Under water - higher equity is better?

Question

Doing some risk analysis.

Let’s say I buy a property now and market value drops soon by 20% is it better to have less downpayment such as 20%. Or if it is better to have / had 40% (either higher down or big lump sum to principal)?

Theresa Harris · Answer

Put as little money in as you can to buy it, but if you are buying in a location where you expect prices to drop 20%...why would you buy there?  If it is the general market that you expect to go down that much (it won't happen), then why not save and buy when prices go down?

The only time I know of recently in the US when house prices dropped was about 15 years ago when banks had been lending money to people that should never have been given loans.

Charles Perkins · Answer

I would never consider purchasing in an area where real estate doesn't appreciate over time.  Investing with foreknowledge that property values are falling seems like a timing problem or at least a situation where my offer would be reduced to reflect this coming change.

As to how much to put in as a down payment that depends more on your numbers, your risk tolerance, ability to get financing, cost of financing, etc.  Personally I don't like to do less than 20%.  You know how many months you could afford to go without any income from a property.  Evictions are sometimes necessary.  Major repairs will come up at some point.  Family emergencies and unexpected illnesses all can come to pass.

Jake Andronico · Answer

@Jeremy H.

The only time negative equity matters is when you HAVE to sell.

If you buy and it does drop, and you don't have to sell, why does it matter?

For people who bought in 2007 at the peak it definitely took awhile for things to get back to positive.

However, if they were renting the entire time they were fine.

The more you have down the less likely you'll have negative equity.

Chris Seveney · Answer

@Jeremy H.

Prices are already dropping.

The questions regarding your down payment are:

1. Are you using all the cash you have - or do you have reserves (should always have reserves)

2. If you have reserves, can you invest the money that provides a better NET return (after tax) than putting it into the down payment

3. Are you ok with that equity being illiquid

4. If you put less down payment, realize if prices drop you will have limited exit unless you come out of pocket at that time

https://wolfstreet.com/wp-content/uploads/2024/03/US-new-house-sales-2024-03-25-price.png

Under water - higher equity is better?

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