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Explain why it is illogical to dismiss the possibility of a home's current value dropping below its original purchase price
Explain why it is illogical to dismiss the possibility of a home's current value dropping below its original purchase price. A phenomenon that occurred during the Great Recession of the late 2000s was homes that were "underwater," where people took out mortgage loans to buy a house at a particular price before the recession, but later the home's value dropped below the amount still owed. People might argue that a home's value should never go "underwater," that the value of a home should never dip below its original purchase price as long as the home has not deteriorated sufficiently.
Expert Solution
There are certain times when the value of a house may go below its purchase price. The value of a house may go down if its surroundings change in a way that affects the daily lives of its occupants. Once comfortable surrounding can deteriorate due to various reasons. Conversely, the value of a house may go down if neighborhood conditions change. For example, a rise in neighborhood crime rates will decrease the prices of all houses in that neighborhood. When the economy is going into a recession, the value of most assets falls. The housing market is not different and values fall when demand decreases.
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