When home prices are stable or falling, home buyers often mischaracterized their downpayment on a home, calling it their "cushion" against falling home prices.
Nothing could be farther from the truth.
Nobody wants to owe money when they sell their home. In fact, when asked, most people will answer that they just want to "break even" on their sale.
So, if that person later sells their home for $30,000 less than they paid for it plus the cost of improvements, $30,000 is their loss. If their initial downpayment happened to be $30,000 and they walk away from the closing table "even", it doesn't change the fact the home owner lost $30,000 on the sale.
The downpayment is not a cushion -- it's an investment. And when facing falling prices, it can be a simple game of Pay Now, or Pay Later.
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My sellers never want to break even and my buyers never call the downpayment cushion. If the prices are falling most of the buyers will stay on the side lines till they think they have found the bottom. Look at the stock market there aren't many buyers around. It has been tough to match up sellers with willing buyers.
Ilyce,
That is an interesting take on home ownership. The nmarket has traditionally always been a tool for people to make money at the closing table. The idea of looking at $30,000 as an investment to lose is concept I can put my arms around. Would you please go into this a little more.
Hi Randy,
I think a good way to put this into perspective is this: no investment is guaranteed, but it is still made in the hopes of some future return. In the example above, the homeowner lost his $30k at the time of sale. Had he not "invested" that money in the home, he could have 1) taken a larger mortgage with relatively small monthly payments (creative financing) and 2) taken that $30k and invested it into some liquid vehicle that would make him more money (with a rate of compounded interest greater than the mortgage rate) in his overall financial picture over time. In addition, the borrower would experience a greater tax benefit from carrying a larger mortgage balance. Combined, these items would be the true "cushion" for unplanned emergencies, home improvements, or having a strategy for improving personal cash flow. When the money is used to simply reduce the term or amount of the mortgage, there is no safety net for any issues that may arise in the future.
I hope that helps. Did I answer your question?