I will say it's their fault... - Zanzibar [14:33:28 09/05/10]
: As far as it's "their fault"... are you saying that all the smart people predicted the housing bubble? How could someone have known in 02 or 03 that the market would implode? Seems like luck, based on when you purchased your home to me.
One doesn't have to predict the exact details of an emergency in order to be prepared for that type of emergency. I didn't predict the Loma Prieta earthquake -- which Mrs. Z. and I lived through -- but we had the proper supplies and knew what to do in the event of an earthquake.
Before buying a house, Mrs. Z. and I lived in a tiny apartment in a bad part of town (knife fight outside our bedroom window!) to maximize our savings. We put off having children and did not travel aside from going to our parents' homes. In those "lost" four years, we saved up more than double our 20% downpayment; only then did we buy a house, and a modest one at that. We could have survived a 50% drop in home prices for that reason. We bought in 1993, so we didn't experience a significant drop shortly after buying, but the point is: if it had happened, it wouldn't have crushed us because we were prepared. It might have been long-term financially better for us to buy a much more expensive home the instant we had a 5% downpayment, but we didn't want to gamble. I don't begrudge the equity of those who did make that decision and had it pay off, but I also don't want them reaching for my wallet when it doesn't pay off.
If you have to pour in all your reserves to barely get into a house, you are taking a gamble that you can't afford to lose. Maybe it is a relatively small risk historically speaking, but you're still betting your life's savings against a noticeable drop in housing prices. There is some luck to whether the gamble pays off. But there is no luck to whether you ensure you are prepared to handle the downside before buying. Electing to perform without a safety net is a conscious decision, or at least it should be so to anyone who thinks about the situation.
With interest rates far lower than the historical average and with home values having skyrocketed to all-time highs... I didn't have to predict the bubble's exact date or extent, to know that it was a more likely time to lose that gamble. Some of my peers at work bought very expensive ($700k and up) homes circa 2000. We could have moved into a much more expensive place as well, but decided not to. If housing prices had doubled since 2000, those peers would have been a significant fraction of a million dollars ahead of where I was. Now tell me: why should money come out of my pocket to cover their losses? Your proposal seems like a pretty sweet deal for them: they would get to pocket any upside, and now you suggest that they get to stick someone else with the tab for the downside. Again, I don't begrudge those people the money they earned in that manner before the bubble burst -- they decided to take a risk and I decided not to. But since I specifically decided not to take that risk, why should the cost of it fall on me?
: Home equity is generally how the middle class builds wealth and what they borrow against. Getting mortgage values aligned with home values is in everybody's interest.
Throwing money at people who lost money on their homes is only in the interest of people who lost money on their homes, in my view. Are you one of them?
If what you're worried about is refinancing or moving, I'd be all for a program that would allow people to carry their negative equity to a new home or through to a refinance. But no getting off the hook for the losses on the bad gamble. I can't believe that anyone would argue that it is sane fiscal policy to take money from the responsible, for handing out to the irresponsible. And yet that is a consistent pattern in our society, and something you apparently champion.
Let me give you a specific example:
John Doe buys a house in 1990 for $200,000. He puts down $20,000 and has a $180,000 30-year mortgage.
In 2004, his home has appreciated to a value of $300,000, and his original mortgage is paid down to $130,000. He refinances to 90% of its current value, taking out a loan for $270,000. He pockets $140,000 ($270,000 new mortgage less $130,000 payoff on original mortgage) on the transaction. He spends this money -- which is not taxed -- on a new Lexus and lavish vacations.
In post-bubble 2010, his home is back down to being worth $200,000 -- just where he started. His $270,000 loan is paid down to about $250,000. As a result, he's $50,000 underwater at this point.
Does he deserve a $50,000 handout to "align his mortgage value with his home value"? He had nearly three times that much cash free and clear, that he directly took out of his house. But he pissed it away. Heck, he could have just as easily invested it somewhere, and still would qualify for the same handout. Pretty nice racket for him: he walks off with $50,000 cash, and you want me to cover for him? No thanks; that's insane.
You write as if you believe that an ever-increasing home value is a constitutional right. Do you really view it as Uncle Sam's job to hand money out to people who lost money on speculation that turned bad?