# Why is home value deflation a bad thing? **URL:** \ **Category:** Great Debates\ **Created:** [September 24, 2008, 7:30pm UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044 "2008-09-24T19:30:16Z")\ **Posts on this page:** 18\ **Page:** 4
**Author:** ![Throatwarbler\_Mangrove](https://avatars.discourse-cdn.com/v4/letter/t/8c91f0/32.png) [@Throatwarbler\_Mangrove](https://boards.straightdope.com/u/Throatwarbler_Mangrove)\ **Post date:** [September 26, 2008, 3:04am UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/61 "2008-09-26T03:04:42Z")
You need to factor in the opportunity cost of your down payment. In a reasonable market, renting a property should ALWAYS be more expensive than owning it - even if we assume the operating costs are all passed on to the final user (that is, leases are “triple net”), the owner takes on the additional risk of falling property prices, and MUST charge a premium for his investment. If owning a property is more expensive than renting it, then property is overbought. Typically, the viability of a property is calculated in the form of a [capitalization rate](http://en.wikipedia.org/wiki/Capitalization_rate). ---
**Author:** ![mazinger\_z](https://avatars.discourse-cdn.com/v4/letter/m/5f9b8f/32.png) [@mazinger\_z](https://boards.straightdope.com/u/mazinger_z)\ **Post date:** [September 26, 2008, 4:37pm UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/62 "2008-09-26T16:37:01Z")
> [@gonzomax](#): > > Not when you take property taxes into consideration. You pay 60 thou in property taxes to live there. Wouldn’t you need to recoup that to break even. Yes, because property taxes don’t really pay for anything right, those are strictly losses? Like roads, police, water, sewer, trash, schools, etc. :rolleyes: ---
**Author:** ![smurfslappa](https://avatars.discourse-cdn.com/v4/letter/s/5f9b8f/32.png) [@smurfslappa](https://boards.straightdope.com/u/smurfslappa)\ **Post date:** [September 27, 2008, 12:55am UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/63 "2008-09-27T00:55:20Z")
> [@SmartAleq](#): > > Okay, helping to prevent foreclosures helps EVERYBODY. Say you have someone in a house they paid 100K for and financed it 100% on an ARM. Dude’s going along making payments and managing–until the ARM goes up a shitpot in a month … > > So far nobody’s told me any reason why this is a bad plan. These institutions are leveraged against the higher interest rates and the predicted income. You take away that source of money flow and they become insolvent, or close to it. Throw in some defaults and they go under. > [@Hank\_Beecher](#): > > So our economy is so fragile that it needs an immediate trillion dollar infusion to avoid a spiraling collapse? If that is the case why wouldn’t it be better to let it collapse and begin the process of building something more robust? > > Doesn’t this perpetuate an economic system that makes us quite vulnerable? Because everybody in the US has the right to bear arms, and a complete collapse would mean a lot of people out of work with no source of income. How would we distribute the food? The American way of life is flushed down the toilet and the world is a much scarier place. It’s not all about the economics of the situation, you really have to think about how the people will react out there. This is an extremely delicate situation… ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [September 27, 2008, 1:07am UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/64 "2008-09-27T01:07:29Z")
It has been suggested that home values are about 1/3 over valued. That means it is a financially logical move to walk from an overpriced mortgage. To simply pay 300 thou for a house that will now be valued at 200 will be a hard sell. From a home owners viewpoint, why should they. ? You would like them to think a deal is a deal.but, is it logical from their position. To make payments for 30 years and know you will never get it back is not easy. ---
**Author:** ![ParentalAdvisory](https://avatars.discourse-cdn.com/v4/letter/p/53a042/32.png) [@ParentalAdvisory](https://boards.straightdope.com/u/ParentalAdvisory)\ **Post date:** [September 27, 2008, 1:30am UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/65 "2008-09-27T01:30:19Z")
> [@gonzomax](#): > > To make payments for 30 years and know you will never get it back is not easy. First, I don’t think most mortgages last 30 years. And second, you buy a home to live in, not to profit later. Sure, it’s nice when you can profit later, but this shouldn’t be the main goal. If you buy for the long term, short term losses shouldn’t get you in a tizzy. If the goal is to profit, you MUST accept the risks when things don’t go your way, no different then putting it on black and spinning the wheel. You don’t see bailouts for losing gamblers, why is an invesment house any different? ---
