

People keep thinking that homeowners are forced to sell when their homes are worth less than what they paid. What these "people" don't realize is that as long as people have jobs, they will not sell. If a black swan event happened and everyone lost their jobs, then perhaps... but until then... no one is going to sell their home, especially not their low rise. The constant thinking is that in the long term, it will go back and even further ahead.
Not everyone bought 15 years ago... lots of people leveraged right now.

A crash doesnt effect 100% of people. You will be fine... great. But the couple who leveraged now is taking on huge risk.
Deal Fanatic
May 1, 2012
5602 posts
1710 upvotes
Markham
Sanyo wrote:
Mar 9th, 2017 10:32 pm
Not everyone bought 15 years ago... lots of people leveraged right now.

A crash doesnt effect 100% of people. You will be fine... great. But the couple who leveraged now is taking on huge risk.
15 years ago I was barely out of Jr. High School. I certainly didn't have a house then.

I bought my place 4 years ago. I can weather a 60% drop. In fact, anyone who purchased 2-4 years ago can weather a substantial drop. It is only the idiots who kept fear mongering, who are going to end up looking like a bunch of chicken littles.
Deal Fanatic
Dec 11, 2008
6592 posts
310 upvotes
Certainly sucks for those who will pay a ton of interest. Which is why we tend to be mortgage free before our first renewal. Total interest will be less than $75k or something.

I think unemployment is a risk but it affects everyone so I dont see renters buying either without a job.
Deal Fanatic
May 1, 2012
5602 posts
1710 upvotes
Markham
speedyforme wrote:
Mar 9th, 2017 10:39 pm
Certainly sucks for those who will pay a ton of interest. Which is why we tend to be mortgage free before our first renewal. Total interest will be less than $75k or something.

I think unemployment is a risk but it affects everyone so I dont see renters buying either without a job.
Unemployment and skyrocketing interest rates are some of the most likely black swan events that may precipitate a RE crash. And if either one did happen, renters are certainly just as boned as owners... so I don't see how that benefits anyone.
Newbie
Feb 23, 2009
61 posts
36 upvotes
Oshawa
Anikiri wrote:
Mar 9th, 2017 10:03 pm
If the market crashed 60%, I would sit at even.

I wouldn't sell even if it went below what I paid. I'll just pay it the same or I'll rent it out.

People keep thinking that homeowners are forced to sell when their homes are worth less than what they paid. What these "people" don't realize is that as long as people have jobs, they will not sell. If a black swan event happened and everyone lost their jobs, then perhaps... but until then... no one is going to sell their home, especially not their low rise. The constant thinking is that in the long term, it will go back and even further ahead.
You really don't understand the situation.
So let's say the drop is 50% on a $1.5mil home you bought that has a $1mil mortgage. You have no equity and are under $250K on value to the bank.
The market just stays level for the next 2 years and interest rates continue to rise slowly. Your wife loses her job, has a baby or gets another job that pays much less.
You say you are going to continue to make payments on the $1mil mortgage, but the house is only worth $750K.
A sometime you will have to renew that mortgage and the bank may not think it's a good risk for them as the house is worth less than the debt.
Your income is much the same or less.
The interest rate is higher.
The choice will not be yours.
When the last time this happened the numbers were much smaller than now and the herd ran for the exits.
You sound like the guy who buys a risky stock to make money tomorrow.
But it goes down 10% and you say "it will bounce".
It goes down another 15% and you become "a long term investor".
Deal Fanatic
May 1, 2012
5602 posts
1710 upvotes
Markham
pkrash wrote:
Mar 9th, 2017 11:39 pm
You really don't understand the situation.
So let's say the drop is 50% on a $1.5mil home you bought that has a $1mil mortgage. You have no equity and are under $250K on value to the bank.
The market just stays level for the next 2 years and interest rates continue to rise slowly. Your wife loses her job, has a baby or gets another job that pays much less.
You say you are going to continue to make payments on the $1mil mortgage, but the house is only worth $750K.
A sometime you will have to renew that mortgage and the bank may not think it's a good risk for them as the house is worth less than the debt.
Your income is much the same or less.
The interest rate is higher.
The choice will not be yours.
When the last time this happened the numbers were much smaller than now and the herd ran for the exits.
You sound like the guy who buys a risky stock to make money tomorrow.
But it goes down 10% and you say "it will bounce".
It goes down another 15% and you become "a long term investor".
First of all, you gotta be drinking some badly spiked coolaid if you think the RE market is going to correct south of 60%. You may as well leave the country, because there may not be a country left.

