The Return of Underwater Mortgages

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In a previous life, my mom used to be a real estate agent, and she often shakes her head at the crazy behaviour of “kids these days” buying houses over Zoom, getting into massive bidding wars, and the signing condition free offers. Back in HER day, people would make their offers conditional on financing, or selling their existing home. They would insist on home inspections! And they definitely would want to see the damned thing in person before plunking down their entire life savings!

However, there is something from “back in the day” that might be making an unwelcome return: Underwater mortgages.

An underwater mortgage happens, basically, when the amount you owe on your mortgage is greater than the value of your home. It means that even if you sell your home, you still owe money to the bank. It also means, by extension, that you need to have enough money to cover the the remaining balance of your mortgage before the bank will permit you to sell. In other words, if you don’t have enough, you literally can’t afford to sell and are effectively trapped in your home. You may also be forced to declare bankruptcy.

This is, to put it mildly, a pretty stressful situation to be in.

In fact, one of the most unpleasant experiences my mom remembers (and one of the reasons she got out of the business) was being the agent in charge of selling properties that had underwater mortgages on them.

In this situation, the home owners are being forced to sell for some reason. Maybe they lost their job, maybe they’re getting a divorce, whatever the reason is, they can’t just sit in the house and wait for its value to recover. So that means they’re losing money on this sale and they know it. The only question is, how much?

So this means that the seller needs to sell for as close to what they paid as possible. Any amount lower than that means they have to come up with a check for the difference to pay off the bank. They also need to sell fast. Because underwater mortgages generally happen in a declining real estate market, the longer they wait the worse it gets.

Put that all together and you get panic attack city. And guess who has to bear the brunt of all that rage when feelings collide with reality? You guessed it, the real estate agent. Despite the fact that it’s not the agent’s fault that these entitled whiny brats only had themselves to blame for overextending themselves in the first place thinking houses can only go up in value and never down.

Well, those days appear to be coming back. Arguably, they might already be here.

How Did We Get Here

Lots of things affect housing prices, from government policies that encourage or discourage home ownership, to the job market, to immigration patterns. Most of these things we can’t predict, which is why people who try to predict the direction of the housing market have such a bad track record.

However, one thing that always affects housing prices is interest rates.

Interest rates, as set by central banks like the US Federal Reserve, the Bank of Canada, or the European Central Bank, affect borrowing costs for things like credit card debt, business loans, and crucially, mortgages. The higher the benchmark rate is, the higher mortgage rates are and vice versa.

The mortgage rate also affects how much a bank is willing to lend to a potential buyer. Banks calculate this using something called the Total Debt Service Ratio, or TDS. Without getting into the details, the TDS is basically a measure of how much of your monthly salary would be taken up by the loan payment. Different countries use different TDS ratios, but generally 40-45% is the highest banks are willing to go in approving new mortgage debt.

So that means that if interest rates go up, the monthly payments would go up. And if your salary doesn’t change, the amount the bank would be willing to lend has to go down in order to maintain the same TDS ratio.

The last time this happened was in the late 80’s. Following rampant inflation, then US federal reserve chairman Paul Volcker raised interest rates in the US to nose-bleed levels of 15%. In Canada, ours spiked as well to 13%. The effect on the housing market was dramatic, with home prices plummeting 30%-40% here in Canada. That was the environment that my mom found herself in dealing with angry underwater homeowners.

So today, we’re back to seeing high inflation, caused by supply chain issues, rising energy costs, and a very unnecessary and destructive war in Ukraine. How high will interest rates go? Beats me, but according to some economists, it could get pretty bad.

For every percentage point of inflation, you raise interest rates by a percentage point or more. So…I would have to increase interest rates to more than 8%, said Markus Brunnermeier, a professor of economics at Princeton.

Just how high will interest rates go?,

If you’re thinking “30% to 40% sounds scary, but 10% to 20% doesn’t so bad,” think about how over-leveraged people when they buy real estate. People don’t pay 20% down payments anymore (another relic of the “good old days,” according to my mom). They put down the bare minimum of 5%, and often have to raid their retirement savings to get even that. That means that for anyone who bought in the past year, it would only take a 5% reduction in housing prices to be underwater on their mortgage.

There Is No Such Thing as Good Debt

This is why I hate financial advisors who tell people that credit card debt is “bad debt” and mortgages are “good debt.” There is no such thing as good debt.

Debt of any kind puts you at the mercy of the giant, intricately interconnected global financial system in ways you can’t predict or control. Could anyone have predicted that Vladamir Putin would invade Ukraine, causing NATO to unite in sanctioning Russia’s economy, causing oil prices to skyrocket, causing inflation to shoot up, forcing central banks to spike interest rates, and causing housing prices to go down? No. Nobody saw that coming. Not even Putin, who started this whole mess to begin with, could have predicted that.

That’s also why during the pandemic when people were using record low interest rates to gobble up overpriced houses I was jumping up and down trying to tell people to cut that shit out. You’re supposed to use low interest rates to refinance your existing debt, not use it as an excuse to get into more of it.

But I guess I’m not that influential, because people didn’t listen. Nobody (except my mom, I guess) remembers a time when interest rates shoot up and housing plummets. The 1980’s was too long ago.

