Why are grownups always worrying about the housing market?

March 27, 2009 5:55 PM

Financial noob filter: Housing market fluctuations seem to have always been a big item, but to my noob mind I think "What do people care unless they are buying or selling a house?". I imagine the answer may be something to do with paying a mortgage on the house based on its previous 500k value when it is now worth only 300k. That or equity leverage. Can anyone clear this up for me?
posted by dino terror to home & garden (19 comments total)

A lot of people I know fueled their consumption over the last few years with HELOC, so equity leverage is a big deal to some people.
posted by synaesthetichaze at 6:07 PM on March 27

We worry about our 401k values too even though we won't be selling those stocks until we're retired. It's hard not to take fluctuations in your net worth personally.

Also, people often see the house as a safety net:

Mortgage is 500K, house is worth 700K: you have a 200K safety net if something catastrophic happens to your income.

Mortgage is 500K, house is worth 300K: you're 200K in the hole if something catastrophic happens to your income.
posted by We had a deal, Kyle at 6:08 PM on March 27

During the housing bubble, lot of people got ARMs with interest rates that jump significantly after an introductory "teaser" period. They knew they wouldn't be able to afford the monthly payments after the rate jumped, but figured they would just refinance when the teaser rate ran out. Unfortunately, no bank is going to loan $500,000 on a house that's currently only worth $300,000. So these people are stuck with the ARM and its higher payments, which, as I mentioned, they knew they couldn't afford when they got the mortgage. Since they can't make their payments, they lose their house (and any equity they thought they were building up).

If they had a 30-year fixed, you might still think it's no biggie, except that a lot of people are losing their jobs right now and would dearly love to sell their house so they can move elsewhere to seek work. If you sell your $500,000 house for $300,000, you're still going to owe the bank $200,000, which will greatly complicate buying a new house (or even renting), so you are basically stuck living where you live until the market recovers, or else not being able to get credit for the next 7-10 years.
posted by kindall at 6:09 PM on March 27

Also property tax burdens based on a reassesment will vary with the market bubble(s), even if someone's not intent on selling or buying.
posted by reptile at 6:09 PM on March 27

In the past if you lost your job and had to sell your house you would have enough room to pay for an apartment for a year and pay the commissions on the sale. Now that isn't the case - if you lose your job and need to sell your house to move to another one, you are stuck.

And paying a mortgage for 500k on something worth 300k is just hard to swallow.
posted by bensherman at 6:09 PM on March 27

What do people care unless they are buying or selling a house?

You left off, what do people care unless they are buying or selling a house, or owning or renting a house, or living in a house, or wishing they lived in a house, or are a bank mortgaging a house, or a financial institution insuring a morgage on a house, or a financial institution selling derivatives based on the insuring of the morgaging of that house, or some poor schlub who's pention is (was) invested in shares of a financial institution that's betting on derivatives of insurance of morgages on a house...

you see where I'm going here with this, right?
posted by Pollomacho at 6:09 PM on March 27 [3 favorites has favorites]

My guess would be because housing expenses are the dominant line item in our respective budgets.

This is no accident because housing expenses are entirely arbitrary in that they are based on how much we can afford to pay after higher-priority needs are met, and there are few higher priority needs than shelter.

When we are collectively rollin', land prices go up. When we po', land prices go down. This is a dynamic of the economy that few people grok.
posted by mrt at 6:13 PM on March 27

Well, among the reasons creditors were willing to give out 'sub-prime mortgages' was the thinking that if you give some deadbeat a $300,000 loan to purchase a $300,000 house, and they default on that loan, you can take possession of the house, sell it for $300,000, and you haven't lost any money.

On the other hand, if when you take possession of that house it's only worth $200,000, you're down by $100,000 and the person who owes it to you is a deadbeat who has just lost their home, i.e. you're probably never going to see that money again.

That said, if it weren't for the economic crisis it has triggered, I don't see why I would care about the creditors losing money on loans given to people who couldn't pay them.


"What do people care unless they are buying or selling a house?"

Also, by the time your average couple has finished paying off their mortgage, their children are just about ready to start looking for their first houses.
posted by Mike1024 at 6:51 PM on March 27

More broadly, the housing market affects the job market. Last I read, there have been about a million jobs lost since Jan. 2007 in construction alone. And that's not even counting related job losses in finance, manufacturing, or retail.

When home values drop, it also causes a drop in property tax revenues. In California, for example, this spells a shortfall of hundreds of millions of dollars for everything from schools and libraries to sheriff's patrols and jails.
posted by scody at 7:19 PM on March 27

Houses have always been a big deal, because they were expensive, and because there's always a percentage of the population that's interested in moving soon. But what is out of normal is the fervor at which it has been covered in the media in the last 10 years or so. For Jebus' sake, there's a whole cable channel about flipping houses! The housing market has gotten so hot that the idea of buying a house, eventually paying it off, and living in it until you die and/or move to Florida is passe. Moving and decorating and staging and improving has become a way of life for many people. So they are inordinately tied to the market.

