cbirch2
Active Member
- Jul 9, 2011
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REPOST: Basically a decrease in home prices is fine if your cash flow is positive. But if your cash flow is negative, and youve have to eat into savings (equity) to finance your spending and have no way of cutting spending, then a decrease in housing prices can make you bankrupt.
If your cash flow is negative, and a lot are during a recession, then you have to finance that deficit with your equity. If your assets depreciate, housing prices fall, then your assets decrease in value and your equity decreases as well. if housing prices decrease by the inverse of your leverage (mathematical formula, assets:equity) then you become insolvent.
It doesnt matter if you have enough money coming in to pay your mortgage that month, because you now have negative equity and if you choose to pay your mortgage you must choose to not pay something else, like your grocery bill.
so if your cash flow is negative a decrease in assets can indeed make you insolvent!!!!
If your cash flow is negative, and a lot are during a recession, then you have to finance that deficit with your equity. If your assets depreciate, housing prices fall, then your assets decrease in value and your equity decreases as well. if housing prices decrease by the inverse of your leverage (mathematical formula, assets:equity) then you become insolvent.
It doesnt matter if you have enough money coming in to pay your mortgage that month, because you now have negative equity and if you choose to pay your mortgage you must choose to not pay something else, like your grocery bill.
so if your cash flow is negative a decrease in assets can indeed make you insolvent!!!!
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