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Why is negative equity bad? (lemmy.nz)

submitted 1 month ago* (last edited 1 month ago) by [email protected] to c/nostupidquestions

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Sometimes drag buys a game on Steam at full price, and then a week later, the game goes on sale. Drag thinks "damn it, drag should have waited". But drag's never that upset, because drag wouldn't have bought the game if it weren't worth the price. Drag failed to save some money, but drag still values the game more than that money, so it's not a big issue.

The concept of negative equity was recently explained to drag, and it sounds like the housing equivalent of that. It happens when the price of housing crashes, but you already have an expensive mortgage out on the house. You still have to pay money worth more than the value of the house. Therefore, your equity, or equivalent share of ownership, is effectively less than zero.

The politician drag was talking to said negative equity is a big problem and it's why we can't just crash the housing market to solve all our cost of living problems. But drag doesn't understand. If you take out a mortgage, you should be able to afford it with your income, and the house should be worth more to you than its market value. Negative equity sounds like a huge bummer, but that politician was talking like it was something life ruining.

Why's negative equity so bad?

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[–] [email protected] 4 points 1 month ago

Negative equity is bad when money is being borrowed. It's true for all secured loans, not just housing.

it blocks refinancing which many people do every 3-5 years.
it means you are paying interest on money you've already lost, in a way compounding that loss.
homes are a common inflation hedge and source of retirement income. Negative equity breaks this assumption.
negative equity encourages holding on to a property to avoid realizing the loss, this prevents more inventory from being on the market.
negative equity can result in loss of both the asset, and an additional bill for the remaining balance which is a double whammy.