**Author:** ![An\_Gadai](https://avatars.discourse-cdn.com/v4/letter/a/d6d6ee/32.png) [@An\_Gadai](https://boards.straightdope.com/u/An_Gadai)\ **Post date:** [September 27, 2008, 1:40am UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/66 "2008-09-27T01:40:14Z")
> [@elmwood](#): > > The good news about price deflation: since I’ll probably be moving out of Cleveland, a few more cities where housing was once quite expensive have now returned to the range of affordability for an urban planner. For me, Denver, Fort Collins, Portland, Phoenix, Austin, and most of Florida are now back in play. > > The bad news: there was never really a bubble in Cleveland, but there was still the crash. Home prices here are at 1980s levels in some neighborhoods, thanks to the bursting of the national bubble and fire sale-priced foreclosures flooding the market. The foreclosure next door is selling for one-third what I paid for mine. Remember, this is in suburban Cleveland, where average home prices never really peaked above $150K. I’m going to either lose a LOT of money by selling, or deal with the hassle of being an out-of-town absentee landlord. > > My mortgage, FWIW: 30 year conventional, 20% down. I got screwed despite being prudent with my financing. So you’re saying it’s a good time for me and the better half to purchase a home in Cleveland? ---
**Author:** ![J\_Cubed](https://avatars.discourse-cdn.com/v4/letter/j/c6cbf5/32.png) [@J\_Cubed](https://boards.straightdope.com/u/J_Cubed)\ **Post date:** [September 27, 2008, 6:32am UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/67 "2008-09-27T06:32:32Z")
> [@pohjonen](#): > > (I personally make 1.50 more an hour than I did in 1981!) **What** do you **do**? ---
**Author:** ![Voyager](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/voyager/32/133_2.png) [@Voyager](https://boards.straightdope.com/u/Voyager)\ **Post date:** [September 27, 2008, 6:50am UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/68 "2008-09-27T06:50:41Z")
> [@mazinger\_z](#): > > Yes, because property taxes don’t really pay for anything right, those are strictly losses? Like roads, police, water, sewer, trash, schools, etc. :rolleyes: When you rent, property taxes are factored into it, so I do think it is fair to include them in the calculation. **erislover** , I basically agree with you. (BTW, did you factor the tax advantages of owning into your calculation?) I don’t know how you’d include the fact that a mortgage gets effectively discounted thanks to inflation, while rents will track inflation. In fact, they might increase faster, which probably indicates a rising market, which means the owner wins even bigger. The exception, to return to the point of this thread, is deflation, which is where the renter wins and the homeowner loses. ---
**Author:** ![Der\_Trihs](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/der_trihs/32/233_2.png) [@Der\_Trihs](https://boards.straightdope.com/u/Der_Trihs)\ **Post date:** [September 27, 2008, 8:36am UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/69 "2008-09-27T08:36:13Z")
> [@Hank\_Beecher](#): > > So our economy is so fragile that it needs an immediate trillion dollar infusion to avoid a spiraling collapse? If that is the case why wouldn’t it be better to let it collapse and begin the process of building something more robust? Because there would be a lot of suffering and chaos, and probably little if any “rebuilding” for a long time. Everyone would sit on what little they had, the economy would stagnate, and the depression would go on and on and on . . . The Herbert Hoover solution of doing nothing and letting society collapse doesn’t work. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [September 28, 2008, 1:43am UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/70 "2008-09-28T01:43:54Z")
> [@Voyager](#): > > **erislover** , I basically agree with you. (BTW, did you factor the tax advantages of owning into your calculation?) I did not, as I did not have a handy way of doing that. But there are many advantages to owning a home besides tax advantages, like easier credit. It is well beyond my meager capabilities to account for them all. There are also advantages to renting in terms of mobility, which is user-dependant. Moving frequently from house to house is considerably more expensive if for no other reason than closing fees etc which I also did not account for in my calculations. Also, as mentioned, the opportunity cost of the downpayment is interesting to consider, which I