So here we are. The home boners have chained themselves to their real estate, once again, thinking the good times will last forever. Only this time, water is starting to seep into the basement, and it just keeps going up…and up…and up.

How To Defend Against an Underwater Mortgage

Ok so if you find yourself in this situation, what can you do about it?

It might be tempting to think: Nothing.

An underwater mortgage doesn’t blow up your finances if you don’t sell. You could theoretically just keep paying the mortgage, ignore your falling home prices, and just wait for your home’s value to pick back up again, however long that might take. It’s an attractive option. I mean, I love doing nothing. It’s the easiest thing in the world to do!

The only problem with that is, sometimes life circumstances force you to sell, in ways none of us have control over. Being laid off can happen to anyone. Same with a divorce. Or an unexpected illness.

If one of these happen, and you happen to be caught in an underwater mortgage situation, you are in for a world of hurt. You may even have to declare bankruptcy if your personal assets can’t cover the difference in your final sale price and the remaining mortgage balance.

So the best way to defend from this situation can be summed up in a single word: Deleverage.

Do whatever it takes to pay that shit off. Take on a second job, get rid of the car, take a hatchet to your expenses. Whatever you can possibly do, do it. And take that cash and throw it at the mortgage.

Don’t get me wrong, I’m not saying you have to pay off the entire mortgage. You just need to pay off enough of the mortgage so you’re no longer underwater. Once your remaining balance is equal to the value of your house, you can breath easier again and resume your normal spending. But as long as you’re in a negative equity situation, you should be in “Red Alert” panic mode and trying to throw as much money at that debt until the water level is below your head again.


Having debt is a dangerous game. There are just so many things that can go wrong and trap you in a situation where there’s no easy way out. That’s why I don’t use debt of any kind in my portfolio, because if something like this happens I could be forced to sell at a loss and possibly blow up my retirement.

And yet so many people think it’s perfectly normal to hold over a million dollars in mortgage debt because they’ve been taught mortgages are “good debt.” It’s complete horse shit.

Mortgages can turn against you. We haven’t seen a situation like that in the past 40 years, so people think it can’t happen, but it’s happening now. It’ll be interesting to see how home owners react to this new era of rising interest rates and underwater mortgages.

If it’s anything like what my mom remembers from the last time it happened, it ain’t going to be pretty.

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85 thoughts on “The Return of Underwater Mortgages”

  1. I know you don’t like home ownership, but I am happy with my house and mortgage. BUT I always purposely did not buy as much as possible, never used the equity to borrow more. Now I am retired early, I have the cash to pay off the mortgage, but then I wouldn’t have any cash to live on! I plan to downsize, maybe more back to UK in a few years anyway.

    I remember the stress my Mum went through when she was paying a mortgage for her new house and hadn’t sold the old one yet. I was only 9 at the time, but it sunk in and I always saw mortgages as scary things to be limited as much as possible. Glad you learned a valuable less from your Mom too!

    People have been doing crazy stuff in the house market for the last few years – I just shake my head 😉

    1. Are you sure there is no such thing as a good debt? Have you looked at “Buy, Borrow and Die” strategy? It might not be entirely applicable to Canada but it is in the US.

      Any way, would be interested in your thoughts on the above strategy.

    2. The stock market is crashing but real estate keeps going up. I am so frustrated. I should have bought five years ago when you guys convinced me out of buying real estate 🙁

      1. The stock market is not crashing. This is just a tiny little baby correction. Not for the faint of heart though. But not as worse as a full blown crash like in 2020, 2008 or 2001.

        Those corrections are normal and very healthy. It helps get rid of excess speculation, which is not a bad thing in the current environment.

        I think the economy is very strong. And inflation is still underappreciated. When large investors realize this, they will buy shares again, and your portfolio will grow to new highs.

        Obviously, there is no warranty, but that’s my overall assessment of the current situation. Keep the course. Let thing stabilize. Buy a home the next time you have a chance. Anyway, if you invested in the stock market in the last 10 years, chances are you’ve done pretty well.

      2. The last 5 years were fantastic for the stock market, and the real estate market is in for a world of hurt now. Plus, unlike the home boners, you didn’t invest with debt, so you’re welcome!

  2. Pretty much everyone who knows Russian geopolitics can tell you that Putin has made no secret of wanting to reunite Russia, so yes. Him invading Ukraine has been a long time expected. Poland is also very wary, as they should be.

    But yeah, housing in Canada is frigging ridiculous. Bidding wars, overpaying by tens or hundreds of thousands over asking price, and buying sight unseen and no inspections! Foreign speculators and corporations buying up all our real estate….it’s a God damn mess. I hope prices crash to painful levels, and foreigners get banned from buying property permanently. Homes should not be investments, and I get annoyed at the blatant greed displayed by some buying dozens of properties while the majority of Canadians either can’t afford to buy or will have a “life debt” like they do in Europe.

    1. Absolutely. The investors buying dozens of properties at a time should never have been allowed to do that. But let’s see what happens to their house of cards as their mortgages go underwater. I’m grabbing the popcorn on that one.

  3. The situation we’re in is this:

    We bought our house 2 years ago with a 15-yr mortgage for $315K (3% interest).
    Now we still owe $270K on the mortgage, but we also have saved enough cash to pay that entire amount off.

    In the current fiscal environment, should we pay off our mortgage or is there a more productive way of deploying that $270K cash? We already maxed out on I-bonds.

