Greetings from New Mexico! I'm a daily reader of your site, love the pictures! I am in a conundrum right now and want your imput on what I should do.
I am not a FB but I am facing a cash flow crunch right now. I live in Santa Fe and purchased a home 8 years ago for $168,000. The housing market is still hot here (mostly money coming from other inflated markets like California) and I have been told my home is now worth between $365k and $375k.
I am sitting on a bunch of equity right now. I refi'd twice in the past 5 years but refrained from taking any cash out to spend on crap. My current mortgage payment is only $670/month not including taxes and insurance. I know how incredibly low this is, however I also have a car payment and a business loan I'm paying on. My payments for all my debts, mortgage payment and escrow are $1,500/month - that's where my cash flow crunch is coming from - this will not ease up until the car loan and the business loan are paid off in January, 2009.
Here's my thought. I sell my house and bank approximately $200k after paying off all my debts. I then rent an equivalent home in the $1,300/month range. By putting that $200k in relatively low risk investments, I can then earn about $700/month in additional income and also free up about $200/mo in cash flow. That's a $900/month swing. I rent for 3 years and then buy again, hopefully at lower prices.
Although Santa Fe isn't as inflated at California or Florida, I have run the numbers and they just don't add up. If you purchased my home today and put 20% down and financed the rest at 6.5% you'd have a monthly payment of about $1,800/month. When you add in insurance, taxes and maintenance you're looking at a monthly carrying cost of this home at about $2,200/month, but you could only rent it for $1,300/month. That means rent either has to increase another $900/month (unlikely given the low wage rates in this town) or the home would have to depreciate down to about $250,000, a 31% decline, in order to make this calculation make sense.
To me the biggest negative is that I would lose that $670/month mortgage payment. That's a fixed, 30 year rate (but I have 28 more years to go). If home prices keep increasing or interest rates go through the roof, after 3 years I could find myself having to pay a much higher mortgage payment when I buy again.
What do you think? Feel free to post this on your blog for feedback
May 16, 2006
Dear HousingPanic;
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41 comments:
sell if you can, take the money and run. if you don't sell now, you'll have significantly less equity a year from now, two years from now.
and do invest the proceeds wisely
I wouldn't be so quick to sell, given how inexpensive your house was originally, and how low your taxes must be compared to what they could be. It isn't likely that housing in Santa Fe will ever crash, because people who move there tend to be wealthy to start with.
If you paid $168,000 eight years ago, it is not logical to think that in a year or two you will be able to buy something comparable for the same amount. Santa Fe isn't Huston or Miami; it's one of the beauty spots of the world with a very high quality of life.
I am considering the same approach of selling my paid for home to invest the proceeds......but.....what about your cash investment/savings facing the falling dollar? I'm thinking a home with a roof over your head is a better choice than worring about liquid dollars depreciating!
It's a smart play, and it's very unlikely you'll lose (if you invest the capital wisely and don't spend it). But if you like your house, and don't want to move, then I would stay put. If it ain't broke don't fix it.
what about getting a boarder for an extra room?
David
Bubble Meter Blog
Oh my god, SELL NOW!
We just cashed out of our home in Albuquerque. There is going to be a down turn. You know how new mexico is the "land of broken dreams". There aren't the jobs there to support the increase in prices. You know how poor most of the state is. You know how substandard the education system is. There are some nice people in new mexico for sure, but take advantage of the situation with the californians. We did.
Also, you don't know when the altitude will catch up with you, regarding health problems. I am only in my 30's and developed some retina problems, that could be related to high altitude sports. You might need to sell in the future and not be able to. Have you seen Rio Rancho? They are building thousands of houses at a time. Who is going to live in all those houses? SELL!
Alert! Renting is cheaper than owning in many places in this wonderful country. IF...you did not buy long ago and work down your payments. For a new home, yes, renting is cheaper. But fast food is cheaper than a five star restaurant, not better.
Bob Shiller said "beautiful places, not necessarily at beaches, will continue to be demanded". (I paraphrase.)
Do NOT sell. Work harder, get out of the other debts.
You have to look at your bigger picture. Is your business growing and based on a need that will continue even if the economy tanks? Do you want to spend many more years in your house? if the economy tanks what will your position be?
How expensice is the car? What about selling it and buying a reliable used car that will allow you to not have to make that payment (and maybe lower insurance costs)? The poster who suggested a roommate had a good idea - if you can find a person who will be worth the added aggrivation. What about a second "job" to supplement your business income?
Good luck.
Sell!
You may not catch 90% of the price move, but 60-70% is very respectable.
sell?
what a stupid idea..
can you buy the same house for 168 even after meltdown?
you must be a moron to even ask that question..
Plus u gotta pay the transaction costs
Plus u have to be extremely lucky to buy at the bottom
The issue is not whether you should sell your house to relieve the pressure of debt, the issue is why you have so much debt to begin with. In my opinion, if you will have to make payments on that car until 2009 (and who knows how long you have been paying it off already) you obviously bought a car that you could not afford and now you are contemplating selling the family home because of it. Did you really need that car? I know you need A car, but why are so many people willing to go so deep into debt to get that stupid new Audi when all you can afford is a used Civic. Why do we let ourselves buy into the hype when it is so devastating to our finances?
Don't sell the house and buy back in 3 years, you will take a bath in costs! Look into living within your means and all your worries will melt away.
Sounds to me like you are tempted to start taking out some of that home equity if you dont sell, that could be a huge mistake, given that adjustable rates are killing people right now.
Depending on your cash flow you could end up draining your home equity, and end up selling your home at a huge discount when the price comes down, and not have enough money to get out of debt. Brutal coctail.