Second of all, you are assuming anyone in the household loses a job or has a kid. You are also assuming that we cannot simply rent the house out and live elsewhere.

Third of all, you clearly don't know how homeownership works. It's not a financial instrument, it's a home. The financial gains are just kosher. Most people buy homes as a means to live, not as means to make money.

Fourth of all, do you understand that you can pay a mortgage down? In effect, it is something akin to around 20% - 30% of your mortgage per 5 years, depending on how aggressive you are. The more you pay it down, the more likely you are to weather a harsher decline. But I digress, you have gotta be living in some sort of alternate reality if you think this market is going to tank 60-70-80%, are you on glue?

Fifth of all, if I bought a house for 1.5mil and I carry a mortage of 1mil, I would be earning close to 200k per year. I am not your little guy barely making ends meet, I am part of the top income bracket in this country. I am certainly not going to sweat over losing some equity that I can gain back later.


For your situation to truly unfold, I would have to lose at least a significant part of my household income, have a kid, carry a significant amount of mortgage, my renewal would be up at the time of the crash, the crash would be extremely severe, and that it won't bounce back.

Why live in this country if you think that's gonna happen? Go move elsewhere.
Deal Addict
Dec 6, 2006
3351 posts
482 upvotes
Toronto
pkrash wrote:
Mar 9th, 2017 11:39 pm
You really don't understand the situation.
So let's say the drop is 50% on a $1.5mil home you bought that has a $1mil mortgage. You have no equity and are under $250K on value to the bank.
The market just stays level for the next 2 years and interest rates continue to rise slowly. Your wife loses her job, has a baby or gets another job that pays much less.
You say you are going to continue to make payments on the $1mil mortgage, but the house is only worth $750K.
A sometime you will have to renew that mortgage and the bank may not think it's a good risk for them as the house is worth less than the debt.
Your income is much the same or less.
The interest rate is higher.
The choice will not be yours.
When the last time this happened the numbers were much smaller than now and the herd ran for the exits.
You sound like the guy who buys a risky stock to make money tomorrow.
But it goes down 10% and you say "it will bounce".
It goes down another 15% and you become "a long term investor".
I don't think you've made enough assumptions to ensure the situation is the absolutely worse.

How about adding a meteor hitting your $1.5mil home, and the neighbors all turn into zombies from the virus in the meteor, and you still cannot sell your home omg!
The worst part, the insurance company says your home insurance does not cover meteor damage, dang!


Well, let's at least try something similar to your hypothetical situation:
- You're renting, invest everything.
- Stocks market crashes 60%, dividends are cut
- You lose your job and have a baby
- Your landlord telling you to move out as he's reclaiming the property for own use (actually he thinks it's not a good risk with you so needs to kick you out)
- Now you can't rent anything else normal/decent with no job & not enough income proof, and you don't have a place to live. The choice will not be yours.
- So you have to go live inside your investment portfolio I guess.
Deal Addict
Dec 30, 1969
1010 posts
212 upvotes
Toronto, ON
smartie wrote:
Mar 9th, 2017 10:30 pm
How can you sure people have jobs? US didn't need 20% unemployment rate to get home prices crashed .
US housing crash had nothing to do with unemployment, it had everything to do with banks lending out mortgages to people that had no ability to pay for it.
Jr. Member
Feb 13, 2017
115 posts
97 upvotes
smartie wrote:
Mar 9th, 2017 10:30 pm
How can you sure people have jobs? US didn't need 20% unemployment rate to get home prices crashed .
US crashed because they were giving 40 year mortgage and qualifying them at like 1,5%

Even though my mortgage is 2% now, I still had to qualify at like 3.9%.

Please stop comparing the corrupt US crash to Canada to justify being priced out.
Member
Dec 30, 1969
477 posts
226 upvotes
Burlington, ON
Anikiri wrote:
Mar 9th, 2017 10:03 pm
If the market crashed 60%, I would sit at even.

I wouldn't sell even if it went below what I paid. I'll just pay it the same or I'll rent it out.

People keep thinking that homeowners are forced to sell when their homes are worth less than what they paid. What these "people" don't realize is that as long as people have jobs, they will not sell. If a black swan event happened and everyone lost their jobs, then perhaps... but until then... no one is going to sell their home, especially not their low rise. The constant thinking is that in the long term, it will go back and even further ahead.
Although a drop in property value won't cause people to lose their homes, other factors certainly can. I personally know people with 800k+ mortgages, 30yr amortization where both spouses work.