    Any suggestions would be greatly appreciated.

    1. I would escalate your payments, but wouldn’t pay it off all at once. What you are trying to avoid is a situation where you pay off the house, a recession hits + you lose your job, and now you have no cash to live on because you put it all into the house. This was my approach (I had the cash to pay it off, but instead of that I would send the mortgage company $5,000 per month, even though the actual payment was less than $1,000). Took a few years, but eventually I got the mortgage paid off (about five years ago). So nice having no rent or mortgage payment! Especially considering how high rents and home prices have gone in recent years. Feels like I’m cheating somehow!

    2. You’re not asking me, BUT I will tell you: the most life changing event in my and my spouse’s life was … paying off our mortgage … in our late 30s. We had avenues open up for us – life choices, I mean – which we could not have foreseen. We are 1000 miles away in a beautiful place, one income and no need to work (that paid off house was sold years ago…paid cash for the next etc). We carry NO debt. The siren song of “leverage”, “using Other People’s Money”, and bigger pockets (putting only a little down on a lot of investment property) has ZERO appeal. We’ve seen the other road. Pay it off. Enjoy life.

      1. Our societal memory is quite short.
        Also…It does not help that California is a non-recourse state – sign any mortgage note you want, because you won’t be sued for a shortcoming – and that the FHA has a track record of not coming after you for short sales. …I do think people forget, however, that forgiven debt is taxable as income.

    3. It depends on the interest rate you are paying compared to what you are earning on your $270,000. I owe about the same on my mortgage, but am paying 1.59% fixed and my investments do far better than that. When my term ends in about 4 years I will reassess. I have no worries because I could pay it off now if I wanted to.

    4. Dave Ramsey would say “pay off your house”, and stay out of debt the rest of your life! I follow his advice and he is right. The numbers may seem favorable to invest, but they do not account for risk. If borrowing against your house is such a great idea, then why not borrow up to 125% of its value and invest that? Because that gives you a pit in your stomach doesn’t it? I sleep very well knowing if some moron plows into me on the highway or I become very ill, that my house is paid for and no one will put me out on the street.

  4. Underwater mortgages may make a comeback, and I hope that it does but there is no evidence of it thus far. In the GTA home prices are 18% higher this year than last year alone. It’s still a strong sellers market as there is still so little inventory for sale.

    Also, besides speculators who are buying pre-construction properties, few people are putting 5% down on homes valued at $800k+ (for Canada) and $1million+ (for the GTA) which is the average price for a property.

  5. I wish home prices were going down. In most parts of the U.S., they’re still skyrocketing, along with rents. I can’t imagine where people are getting the money to pay these prices. I do think this will end badly. The longer it takes, the worse it will be.

  6. 1980’s? I was underwater in the US crash of 2008, but was able to wait it out and did not sell until 2019 at about the same as I paid for it. I get alerts on the value of my current home and it said my value increase 21% this last year. Luckily that home is almost paid off, so I will not be underwater even if we do see the decreases of the 1908’s or early 2000’s.

    1. Good for you! As you will find, rapid price moves don’t matter nearly as much when you actually own your asset. The stock market is gyrating too, but the big difference is I’m not in debt and can, like you, afford to wait until my portfolio goes back up again.

  7. I remember those days. First mortgage at 11%. Second mortgage (necessary because we didn’t have the full 20% down) at 13%. Then the value of the house plummeted just as my ex decided he wanted out. The drop in house value was the only bright spot in that mess – it meant I gave him peanuts for keeping the house.

    It was tough. I had to make a lot of sacrifices- no travel, no bar hopping/going out, no gym memberships/league sports, no car etc. I also rented out the spare bedrooms to students to raise some money….

    But it’s doable. It got easier with time. And I’m glad I did it because selling that house 28 years later is what is financing my FIRE.

    I was very lucky that I started at the top end of mortgage interest rates – each time I renewed it was at a lower rate. Doing it the other way, with the rates going up? Ouf, that would make for many sleepless nights.

    From someone who’s been in these trenches I offer this quote: “Hope for the best, plan for the worst, shoot for the middle.”

  8. News flash: real estate values can go down. I was lucky enough to purchase a home in the US in 2007. Two years later obviously things crashed, I lost my job and had to move back to Canada. I couldn’t sell the place for any price, for YEARS. I had to rent it but only part time. I was a slave to this house until it sold. It took 5 years to sell at a 30% loss, (plus opportunity costs). This experience turned me off real estate for life. I moved back to Vancouver and rented.

    Even though I missed the Vancouver housing run up by renting, I still managed to retire 9 years later with the stock market. I have a lot of friends who made a killing on real estate in Vancouver over the last 10 years but they all still working….

    Debt can be ugly.

    1. Isn’t that interesting? Even when people make a so-called killing in real estate, they still have to work! While people who make a killing in the stock market can quit.

      I don’t think I’ll ever own real estate. When it goes down, it sucks, but even when it goes up it doesn’t help all that much.

