This is not the reality for the vast majority of homeowners. Banks are very good at estimating these costs, and they will decline loans that are too large for the homeowner to maintain a financial margin of safety.

I anticipate the objection that the financial crisis proves me wrong. Well, even at the worst of the crisis, annual foreclosure rates were under 10% (i.e. 90+% of mortgages were stable). And, banks have certainly further tightened up their underwriting since then.

This is just nuts.

Agreed, this is an insane (and insanely stressful) way of saving.

Even in this case, isn’t there a reasonably good chance the person could have sold it for 10% more than ($X+$Y+$Z)[1] at the time of the crisis? The lender and the loaner will part with the equity based on the mortgage payments over the years.

Based on cursory look into Redfin data, homes in the Bay Area are vanishing in 5-12 days, selling at 100-300K above the listed price.

[1] I hope we don’t cite recession here.

In the bay area over the last 5 years? Sure.

Across much of the US? Probably not. Don't forget the average cost of selling a house is 6%. Buy a place for $500K and if the value of the house doesn't go up by at least 6% you've lost money.

That doesn't include all the other costs associated with buying a new house (moving costs, etc).

Not to mention loan origination fees, appraisals, and inspections costs.

Forgive me, I was very biased toward Bay Area.