FDIC: Busts Don't Usually Follow Booms
CNN/Money, May 4, 2005 — The FDIC report points out that busts that have followed booms have tended to be rather mild, more stagnation that catastrophe. No housing bust that followed a boom during the past 25 years exceeded a 20 percent average price drop. Furthermore, the correlation between boom and bust seems weak. The…
CNN/Money, May 4, 2005 — The FDIC report points out that busts that have followed booms have tended to be rather mild, more stagnation that catastrophe. No housing bust that followed a boom during the past 25 years exceeded a 20 percent average price drop. Furthermore, the correlation between boom and bust seems weak. The FDIC reports, “In just 9 of 54 unique boom episodes prior to 1998…did a bust subsequently occur within a five-year window.” As a matter of fact, FDIC data revealed that more housing price busts (12) occurred in markets that hadn’t gone through booms than in ones that did. They are more likely to result from collapses in local economic conditions than from mere run-ups in prices.
Comment: The article also mentions the added vulnerability this time around from the aggressive financing practices on the part of both lenders and borrowers.
Busts Don’t Follow Booms [CNN/Money]
A standard mortgage does not require additional equity if the value of the home drops. Of course, if you sell a home that has lost value, you may need cash in addition to the sale proceeds to pay off your loan.
It is ridiculous to think that a bank is going to “call” for additional funds if your home value falls below principal. Banks can not ask you for additional money if the value of your house falls below the remaining principal balance of your home (and no bank would give you a HELOC in this situation, because, by definition, you have no equity). This is the whole reason that banks require a down-payment, i.e., to mitigate against the risk of this happening (if you have to put in 10% equity, then the bank is not screwed until the value drops by more than 10%). Of course, with the increase in 90%+ financing in the bubble market, the banks are taking on more of that risk.
While I have always said that real estate is a great longterm investment, it can be a very bad investment in the short term. Just ask those people who bought at the height of the last bubble in the late 80s. It took a decade for their property to return to its value. Of course, if they held on until today, they have recovered quite nicely. Long term.
I work for a company that buys mortgages, and no one is going around re-assessing housing prices after the mortgage is funded. It only comes up when you try to refi, or get a HELOC.
I’m pretty sure it doesn’t matter.
Does anyone know whether the $500 capital gains exemption for married couples applies when only one partner actually owns the house?
Also……….I was saying ANOTHER factor of the overinflated Real Estate market is the 2 year no capital gains tax rule. Of course low interest rates are another factor. Everyone wants to pigeon hole each statement here. There are many factors to rising prices. One of them is the recent (1997) law where you don’t pay tax on the capital gain up to 250K every two years.
Also……….I was saying ANOTHER factor of the overinflated Real Estate market is the 2 year no capital gains tax rule. Of course low interest rates are another factor. Everyone wants to pigeon hole each statement here. There are many factors to rising prices. One of them is the recent (1997) law where you don’t pay tax on the capital gain up to 250K every two years.
And those gains every two years were TAX FREE. you might think it is insignificant, but you would give up almost half of that gain to the IRS in the past for Capital gain.
If you go to the library and look at microfilm of the New York Times from 1988 and look at the price of houses in Park Slope you will see they were in the 800’s. Then if you look at Park Slope in the Times in early 1996 you will see houses in the 400’s. Or look at a street on http://www.domania.com and find a place that dates back and you will see they did indeed decline that much.
And yes the bank does want money when your house dips below what you have borrowed. Ask any bank. so GET REAL.
The re-investment rule was a one time allowance. You were not allowed to do it in the past every 2 years like now. Just once. And believe it or not since 1997 you could have made 250k every two years on brownstones in Park Slope. (400 in 97, 650 in 99, 900K in 01, 1.15mil in 03 and at least 1.3mil in 05). Do the math people.