  9. You have it correct about debt. Good news for those who have fully paid off houses and rentals is that interest rates are going up and it’s time for us savers to benefit with low risk especially as we will likely retire in 10-15 years.
    It’s about culture and good parenting as well. My parents are from Ireland which used to be a third world country and the fear was always going into poverty . It must be genetics as those who survived catastrophic events in the past passed along their fear of poverty gene to later generations.
    That’s why I always scrimp, save , DIY, never go into debt and pay off debts as fast as possible

    1. Yes! Exactly. Good job on paying off your houses before this mess happens. I truly believe that people who are afraid of debt will eventually get ahead, while people who are comfortable with debt will keep shooting themselves in the foot.

  10. We’re also starting to see a new F*d up phenomenon: In California where I live, particularly hot RE markets (also where I live), sellers will only consider cash offers. Obviously only the wealthy can do this, but there’s a new product being offered by RE/Lending companies that allows “normal” people to make “cash offers”. In a nutshell, the buyer enters a contract with RE/Lending company such that the RE/Lending company buys the house using cash, and immediately afterwards”sells” it back to the buyer (using conventional lending, 5% or 10%, etc). The end result is that a buyer ends up with a house that didn’t go through the typical appraisal, inspection, contingency, etc process….
    ….when things ultimately do go to sh*t, I can’t wait to see how it plays out for these suckers ! …it’s one thing to be upside-down, but to be upside-down on a house that would have wayyyy over appraised, and also has termites, dry-rot, black mold, and a leaky roof… good times !!

  11. In the US we have collective home equity of about $7T and super healthy LTV of 35%+. And the vast majority of homeowners are are locked into long-term sub-4% interest rates. This lucky bunch has a long-term hedge against housing inflation. Homeownership with responsible LTV (which is unique to the individual) and a long-term fixed low-interest mortgage rate is capitalism magic in its finest form. Calling it “good debt” doesn’t begin to do it justice. Ask anyone that’s owned over the last 10-years. More sadly, ask anyone who has rented over the last 10-years and watched their rents spike 50%+ while their dreams of homeownership faded further and further away. Or ask anyone on the planet where there is no mature mortgage system (most of the world). The fact is that over time both home prices and rents appreciate about 2-3% a year on average (here in the US). If one plans to live in a housing unit for the 55 years of the average adult life, doing so as an owner is the best option by a very very very wide margin. Plug it into a spreadsheet. “Math that shit up.” The compounding effects of rent inflation are brutal whereas a 30-year fixed mortgage payment has completely disappeared half-way through and you own a house to boot! Yes. There are costs associated with owning: Upkeep, property tax, insurance, etc. But these same costs exist for renters. They as passed down to them by the landlord who typically gets to layer in a nice profit too. Using debt of any kind unwisely is unwise. Using debt wisely, such as responsibly through a 30-year fixed rate mortgage, is generally a wise move. Housing is a very long game and deserves to be played with the full duration in mind.

    1. You make a strong argument, but I think in the context of FIRE there’s an additional psychology amongst many (myself included)….the feeling of being untethered and also the dislike of illiquid assets.

    2. I’m an atheist but amen. I have paid off house but I still hope housing crashes. No one can afford anything. Not even me with paid off home and enough cash for 20 percent down AND 100k salary.

    3. You got lucky, and don’t get me wrong, I’m genuinely happy that it worked out for you. But if you had bought this year, just as rates were going up, and then gotten laid off, that mortgage would have been a millstone around your neck.

      Any deal in which there’s a chance that I’d have to declare bankruptcy is a deal I will happily pass on.

  12. Yeah I love the whole thing of ‘there’s no such thing as good debt’. Don’t get me wrong, I’m not Dave Ramsey, but “good debt” isn’t a thing because debt is debt. Consumer debt is suboptimal to mortgage debt because the former is a pure loss and the latter has a chance, but not a guarantee, that you might get more money out of that debt.

    But all this happening seems to be completely in line with Ray Dalio’s thesis on the big debt crisis:
    1. Things go well over time.
    2. People leverage more and more, confident good times keep continuing.
    3. The good times don’t keep continuing.
    4. Hawkish events happen and money slows down.
    5. Economy crashes and maybe it recovers (or maybe the currency gets eliminated completely and replaced by another currency).
    6. Repeat steps 1-5.

  13. You know what the wise say:
    1) Gold is the money of kings
    2) Silver is the money of the working class
    3) Barter is the money of peasants, but
    4) Debt is the money of slaves.

  14. we bought our current home via a short sale. most states (at least in the US) offer a deficiency waiver on the difference owed between the principal balance of the mortgage and the sales prices. so not all is lost generally. if there’s a true crisis, most mortgage servicers will allow the short sale to proceed. you just mess up your credit for a while, but bankruptcy doesn’t necessarily ensue.

    more deets from fannie mae:

  15. I love this post so much, for multiple reasons.

    First, I totally agree about the “no good debt.” I am so afraid of debt. I have never been late on a credit card bill and I plan to keep it that way. I also don’t own a house — whenever I get House Envy and want a place of my own, I always think of this blog and your fabulous book and how free I am compared to some of my peers who have houses they can’t afford AND student loans.