The whole situation could turn bad if:
1) One person loses their job or becomes disabled, they can't pay the mortgage.
2) If the mortgage rate goes up by a single percent they could be looking at paying ~$8000 more per year that they don't have when the mortgage gets renewed.
3) Another kid means mom has to take time off of work, would put significant strain on the family finances.

Blue-sky planning works until there is a storm, and then things go bad, really bad. A home is not worth putting your family's financial future at risk.
Deal Addict
User avatar
Jun 28, 2007
3839 posts
1009 upvotes
pkrash wrote:
Mar 9th, 2017 9:58 pm
The fact that nobody has answered this tells a lot...most posters here have no idea about what happened or are too young to know.
Bought my first home in 1987.
It's true, many things are the same with this boom as in the late 80's/early 90's:
- Bidding wars.
- Quick sales.
- Line ups for new builds that won't be ready for years.
- Builders mostly only offer large 2 storey, poorly built homes on small lots to maximize profit/acre.
- Over-paying for crappy homes in crappy locations.
- High leverage.
- Tons of condos being built in the GTA.
- Speculation.
- People think it will never end.
What's different:
- Interest rates are historically low.
- Income increases are low.
- There is some more foreign investment (how much more is debatable).
- There is greater general wealth, with most Boomers having some equity.

I was happy to get a 12% mortgage in 1989 because rates were increasing weekly or monthly 1/4% to 1/2% at a time. Rates peaked at about 14.75%.
The idea of 2-3% for such a long time with 1/4% change in a year would not be normal...but this is considered normal now.
Historically 5-6% would be considered a good rate. It allows for some actual savings accounts and GIC's that paid interest.
Can you imagine a $1mil mortgage at 6%?
So when people finally realized they were paying too much (or couldn't pay) for their crappy house on a crappy lot in a crappy location the business plan started to fall apart.
You couldn't sell because there was nobody to buy.
The bank took your home if you couldn't pay. You can't "refuse to sell in a depressed market".
You left your home to the bank and walked away because your equity was gone and you had to keep paying the bills.
People lost jobs making things worse.
Rich locals and foreigners don't "just buy and support prices"...that's called "catching a falling knife". They wait for the bottom or near bottom.

What is never different in human nature is that there is always a herd mentality with fear and greed.
We are currently in a situation which is unsustainable.
We will see how strong this bull market is when the Fed raises rates and fear creeps in.
The main thing that was different in the late 80s today and today was the speed and breath of that run up compared to today. For example, prices actually surged by more on a % basis over a period of under 5 years compared to today which has seen steady growth (though at periodic times more rampant growth) - see chart below. At least in hindsight, the swiftness of that run-up in the 80s made for a likely sharp reversal if the factors that pushed up activity so quick reversed. From what I recall back then, the main factor was speculation - far more flipping going on - developers spec building etc etc. When interest rates rose in the early 90s and the recession kicked in (which was far more painful for Toronto than the last one in 2008) it killed that bubble quickly.

Image

There is less evidence of this kind of speculative behaviour today. Today (outside of the condo market) people are buying to live, not to flip. This could be a good thing but it could also be a bad thing should the market turn sharply. At least in the 90s, the only people who got killed were the speculators and condo developers - while most "long term" homeowners were for the most part, completely unaffected (except for those who might have lost their jobs when unemployment soared to double digit levels). Today, if there was a severe enough spike in interest rates and unemployment, it would be worse for more people, simply because the average person is living with more debt and less non-home equity than back then.
Member
Jan 20, 2007
382 posts
39 upvotes
Niagara
Is it really that simple a calculation (purchase price of house - selling price of house = profit?). Don't you need to include the other costs - property taxes, maintenance, insurance, interest costs, selling costs/buying costs (I'm ignoring inflation)? If you purchased a house for a 100k with 10% down ten years ago you've probably spent at least 40k in costs between then and now (interest alone is around 2-3k/year). So say it's worth 200k today a 30% drop would be enough to put you at the break even point.
Deal Fanatic
User avatar
May 11, 2008
9116 posts
256 upvotes
ancodia wrote:
Mar 10th, 2017 2:12 pm
Is it really that simple a calculation (purchase price of house - selling price of house = profit?). Don't you need to include the other costs - property taxes, maintenance, insurance, interest costs, selling costs/buying costs (I'm ignoring inflation)? If you purchased a house for a 100k with 10% down ten years ago you've probably spent at least 40k in costs between then and now (interest alone is around 2-3k/year). So say it's worth 200k today a 30% drop would be enough to put you at the break even point.
If you're doing that then you need to factor in the rent you're paying during those 10 years. How much would rent be for a house like that?
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