hadn’t. > [@](#): > > I don’t know how you’d include the fact that a mortgage gets effectively discounted thanks to inflation, while rents will track inflation. I have no data for this, but my intuition tells me that lenders account for some expected inflation via the interest rate. In principle rent could track inflation, but in my 12 years of renting, it doesn’t seem to in practice, in that I’ve only once had my rent raised on me. [Ohio and Massachusetts] > [@](#): > > The exception, to return to the point of this thread, is deflation, which is where the renter wins and the homeowner loses. It’s possible, but again, it is important to figure this out relative to the alternative, _not_ in absolute terms of the purchase price, which is not especially meaningful in this case (since it is safe to assume you will be living _somewhere_). Certainly the shorter you’ve been paying your mortgage, the more the change in market price could hurt you in principle. Also, as you mention, people do have to move for other reasons like work, so there is always some flux in any particular area, and depreciation is a downer there. ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [September 29, 2008, 4:00am UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/71 "2008-09-29T04:00:54Z")
Like I posted in another thread. Lets say you buy a house for 400 thou. It is now worth 250. Do you just continue making payments for 30 years on a 400 thou house you don’t own. A guy buys the house down the street tomorrow. He pays 250. You should just stay and make much, much bigger payments. Or do you walk. Then buy a house for 400 later that is much nicer. It is not that easy to tell others how they should spend their money, when they could get much better value. Should the mortgage company refuse to renegotiate. They know you are paying much more than the house is worth. Too bad, just pay double and shut up. ---
**Author:** ![ParentalAdvisory](https://avatars.discourse-cdn.com/v4/letter/p/53a042/32.png) [@ParentalAdvisory](https://boards.straightdope.com/u/ParentalAdvisory)\ **Post date:** [September 29, 2008, 5:45am UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/72 "2008-09-29T05:45:14Z")
> [@gonzomax](#): > > It is not that easy to tell others how they should spend their money, when they could get much better value. But they **borrowed money that was not theirs** with a **signed contract stating they would pay it back**. The money they borrowed is everybody’s money that has an financial account, **including your money**. Now many are just walking away from their obligations to these loans, and are unable to put the money they owe back into **our savings accounts**. To allow you to keep seeing your balance when you log on to your account, money needs to be printed from the government, so you don’t panic. It’s dishonest to not pay back the loans, and it ultimately devalues your money over time. This happens everyday with automotive loans. You would have to be a complete moron not understand that a brand new car is worth less than you bought it for as you drive if off the lot. But people understand that the loan needs to be paid back for the loan balance of the new car price, regardless of the plummeting value of the new car for its usable life. Why should homes be any different? Of course you could argue that people understand that cars depreciate, and houses appreciate. But nobody ever said that homes always appreciate (or that collector cars cannot appreciate), and that there is risk involved when you take a loan on the perceived value of whatever you used the money for. And if the value falls on your investment, you still need to pay back the loan, regardless of value. ---
**Author:** ![even\_sven](https://avatars.discourse-cdn.com/v4/letter/e/dfb087/32.png) [@even\_sven](https://boards.straightdope.com/u/even_sven)\ **Post date:** [September 29, 2008, 6:21am UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/73 "2008-09-29T06:21:31Z")
> [@gonzomax](#): > > Should the mortgage company refuse to renegotiate. They know you are paying much more than the house is worth. Too bad, just pay double and shut up. If I buy a house and it goes up in value, should the mortgage company get to renegotiate since clearly I’m paying much less than the house is worth? ---
**Author:** ![gonzomax](https://avatars.discourse-cdn.com/v4/letter/g/e8c25b/32.png) [@gonzomax](https://boards.straightdope.com/u/gonzomax)\ **Post date:** [September 29, 2008, 6:23pm UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/74 "2008-09-29T18:23:37Z")
> [@mazinger\_z](#): > > Yes, because property taxes don’t really pay for anything right, those are strictly losses? Like roads, police, water, sewer, trash, schools, etc. :rolleyes: You don’t pay them in an apartment. It is a home owners expense. Pick up your eyes. It is mostly foe schools anyway. Roads are fixed off gas taxes. ---