    I’m somewhat embarrassed to admit this, considering I have two graduate business degrees (in accounting and finance!), but I didn’t fully comprehend what being “underwater” meant until I read this post, so thanks for clearing it up, Wanderer! Considering no one can really predict the real estate market, that makes me question who would buy a house ever?! Because wouldn’t the possibility of going underwater exist at any time, in theory? It’s not usually obvious until AFTER the fact that a market has bottomed out or hit its peak, so a person could buy a house at the peak without realizing it and have the value not recover for ages, if at all…

    And finally, this post made me think of my very nice (but also very shortsighted and foolish) coworker. He bought two houses within a year of each other. He lives in one and rents the other out. He lives in the same city I do, which is an EXTREMELY hot real estate market, even before COVID and the past two years happened. (Seriously, cash offers have been a thing here for ages. I figured out shortly after I moved here that I’d pretty much never be able to afford to buy here unless a massive crash happened.) Anyway, not only did he buy two houses, he only put 5% down for each of them. Yes, I asked, and yes, that is just ridiculous. We’re on the same team at work and at the same level. I could quit tomorrow, though, and be fine for quite a while. He, on the other hand, is pretty much stuck, and it’s all his own doing.

    1. Aww, thank you for the love! I also knew people like this at my (past) job. It doesn’t matter how much money you make, but if you keep going into debt, then your house of cards can be destroyed at any point. I don’t get it either, but hey. That’s why I’m out here retired and travelling and they’re still back at the office.

  16. But how do you calculate/find out how much your house is actually worth? So you know if you are in underwater debt or not.
    I bought my house in 2020 (Canada, Southern Ontario). I bought at the early stages of this housing market boom. My neighbors paid significantly less (100k) for a similar house, they’ve also been in their homes 30+years. I don’t think I over paid for my house. But now homes in the neighborhood are significantly more than what I paid for (150k-200k).

    So I’m in the middle. I do believe in good and bad debt. I thankfully have a full time job and work a lot of OT. My interest rate is less than 2% locked for 5 years. The plan is to put as much money on my mortgage so when I refinance I won’t be in a bad spot. But again. How do I find out how much my house is actually worth?

    1. Get real acquainted with MLS and Zillow/Zolo. Watch sale prices of houses in your neighborhood with similar characteristics. Unfortunately, unlike stocks your home isn’t priced by the market every second, so you will have to do it yourself.

      1. I have been half following you guys past five years and I’m really sorry that you guys missed out on the housing boom and are now seeing your equity gains vanish.

        Housing prices will slow but they are still very strong.

  17. I’ve been so hesitant to get the same “home boner” as everyone else around me. That said, as my family grows and my little kids will soon be school age, I have to think more deliberately about housing. We rent now. Rents are going up just as fast as home prices. If I were single, or just with my spouse, I’d be happy to be nomadic and could care less about housing. But I start to look at things differently with a family. Although I don’t really want to buy a house, I also don’t want to be priced out of the market in the near future, especially with interest rates rising. So I’m really hoping that everyone with a home boner gets an ice cold shower soon, so I have my chance to get a reasonably priced home in a reasonable school district.

    1. You could start up a separate bank account to save a bigger downpayment so the mortgage could be paid by one of yours income. I always had the fear that my husband would get hurt at work or die and we would only have one income. I think the better thing to do is look for a rundown house in a good school district and fix it up while you’re living in it as long as you’re handy. Rents here seem to be going up as fast as house prices. However if the interest rates rise enough, perhaps the housing market will stabilize. Also they doing a lot of building here which should ease both the rental and housing market in a few years or so.

    2. Ha ha. You said boner. Kidding aside. People with families need stability and that means a home in a safe area and great school district and a predictable monthly house payment that won’t increase like rents Not to mention renting someone else’s home just plain sucks compared to owning your own home where you are free to do as you choose with improvements etc, versus getting permission from the mommy daddy landlord. Home ownership is a must if you have kids and want to be a part of your local community and grow your wealth, which has been especially the case the past decade. Eventually the home will be paid off and your payments will just be taxes insurance and maintenance — much less than renting. Property taxes are not fun but you are paying money that goes to benefit your local community and you can take some pride in that. You can still travel prolifically but I submit having a place to call home and a home to come back to from your trip is really really nice. Pets love having a home too. Of course if you have no kids, pets or community ties jet setting around the world and staying in other peoples homes is an option if that is your lifestyle choice.

  18. What indicators are you looking at to determine that people are underwater? I’ve been keeping an eye this and every market I look at home values keep going up. Days on market are still low as well

  19. Are you guys still sour over not purchasing a home years ago? I’d just get over it.

    Yes, you could have made way more money if you bought a single family home in Toronto or Vancouver. But it’s just money.

    Be humble and keep learning from your mistakes.

    1. These guys want to travel and have fun with as few obligations as possible. This is their current lifestyle choice which makes this blog entertaining. Most of us are way to rooted in our communities or have families with lots of stuff which require bigger and bigger houses for our stuff (to steal a line from the late and great George Carlin) to live this way. I enjoy reading about their travels. Kind of dreamy stuff. If they stayed put and bought a home years ago of course they might have a higher net worth today but at the cost of less travel experiences and this blog, which is a stream of income, would not exist. Eventually they may want that house and kids and can do a blog about such a transition.

      1. Maybe the desire it to travel and buy final home..somewhere cheap. Probably too far away from a decent hospital with medical doctor specialists in final stage of life.

        I agree huge debt for too long is not good. It become a mental health matter also.