Why it's important now is that so many people in that class are stuck with whatever house they are in now. Maybe they bought injudiciously, thinking they would make that quick quarter million dollar profit and move on to the better location. And yeah, it probably hurts to be paying for a $300,000 house that they couldn't sell for $200,000 right now. So the housing market is top of mind for them, and the media caters to it.

For people who are where they are staying for a while, or didn't buy stupidly, they don't really care. If I had just bought my dream house a year ago, and the asking price was a deal then, there is no (valid) reason why I should be pissed about the market value. It's my house, I'm not selling it.

A home isn't an investment- it's an expense. It's only an investment in the sense that when its paid off, now you have shelter that you don't pay for. And in the sense that you get to lock in your "rent" payment. I buy a house now, and my mortgage is say $1500. That's about par with rent. But in 20 years, when it's nearly paid off, chances are, rent will be more like $2500. My investment is paying off, because I can live relatively cheaper.

(Same thing happens with cars- everyone loves to get in a tizzy about how much cars decline in value. So what? In the first place, it's a machine that wears out. In the second place, if you aren't selling it, it doesn't matter. And if you are selling it, it's your choice whether you want to take what's offered or not.)

It's also something for Dads to complain about at the dinner table.
posted by gjc at 7:29 PM on March 27

Equity = mobility = control. No Equity = less mobility = less or no control.

Wealth aside, loss of control is generally not a good thing.
posted by Rafaelloello at 7:34 PM on March 27 [1 favorite has favorites]

Just because you don't want to sell now doesn't mean that you won't want to sell in a couple of years. What if you lose your job, and can't find a new one nearby? What if you're offered a great new job across the country? What if you find a great deal on a better house across town? If you're $200k in the hole, you have a lot less flexibility about when to move.

The other issue is regret: If you had sold at the top of the market, you'd be a lot richer right now. It's hard for this not to bother people, even if they really did make the right decision at the time.
posted by sesquipedalian at 7:36 PM on March 27

Because of the way many banks leveraged mortgage values to raise funds and create equities, a disproportionate amount of the economy is connected to housing values. In turn this affects pretty much any type of bank loan, which turns into bigger problems for everyone.

Here's a good flash video called "The Crisis of Credit" that should help explain it.
posted by JuiceBoxHero at 8:07 PM on March 27

Why pay off a $600,000 mortgage when you can file for bankruptcy, start over and get the same place for $300,000. That's why.
posted by furtive at 9:02 PM on March 27

For a business, it may be hard to attract qualified people to your area when the housing values are declining. That leads to things like the USPS million dollar house buying debacle.
posted by Yorrick at 9:10 PM on March 27

People care for a number of reasons.


1. Taxes. This works two ways. Firstly, home owners not in the market want to pay as little tax as possible. Secondly, governments country wide are facing record shortfalls in property taxes as a result. That means furloughs and layoffs.

2. Most banks make money offering home loans and holding them to maturity. The primary indicator of defaults among "conforming loans" i.e. normal loans, is how big the downpayment is. Basically, the bigger the downpayment the bigger the downturn can be before massive defaults and foreclosures. The standard downpayment is like 20 percent, and some areas have seen far more than a 20 percent drop. Imagine your savings account is in a bank where the bank is effectively insolvent.

3. You can't outsource home construction. In a 2002-2007 economy where outsourcing jobs was a concern for many, we imported of labor for construction, though illegal. Arguably after the dot com collapse, housing was one of the few vibrant areas of the economy. Housing permits are an indicator not only of income, but job growth.

4. Along with the construction boom came a number of people who took a 2nd mortgage out on their home equity (a "HELOC"), which helped fuel consumer spending for other things like cars and Apple computers and trips to Disneyworld. In a down market, that gravy train is over, and more people are upside down than would otherwise be. This is sort an opposite of the "wealth effect", which is fairly important because a house is the only investment most Americans have (or had...)

5. Inflation. Whatever bullshit the government cooked up for "rent equivilent" who's name I can't remember is like 20 percent of CPI, maybe more.

These are just the reasons I can think of without reading the other comments, which on preview are also pretty important.
posted by pwnguin at 11:12 PM on March 27

I think at the base of it, people like to think they're getting ahead--or at least not falling behind.
posted by maxwelton at 1:36 AM on March 28

That ought to about cover it, thanks for the responses!
posted by dino terror at 7:51 AM on March 28

Also because home loans and the industry around them are a big part of the very big mess we're in. Home prices are an indicator of how bad it is. (vastly oversimplified comment)
posted by theora55 at 2:52 PM on March 28