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Comment by cjbgkagh | Hacker News Reader

I generally have the same rule of thumb; not a crash until down 50% from peak. But housing is leveraged. It’s not like stock where few people have margin accounts, a 20% reversion sends most people who bought recently underwater. Plus the size of the real estate market is much bigger than the stock market. The flow-on reverse wealth effect will feel like a stock crash to many people.

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But notably its only people who bought recently. I purchased 5 years ago, and our home's price would have to go down by half for us to get back to even, then a bit further to be truly underwater. And that's with us having put down only 5% -- anyone putting 10-20% down would have more buffer still. Someone who purchased 2 years ago might have less of a buffer, but still perhaps 20-30%. Our neighbors who purchased 7 years ago can lose ~70% and still be ok.

Not meant to downplay how awful it can be for some folks, just meant for perspective.

For the USA specifically, does being underwater actually matter as long as you can afford the repayment? It's my understanding that most mortgages are fixed for 30 years so your interest rates won't be changing?

Of course it matters, losing wealth matters even if it’s not ‘crystallized’ by selling. Your options are much more limited. Fixed low rates are only helpful so long as you can maintain sufficient income which in a severe recession becomes more difficult. Additionally if the property continues to depreciate it may be wise to cut one’s losses go bankrupt and start over. Historically those who held on were bailed out in short order by the inflation of subsequent bigger bubble. The size of this recession may get too big to bail out so we could enter new territory. Or maybe we kick the can down the road again, I don’t know, but it’s a risk.

It makes it difficult to move

A 20% reversion is back to early 2021 prices..

Given the long history of ever increasing housing prices people have become accustomed to treating asset price inflation on property as income. Why work a 9-5 when your house can make your money (and your banks money) go to work for you. A lot of that money is spent - it's very difficult to un-spend it for a downturn. Plus a chunk of the recent nominal price inflation is due to general inflation and regressing to the same price 2 years ago is a loss in absolute real terms. Plus going forward people who could assume a $100K yearly increase in wealth from a property have lost that $100K in 'income' and must make up the shortfall from elsewhere. It's a huge marginal difference. Then there is the erosion of the tax base; governments make a percentage of the capital gains on nominal inflation as kind of a wealth tax. During a deflationary period this money disappears and can take a very long time to come back. The shortfall again must be made up for by further taxing the taxpayers or by borrowing with the expectation that the same taxpayers will pay it off later. These are the same taxpayers who lost their $100K in 'income' so they're not exactly flush with money.

In China for decades, the average house appreciated more in one year than the average person made after taxes in a life-time.

>a 20% reversion sends most people who bought recently underwater.

Does this matter as long as the owners can pay the mortgage?

Most Americans move every 7 years. Being locked into a home means fewer economic opportunities.

> Most Americans move every 7 years

No, most don't. That’s the average, not the mode (and even moreso not a fact about the majority.)

Particularly, poor and socially disadvantaged people are forced to move a lot more, and average income and, even moreso, rich people, especially from advantaged backgrounds, move significantly less.

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