        There is some debt that can be good…a modest student loan where you have invested your education in an accredited university program. I stress accredited program since I’ve known some people who got ripped off and found themselves not as good as credentials for employers to even understand what they learned. I’m sure the couple for this blog are grateful for their education to enable them to have a few first jobs to build up equity, etc.

    2. OMG Kathy, you’re the sour one here. They (and I) couldn’t be happier renting and, like me, they will never EVER buy a house. It’s very stupid if you think, you’ll die and you’ll hardly sell the house to enjoy that money b4 you die so it’s a huge DRAG on your life

      1. Interestingly, Bengen just recently wrote an article in WSJ. He is retired and holding 70% cash and seemingly terrified of investing in stocks or bonds right now. The guru has abandoned his life’s work out of fear over current market conditions. Makes you wonder who to listen to when it comes to where to invest. Bengen appears to have a very negative opinion of markets contradicting his own optimistic SWR research.

  20. “ You could theoretically just keep paying the mortgage, ignore your falling home prices, and just wait for your home’s value to pick back up again, however long that might take.”

    You have to live somewhere, so as long as circumstances allow it, this is a really good option. My home was underwater years 2-5, but has recovered nicely.

  21. People in the comments will try and justify their home debt every which way, but at the end of the day debt is debt. Credit card debt = student loan debt = mortgage debt. You owe money to somebody else. Period. Leverage this, leverage that. It’s all words. You owe someone money.

    1. interest rate level matters. 20% rate on credit card debt is very different from a mortgage rate that is below inflation.

  22. I understand your fears about underwater homeowners. I thought a lot about that when I bought my house in 2013. Also, the housing sector has a major impact on the overall economy, so it could hurt my stock portfolio as well.

    However, I did a lot of research in the last two years, and it seems that this general fear is misguided.

    What I found in the data is that the general level of indebtedness, in Canada and USA, is very low compared to the value of assets. Average mortgage balances in Canada are around 150K$ to 250K$. And this also include Toronto and Vancouver. Mortgage initiation balances can be higher, but they are rarely higher than 300K$ or 400K$. Also, about a third of canadian homeowners own their home outright, meaning they have already paid their mortgage completely. This is especially true for people aged 50 yo and over (more than 50% of them).

    What I deduct from this data is that many people bought a home a long time ago. Over the years, they paid their mortgage, some after 30 years of working very hard. Now their home value can be 10X what they paid. If they move, they will likely buy something similar or smaller. Maybe a condo for their retirement ?

    The problem begins here. During the pandemic, lots of people wanted to do the same move at the same time. Consequently, the property they wished to have and bid for had 10 others bidders or more, with at least 2 or 3 with an even better financial situation than them. The highest bider gets the house. All other 9 bidders lose the house, including any first time home buyers who would love to enter the housing market. Eventually, all the bidders who have lost this home scramble to find another place with the intention of winning the next time. Others capitulate and bid up rents instead…

    Now, we are in a situation were people stop selling their home, in fear they will not be able to buy another property. So the housing supply decrease even more. And prices continue to go higher.

    Personally, I would not want to sell my house in a market like this. I would prefer to wait and see, so the market can cool down and prices stabilize a little bit.

    So, from my perspective, what I see in the data is the complete opposite of what you think will happen, and the complete opposite of what happened during the 1990s.

    Honestly, this is not really surprising when you consider the vast amount of wealth that people have amassed over the years, thanks to the hot housing market in Canada in the last 40 years as well as to the stock market in the last 20 years.

    1M$ used to be a lot of money. Now, not so much… ?! That’s crazy when you think about that.


    On the use of debt as leverage, I would compare it to the use of FIRE. (no pun intended)

    If you don’t want to use it, it’s ok. If you are scared by it or have a tendency to be reckless, you better stay away as well.

    Fire is dangerous. But it’s a great tool for those who know how to use it. Think of all the great meals you had with well-cooked foods or the metals that can be casted for specific items we want to use. All of these would be impossible without fire. But you could still eat uncooked meal and use basic tools that have not been forged.

    Debt is the same. It can be very useful if you know how to use it well. But if you don’t use it wisely, it can hurt you, and even kill you. It also had more stress, because even if you know how to use it well, an accident can always happen…

    So, I respect your choice of not wanting to get any debt.

    As for myself, my mortgage is currently around 25% of my home value. But if I add my investments, the ratio fall to only 10% of total assets. I could easily pay it down any time. And I could do it depending on how much they raise interest rates. So it’s really not that stressful in my situation. And the probability of me getting underwater at this point is almost inexistant …

    1. Personally, I would not want to sell my house in a market like this. I would prefer to wait and see, so the market can cool down and prices stabilize a little bit.


      So, if I understand correctly, you would like to sell your house after prices drop?

      It’s the peak of the housing market. Sell at peak. Reap the rewards of being a the peak. Invest the proceeds and rent. When house prices drop, buy back in if that still makes sense. Buy low…sell high.

      What am I missing here?

      1. It sounds like “stabilize” for him means the opposite: levelling off at a peak even higher than now.

        Most forget housing is not completely an investment choice. There’s a huge consumption aspect baked in for many where there’s value derived from the fact you can knock down a wall should you ever want to and never have to be at the mercy of your landlord keeping you on. Those intangibles are a consumption value and not an investment one.