I think homes will come down to 2000-2001 prices, weather you live in Santa Fe or Miami, unfortunately some of the models I have run point to 1997 prices.
I grew up in New Mexico, there is a reason it is named "the land of entrapment", low paying jobs, tons of illegals.
Don't sell.
Refinance the business loan and car loan with a 2nd mortgage.
Get your financial act together. For example, don't eat out in restaurants. Take the money saved adn pay off the loans.
I'm not expecting the home to come down to $168k again. However, as I said in the post, the real value of this home is around $250k based on the rental costs. If I take out the $200k in equity now and then buy back when prices move back to this realistic level, I only would have to finance about $50k.
FB means "F*#&ed Borrower"
Everyone who is buying in Santa Fe is from out of state. No one who lives here can now afford to purchase a home - even professionals. I believe this crop of homebuyers from other inflated markets will dry up as soon as those markets implode.
The development I live in used to have mostly families and working professionals living here. Now its mostly out of state retirees and all the new homes being built are $500k plus.
Jymkata
Provided you're fairly sure you'll still need housing in New Mexico for the foreseeable future, sell the car, not the house, and then start driving what you can buy with cash or take public transportation. The only thing dumber than buying a house in this market has got to be borrowing money to buy a car...ever.
I have too many renting friends who've had their homes sold out from under them to greedy developers. As long as the fundamentals are good, as yours appear to be, there are some definite benefits to homeownership.
I think you should first thank your lucky stars you are in the position you are in. Congratulations there. :)
You have to ask yourself what you really want, money in the bank or your own roof over your head. Do you love this house, or was it always a step in your path to what you want eventually? If the $ is tight right now, why not rent out your place to cover costs, then go rent yourself something more affordable for the time being? You get to keep your dream home (if that is your dream home), someone else foots the higher bill, and when things settle for you financially, you can move back home. Count your blessings, you've done well.
K.
As pointed out by many--the problem for you surprisingly is not your house.
It's your other debts. Selling your house and renting means paying off your mortgage debt first, and then the others. The mortgage debt in your case fortuantely is the least of of the problems.
A housemate for rent sounds like a decent, if potentially annoying idea. Use it to pay off non-mortgage debt, especially floating rate debt, sooner than planned.
If, as you say, the locals can't afford to buy a house there must be plenty who need some less expensive housing.
One omission: You don't seem to be accounting for your tax benefit of owning. $1 of mortgage is not the same of $1 of rent if you pay taxes. Don't forget to factor this into your decision.
Good luck!
Unfortunately, getting a housemate is a non starter. I've got a toddler at home and there's no way the wife would go for it.
Most of these posters obviously don't know about renters, or roomates in new mexico. Now, this fine poster might get lucky, but from my experience in new mexico- many, many people skip out on rent, trash houses, and steal things out of the rental houses. (not to mention the meth lab possiblility) It's not a terribly civilized place. I don't think a roomate is an option. There is no good- reliable, quick- public transportation in new mexico. (although the new double buses along central seem pretty efficient)
But maybe buying a less expensive vehicle is an option.
good luck.
I do believe that prices are going to plummet. All those rich retirees will get sick, and their younger family members won't find work in new mexico, unless things drasticly change. All those houses will be sold at a loss.
Oops. Wife, toddler... on top of barely making ends meet, car payment for the next 3 years, business loan (how will it weather the economic downturn?).
Maybe you need to figure out a way to make $$ off the out of staters who moved in. Yard care for instance. Better than paying to work out in a gym.
Unfortunately, getting a housemate is a non starter. I've got a toddler at home and there's no way the wife would go for it."
how about if she cleaned, preferably in the nude, for free rent?
If you truly like where you live, sell your car, eliminate the car loan and buy a used one for cash. Then reduce your frivolous expenses by 20% and see if it alleviates. If not and you still want to stay, see if you can get some cash out refi and buy BEARX, which should return at least 15-20% for the next two years. You're not going to be able to rent a very nice place for under $1K anywhere these days, and if you have a wife and toddler, they should be your priority.
If you don't really love where you live now, then sell and rent for two years as you described IIF your wife will tolerate that, but put the $200K away in a SAFE medium yield vehicle. If you do that get at least a year lease. Rents tend to rise as housing bubbles collapse (sudden influx of renters).
Get a cheaper car! What are you doing with such an exorbitant car payment? Sell that first.
If you like your house, do not sell. With $168,000 mortgage, you could pay this off sooner than you might think.
The people who will weather any economic downturn best are those with A) cash, B) gold, and C) own their homes outright.
I have a pal who bought a house four years ago with an I/O negative amortization loan. Everyone said he was crazy. But he's been making 4x principle payments since the day he moved in, and is less than 3 years away from owning his house outright.
Pre-RE crash mindset said he was nuts for not leveraging his equity.
Post-RE crash mindset will say he's a friggin genius.
you may have missed the peak, but now is still a great time to sell.
Take the money and make it real, paper equity means nothing until you sell, and I can just about garuntee housing prices will continue to go lower for years to come.
sell it. put 40% in oil & gas trusts, 10% to 20% in a gold/silver fund and the rest in low risk bonds spread between 5 and 10 years. you'll get a lot of cash flow. if inflation continues, the oil & gas trusts will do great, as will the gold/silver stocks, and should make up for the hit on the bonds - and the high rates will stop house prices from going anywhere. if there's deflation (unlikely w/ the fed) your bonds will do great and interest rates will be low for the repurchase later and i can't see houses running away w/ deflation (would be an economic slow down in a heavily indebted economy). just an idea. good luck.
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