Consider This Scenario

[Daniel Maciag]

Consider the following scenario, presented by a question.

Buyer 1 and Buyer 2 live in a low supply high demand multi family housing area. There are only 2 MF houses in this area. MF1 is priced at 1m and MF2 is priced also at 1m, except MF1 is a slightly better looking house.

Buyer 1 figures that he can afford MF1 without going over 30% of his income as to use the remaining 70% for savings in case something goes wrong. He has a relatively stable job and has a good chance of paying off the loan in 30 years. Buyer 1 makes the offer for MF1 of 1 million. Buyer 2 comes in and has zero sense of the state of the economy, works at a highly leveraged junk start up that is about to go lehman. Buyer 2 insists on throwing 45% of his income into a monthly ARM floating rate mortgage in 2016 and offers 1.2M. Buyer 1 receives this information and is asked if he is willing to offer more and realizes that it will cause high default chances if something goes even slightly wrong, and rationally says no.

The other seller in the area raises price of MF2 based on the fact that MF1 sold for 20% over asking price. MF2 is now on sale for 1.2M. Buyer 1 cannot buy MF2 and is upset. Buyer 1 goes about his payments and see's his mortgage rising since he wasn't aware that the FED is raising rates for the next 3+ years. He see's his house price drop, mortgage rise, loses his job and defaults on the loan. MF2 is still the only house on the market as most lenders won't let you finance a foreclosed MF1.

What does buyer 1 do to have a roof of his/her head?