        1. You are right. My base assumption is that prices will stabilize at a higher level than they are right now.

          We seem to have a chronic undersupply of houses. This is very clear in the US due to the housing crisis in 2007-08. But it seems to be also the case in Canada. Maybe heavy regulation in housing – in new constructions and rental market – are to blame ?

          Also, prices of commodities are all increasing very fast (lumber, metals, wages). So cost of rebuilt is also going up. Not mentionning the cost of new construction also going up, therefore decreasing competition when selling an existing house.

          I agree with the intangibles. There is great value in having freedom and control over the place you live in.

          1. I’m sure that you feel like there is great value in having freedom and control over the place you live in. Are you saying you lack freedom and control in other aspects of your existence that this is so important? Not trying to assume anything. Just wondering.

            Emotions (feelings) should not be a factor in any decision making though. That’s a recipe for future anguish and disappointment. The same goes for thinking prices for homes can only go up. Many think the same for crypto and meme stocks. I’m still waiting for Buttcoin to get to $100,000 or even $1 million (I hold zero, BTW). Did the prognosticators already cash out and move on to other things now?

            Also, there is no chronic undersupply of houses. I know you don’t want to believe that nor do you want to be convinced that it is the case. There is currently an undersupply of a commodity called “residential housing”. Central banks around the world will work towards fixing that issue. When they complete their task, many will wonder how all of a sudden there is a glut of this particular unwanted commodity called “residential housing”. It’s ok, don’t believe it. It won’t matter though.

            Math. Science. Facts. Better not to mix emotions into it.

            1. There’s a careful what you wish for aspect here. The more you guys convince others that renting is better, the higher the rental yield will be on homes. This means either 1)house prices fall as ownership is discouraged OR 2) rentals rise as more people prefer the flexibility and being short on housing exposure.

              number 1 is good for renters, but number 2 is not … so careful what you wish for. It’s an ecosystem and renters need owners to actually care to own. If everyone jumps ship and wants to rent, it’ll be a nightmare for you guys then too.

            2. Thank you Dave for your answer.

              Like I said in my comment, I am not sure we are in a chronic undersupply of home in Canada. I am almost certain for the USA (90% prob), but it’s only a possibility I’m taking into consideration for Canada (50% prob).

              If you have data to provide showing an oversupply of homes that may have a negative impact on housing prices in the future, please let me know. I would be glad to have a look at your information.


              “Are you saying you lack freedom and control in other aspects of your existence that this is so important?”

              Not sure to understand your question. I feel pretty free and in control in all aspects of my life.

      2. My house didn’t increase that much in price since the start of the pandemic, maybe +15% ? But I don’t really know, there is so few inventory right now to compare with, and I don’t know the selling price of a house even if the listing price was available.

        I am in the city and most people seems to be leaving the city due to the pandemic. Some houses in the countryside (2hrs from the city) have appreciated +80%. I think this trend will start to reverse soon as the pandemic is ending. But, I don’t see selling my house as a big potential gain right now.

        Also, rent are increasing as well. If you are renting since a while, you are generally protected from rent increases. But if you look to rent a new place, you will likely have to pay the new market price.

        I have also other advantages to keep the house. My housing expenses are relatively low if I compare to similar rentals (around $600 per month if I exclude heating, insurance and the mortgage). And I have locked-in very good rates on the mortgage which I would lost if I sell + have to pay a penalty. So, it’s not like the totality of the value of my house is unproductive. In fact, my house is earning me money, sort of … which would not be possible with a rent.

        In a few years, things may change. But right now, I prefer to stay put.

        As for housing prices, I have no idea where they will be in a few years from now. It’s possible they drop. But at the moment, everything seems to point to even higher prices in the future.

        1. ‘But at the moment, everything seems to point to even higher prices in the future.’

          lol, no they dont

          rates are rising. Rising rates mean higher mortgage rates –this means lower house prices. This is nothing new.

          1. The primary drivers of home price are supply and demand. Things like disposable income of local population, services at proximity, desirability of neighborhood, etc, are the main determinant of demand. Costs of construction, availability of lands and government regulations are the main determinant of supply.

            Interest rates are secondary. This is why Toronto, for example, will always have higher home prices than Winnepeg, no matter what the interest rate is.

  23. Unsustainable housing bubble – a recent Canadian Beijinger …

    A big part of the problem is parents helping their children getting into the housing market bidding prices up even higher in the frenzy (for houses they can’t actually afford by themselves etc), … ***REITS (and other ***companies …) , and ***private investors (including those again buying a second or 3 house for their children etc …), ***lack of supply of new housing to match immigration (many with wealthy families back home helping!? ….), government red tape bureaucracy on new housing, Trudeau hyper-inflated inflation etc … the present housing market may be unsustainable and may have a significant drop soon ? In China families are limited to buying only 2 places, taxes on 2nd+ … multiple plus homes if they bought before the new law, companies are extremely limited or restricted from buying up housing*** etc…. individuals must also pay 20% plus downpayments …I think these kinds of policies would be highly effective here … what do you think?

  24. The same crisis happens in the UK in 1990s.. which cause housing crash and thousands loss their properties due to failing to pay mortgages.

    House prices rose significantly from 1983 onwards, but crashed at the end of the decade as interest rates rose to almost 15% and the economy fell into recession. The subsequent fall in the early 1990s led many borrowers into negative equity – their mortgages were bigger than the value of the homes they were secured on.

