Understanding Housing Collapse

[Iccarus]

Been reading this forum for a long time, and have been able to learn a moutain of information from the many self-made experts in here. One thing I have never been able to fully grasp though is why owning a house that you paid 250,000 for, and having housing prices plummet to where the house you bought at 250,000 is now worth 190,000 forces people to sell. Their mortgage payment has not changed from when they first purchased the home (unless interest rates creeped up a bit) but why is this generating forclosures? Are people put off by the fact that their house is undervalued? Won't corrections come to fruition and provide them with an apprecation in value over time again? Maybe I'm missing something. Thankyou to anyone who can give me a better understanding of what's going on here.

[Jungle]

You said it, as long as you can make the payments your house will be yours. The OSFI just released they are going to back off possible legislation that would make banks approve you all over again every time your mortgage term is up. So change a job with lower salary/ mat leave whatever, and you could be screwed. They are not doing this now for the reason that if you are showing history of making payments OK, that is enough reason to leave you alone.


However, losing your job, becoming disabled, etc or have financial hardship, you could be forced to sell.

[HaroldCrump]

Iccarus, the way to look at this situation is this : house prices do not drop 25% ($250k > $190K) for no reason.
There is usually a recession going on, a credit crunch going on, or some other significant reason that causes such a drop.
That same reason also causes widespread unemployment.
Often times, both spouses are left without work at the same time (the "Two Income Trap").

So employment is the key factor here that determines whether people sell or not.
And when there are more sellers than buyers, what happens - yep, prices go down.

[Iccarus]

So employment is the key factor here..

Ah yes, I forgot to factor in the cause of the downturn. Its the combination of the lack of income and the devaluing that is causing it all. Thankyou very much, it seems so simple now, I feel kind of dumb for not connecting the dots.

[mind_business]

To add to Harold's post, there's a lot of people who can just barely afford their mortgage and living expenses during good times, let alone during a recession ... even when only one spouse loses their job.

[phrenk]

The OSFI just released they are going to back off possible legislation that would make banks approve you all over again every time your mortgage term is up.

The fact that OSFI backed off from legislation requiring re approval when mortgage term is up or requiring HELOC to be amortized is a clear sign they are getting extremely nervous and know that the slightest catalyst will have bring the housing collapse in full swing.

[fraser]

We are in the process of selling our house and downsizing.

Our real estate agent tells us that when the mortgage expires and is up for renewal, some lenders are asking for a new appraisal on the home. In some cases this appraisal comes in at less than the outstanding mortgage balance. The bank then asks the mortgagee to pay the mortgage down to the appraised value. The bank or mortgage company does not want, for example, to hold a $250K mortgage on a house that is now only worth $190K. Our agemt tells us that some people are being forced to sell. This is in the Calgary market where prices are still not what they were at the height of the market in 2007/2008. This is especially true for those homes where the owner may be depending upon some sort of mortgage helper that the bank will not include in their calculations. Not sure how common it is, but this is what we were told. Not a great situation for some folks to be in.

[Potato]

Some people just have to sell: Howard mentioned unemployment, but there's also divorce, having to move for a job, and I'm sure some other factors that aren't coming to mind at the moment. If you're underwater, then that process gets even more painful and could lead to foreclosure. Plus there's always a (very) small background level of people that just simply have bad credit and have to bail on their house or get foreclosed on when they run into any kind of large financial stress (like a major repair, or an emergency last minute bachelor party in Vegas).

[Rusty O'Toole]

Typically, in Canada people are not forced to sell because they do not have giant mortgages they can't afford to make payments on. When real estate dips, they put their house on the market at an unrealistic price and it sits there forever. They refuse to take a loss. Eventually they take the house off the market and decide to keep it, maybe fix it up, add another room or something rather than move.

This is why dips in Canada are usually small and short lived. There may be a few houses dumped on the market because the sellers have to move, or divorce, death etc. but usually the listings get thin in a down market.

The American situation is totally different. In the US in the 2000s they were handing out mortgages like candy at Halloween. 100% financing or more, to people who did not qualify by any rational standard, mortgages that had to be renewed every 2 or 3 years, and whose only hope was that prices would rise enough to bail them out. When prices dipped it started an avalanche of defaults and foreclosures that has not ended yet.

Basically the whole thing was a series of scams, where crook mortgage lenders and big banks kept passing the hot potato to some other sucker until Uncle Sam ended up bailing out the whole mess and sweeping it under the rug.

[sags]

I would think HELOC loans in an area where home prices are falling, would get close scrutiny from lenders.