**Author:** ![erislover](https://avatars.discourse-cdn.com/v4/letter/e/71e660/32.png) [@erislover](https://boards.straightdope.com/u/erislover)\ **Post date:** [September 29, 2008, 6:27pm UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/75 "2008-09-29T18:27:27Z")
> [@gonzomax](#): > > You don’t pay them in an apartment. It is a home owners expense. Pick up your eyes. One might imagine that the owner might pass this on to the renter, either in the terms of the lease (business lease) or indirectly as part of the rent (domicile). ---
**Author:** ![msmith537](https://avatars.discourse-cdn.com/v4/letter/m/d9b06d/32.png) [@msmith537](https://boards.straightdope.com/u/msmith537)\ **Post date:** [September 29, 2008, 6:46pm UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/76 "2008-09-29T18:46:21Z")
> [@Hank\_Beecher](#): > > So our economy is so fragile that it needs an immediate trillion dollar infusion to avoid a spiraling collapse? If that is the case why wouldn’t it be better to let it collapse and begin the process of building something more robust? > > Doesn’t this perpetuate an economic system that makes us quite vulnerable? That doesn’t even make any sense. The problem isn’t that there are a bunch of homeowners who have to have their homes foreclosed on or have lost the value of their homes. The problem is that because the banks are now stuck with all those bad loans, they are unwilling or unable to lend money needed to finance economic growth. Businesses looking to expand, new homeowners who might want to take advantage of lower prices, even other banks can’t get the capital they need. ---
**Author:** ![Strassia](https://avatars.discourse-cdn.com/v4/letter/s/e8c25b/32.png) [@Strassia](https://boards.straightdope.com/u/Strassia)\ **Post date:** [September 29, 2008, 8:02pm UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/77 "2008-09-29T20:02:21Z")
This is a complicated topic and hard pinpoint at all times. But over a long period, on average, unless you are going to move frequently, buying is usually financially best. To paraphrase someone else, renters are paying their landlords expenses, plus a little. In the short term rent should be lower than the payment on a new mortgage. But over time rents go up, and mortgages stay the same and go down. Owners have to deal with repairs and maintence, but that gets factored into rents just like insurance and taxes. The longer you live somewhere, the more this is true. Your mortgage should stay the same until it is paid off, and depending on where you live, you taxes can only go up so fast until you sell (CA Prop 13 limits, for example). Now, if you get interest only and never pay any principle, or you upgrade houses every five years, or you have a catastrophe that is not insured, and the situation changes. ---
**Author:** ![msmith537](https://avatars.discourse-cdn.com/v4/letter/m/d9b06d/32.png) [@msmith537](https://boards.straightdope.com/u/msmith537)\ **Post date:** [September 29, 2008, 8:24pm UTC](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044/78 "2008-09-29T20:24:36Z")
> [@Strassia](#): > > This is a complicated topic and hard pinpoint at all times. But over a long period, on average, unless you are going to move frequently, buying is usually financially best. > To paraphrase someone else, renters are paying their landlords expenses, plus a little. In the short term rent should be lower than the payment on a new mortgage. But over time rents go up, and mortgages stay the same and go down. Owners have to deal with repairs and maintence, but that gets factored into rents just like insurance and taxes. The longer you live somewhere, the more this is true. Your mortgage should stay the same until it is paid off, and depending on where you live, you taxes can only go up so fast until you sell (CA Prop 13 limits, for example). I think it depends. You need to compare the cost of renting vs your mortgage payments. The opportunity cost associated with putting the difference into the mortgage instead of an investment with a higher return. The expected real increase in value of your home (IOW adjusting for inflation). The additional costs of maintenance and taxes. I would also say that if you are in a place like New York City, you also need to account for the cost of owning a car and commuting via the train vs not owning a car and getting to work that much faster. [Previous page](https://boards.straightdope.com/t/why-is-home-value-deflation-a-bad-thing/465044.md?page=3)