    Some borrowers handed back their keys to their lender, others fell behind on payments. Repossessions rose, peaking at 75,500 in 1991. These homes went back on the market, depressing prices further.

  25. folks were euphoric in 2021

    ballgame has chnaged. Bull market is toast for awhile fellas

    your assumption of 6-8% /yr retunrs needs some serious adjusting

    Powell will raise rates min 5 times this year

  26. Debt is math and emotion and actually somewhat irrelevant depending on how you manage it. Consumer debt is dangerous, debt held in a potentially appreciating asset is much less risky. Life is risky and we need to learn to manage the risks that arise.
    A man with 800K in assets and 250K in debt when he passes is not a failure.
    Almost every country on the planet has debt and how does it make sense that it is highly promoted to hold US equities in some form, yet the US is the most indebted country in the world. Is that not a contradiction?
    Most cannot buy a home or build a business without taking on some debt. This avoidance of debt at all cost can create missed opportunities.
    Debt is a tool and nothing more, learn to manage it appropriately.
    Your cash flow must be able to handle debt payments in all forms. If it can’t then you can’t afford it. That means you MUST find ways to secure your cash flow.

  27. This brings back bad memories from about 5 years ago. My wife was pregnant and I had 2 rentals and a PPOR in Western Australia and unlike the east coast cities, our property prices kept going down. (Linked to iron ore and mining in Western Australia).

    Luckily I was able to sell off the rentals and double down on the ppor. I have almost paid off the ppor off fully and look forward to years of no mortgage stress! Meanwhile friends in the East Coast Australia are doing the opposite and using property price growth to take out further lines of credit for new rentals.

  28. All suffering to home owners and mortgage takers isn’t enough. Especially for those who stupidly took on bid wars to buy at any cost.
    Hope they go on to foreclosure and for 2008 to happen again!

  29. I’m truly envious of Canadian homeowners. Y’alls home prices have been on FIRE! Canadian home prices have far surpassed U.S. home prices, and the U.S. has plenty of opportunity and high-paying jobs.

    If U.S. home prices rise as much as Canada’s, our home prices would be around 70% higher. Congrats to those of you who own Canadian real estate.

    Although prices will slow down, everything moves in cycles. Just enjoy your homes. And enjoy your stocks in a down cycle too. But I’m not sure how.


    1. immigration policy and openness accounts for some of this difference between US and Canada imo. more of that leads to greater decoupling of home prices to local income

      1. Yeah, I wonder if the U.S. will become more lax as time goes on to welcome even more wealthy foreigners to buy up U.S. real estate.

        I estimate in my article that there is about $200+ billion in foreign real estate demand looking to buy more U.S. real estate. The pandemic has really throttled foreign demand.

        Even though the U.S. real estate market hasn’t done as well as Canada’s, I’m still thankful to own. Being able to generate passive income, enjoy the home, and experience good price appreciation has been a blessing. Also, to be able to help our children if with shelter if they need to as adults is nice.

        I understand the frustration of not owning an asset that has gone up in value. We’ve all missed the boat before. So writing out our frustrations is a a healthy thing to do!


    2. It always depends on your point of view, I guess.

      I don’t really gain anything when the price of my home is higher. Expenses stays the same, and they can even go higher with property taxes. And, if I was looking to buy something, like a rental property, then higher prices are really bad because they reduce the expected return. For a Canadian like me, who is always looking for something to buy, that’s pretty bad…

      Like you said, I try to just enjoy my house and don’t think too much about its value.

      For stocks, I try to focus more on earning power, instead of portfolio value, even if it’s difficult not to pay attention to portfolio value.

      For example, the P/E ratio of the S&P 500 is currently around 21.6, or 4.6%. So a 1M$ portfolio earns around 46,000$ per year, without inflation, growth, etc. Obviously, it’s not a guaranteed return, but an approximate one. A recession could reduce the “E”. But in general, earnings increase over the years.

      If the S&P500 goes down, let say, 20%, the P/E ratio will now be around 17.3, or 5.8%, assuming the “E” has not changed. So you “enjoy” a better rate of return on your investments. Ins’t that great !? 🙂 If you can rebalance by selling some bonds and/or refinancing real estate, then you can really take advantage of this decrease in stock prices.

      I think this is what’s happening right now. Stocks are going down because interest rates on bonds are going up. They are not going down because the earnings (“E”) are going down. Even if we have a recession, I think it will be mild, and that earnings will still be higher, because of inflation.

      We have another great example this morning with the report of Coca-Cola. They exceeded expectations, higher revenues and earnings by about 10%. The stock price is higher (new record high). My guess is that it will be the case for many companies.

      Investors who own index funds – and therefore shares of Coca-Cola – are getting richer, even though their portfolio value is down temporarily. Isn’t it that weird ? But that’s how the stock market works, like it or not…

      Personally, I get a lot of enjoyment knowing my potential income is increasing. But maybe it’s just me who think like this. Maybe I’m weird… 😐

      1. I honestly would rather have a piece of real estate that is appreciating and rental income is growing. Or a primary residence that is appreciating and I’m getting to enjoy it. It’s like living for free or getting paid to live.

        And if you have kids, owning real estate feels even better because you’re sheltering them too. It’s hard to fully understand until the kids come.


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