I feel sorry for those extremely unlucky home buyers of 2005 and 2006, who now go to bed every night knowing that they're upside down on their home purchase. And sometimes significantly upside down.
Not only is it a sinking feeling to know you could have bought something cheaper if you had just waited (and not listened to your realtor), but it must really suck to be paralyzed, not being able to move even if you wanted to since you'd go broke if you sold.
One problem with 2005 and 2006 purchases though is that those homedebtors will be upside down for an amazing amount of time - a decade or more perhaps? And they'll be even more upside down tomorrow than they are today.
Here's a good article on being upside down. Any HP'ers know the feeling?
SELLERS STUCK WHEN PRICES GO UPSIDE DOWN
Every car dealer knows what upside down means: owing more on a car than it is worth.
George Fischer of Sarasota -- like many other would-be real estate sellers across Southwest Florida and the nation -- is rapidly learning that the term can also apply to a home.
Since the Fourth of July, he has been trying without luck to sell his spacious Cedar Creek home, with its elegant fireplace and hardwood floors.He has periodically allotted himself the painful duty of slashing his own asking price.
Fischer started out at $399,000 and came down quickly to $389,000. Since then he reprinted his full-color flier to read "Offered @ under appraised value; $379,000 ... CONSIDERING ALL OFFERS!"After a few weeks he came down to $359,000.
The problem is, he paid $320,000 in May 2005, just as the market was topping out, and then put $30,000 more into the place, for an outlay of $350,000, not counting monthly carrying costs.So even if Fischer gets his asking price -- and even without counting any closing costs except the 3 percent commission -- he would be in the red on the deal.The $359,000 sale price minus a $10,770 commission is $348,230.
."The activity has just died," said Peter Magnuson, a Sarasota real estate investor who chairs a local real estate investor club that meets at Sarasota's Oriental Buffet on Bee Ridge Road. "People have lost money, and they just haven't realized it yet."
"Almost everybody who bought in 2005, if they try to sell in 2006, is going to be upside down."
December 02, 2006
Oh, the sinking feeling of being upside down
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I have a friend in Roseville who was upside down last year. Bought in 2000 for 167K then proceeded to refi 3-4 times. She was upset last year when the bank wouldnt let her take the last 20% of equity. I told her that last 20% was a "cushion" for the bank, silence. I don't think she understands why she can't borrow all of it.
Same as a child who robs their own piggy bank over and over till it's all gone.
I to am from massachusetts, and i have to say we are far more ahead than the rest of the country as far as equity loss..imagine wanting to pull that last 20% out of a house that is loosing value daily, to do what ? go buy more things....You got to have type people are the one's i feel nothing for and deserve your fate...WORK HARD FOR WHAY YOU WANT DAMIT! Why must you feel it is an entitlement to have credit and borrow borrow borrow.
I don't feel sorry for this guy either, because this isn't the first time that he bought a house for the purpose of flipping it. The article shows that he held a house and sold it during "the boom years" so he's not hurting, unless he's spent all of that money by now.
Here's my husbands TRUE story:
Sorry it's so long.
My husband (way before we met) bought his home in Alameda CA in 1991. Had an adjustable mortgage and a loan with a penalty clause for the life of the loan.
Mortgage amount started out at 1,100mo. Then a nasty little note from the bank arrived in the mail. 1,500mo. A while later, another nasty little note from the bank-1,700mo.
By now, it getting pretty tight to make those payments. Thank god no kids or wife to support! Only a cat who can't or won't contribute to this growing money pit.
House needed a new roof at the purchase, but husband wanted in the market so bad that he didnt ask the seller to repair it. Fast forward 7 years later- sitting in the dining room having dinner one night-drip,drip,drip...another letter from the bank arrives...
and so on and so on....
Finally, the adjustable loan maxed out at 2,700 a month. This was just as housing started to recover in 1998, and only now did he finally have enough equity to get the hell out of that loan!
Twice a year that nasty little note from the bank would arrive. All this for a 2 bedroom, 1 bath, 985 sq foot house on a busy Alameda street, peeling paint, old roof with dryrot rafters all on an upside mortgage.
The moral to this story? He survived. but for 5 long years there was only darkness... with canned chicken and top ramen as his best friends.
Will this happen again? Yes, but not to us. This is why its important to not loose patience and jump into a market that is falling. This is only the beginning of years of lost depreciation before a turnaround. If there even IS a turnaround. This isnt the 1970's either - meaning no jobs (computer industry)to save these prices from ever coming back to these super inflated levels.
Now, we have no problem sitting out the bubble, we enjoy life, go to Lake Tahoe, and best of all... no house repairs!
A person I see occasionally had been telling me about his real estate escapades of the last few years in California's Central Valley. Near the beginning of 2005, he and his wife had managed to "purchase" 6 homes and install tenants in 5 of them. I asked him if the tenant's rent was enough to cover expenses and he said that it was. I asked him about the terms of his latest home purchase and he said that he had gotten a 1% loan. When I pressed him for more details, he said that his wife handles all of that and he didn't know any of the details.
Early this year, I saw this man again and he proudly showed me an anniversary gift that his wife bought for him: A brand new $45,000 Ford Expedition. I assumed that he had gotten a 0% down and 0% 60-month financing deal on a dealer invoice price. But no -- he told me that they paid cash for the vehicle. My immediate conclusion was that this money came from refinancing deals or HELOC loans on one or more of his properties.
Yesterday I saw this guy again and his rosy real estate portfolio had started to wither. His tenants were no longer paying the full carrying costs of the loans. His 4-month attempt to sell one of his houses had been unsuccessful. In addition, he was now faced with a property tax bill of over $8,000 on his primary residence.
So, I now have personal knowledge of someone who has followed in the footsteps of Casey Serin. I'm certain that there will be many more such tragedies unfolding in 2007.
Incidentally, judging from his December 1st, 2006 update, it looks like Casey's back on meth again.
"...the sinking feeling of being upside down...."
Oh boy, do I remember this here in CA in the early '90's. I had several friends who had recently bought, then could not sell or re-finance because they were upside down on their mortgages. The few that did sell had to bring $$$ to the table to get out of their homes. I remember one friend whose CPA told him it would be YEARS before he recovered financially.
I know one couple now that is having to tap their IRA's to cover property taxes on all their "investment" properties, as nothing is cash flow positive. How long can that continue?
People have such short term memories and think it won't happen again, but I think 2007 is going to be very painful for a lot of people.
Who buys a house to sell it the next year?! In a normal market, too, with transaction fees, you're upside-down selling a house after a year.
No pity for these losers. Enjoy riding the market down!
Well said.
Counting realtor fees, etc., I'm probably about break even on my home right now. Difference is I have fixed-term payments that I can manage and plan to live here at least 10-15 years. So I'm not particularly concerned.
I still believe that you buy a house to live in. Making money off a house runs a distant second.
Inflation is going to take care of this temporary situation with RE prices vs. valuations. By 2010 the average house is going to cost $500K so even the fools in Phoenix, Marin Co., and Vegas will have equity again.
The people laughing will be the ones who bought a decent house with a fixed rate mortgage. If anbody remembers 1981 and the 18% mortgage interest rates, that is where we are headed. Back then banks were offering huge discounts to people to pay down their mortgage balances so they could get them off the books.
I posted my experience of selling a house in portland, oregon at adamlake.blogspot.com. Also have posted some hints on how to move a house in this market.
44% Drop in Price in Ft Meyers Florida. Up Tick in activity Q1 07 according to Lereah. (:
Source: Orlando Sentinal
Existing-home sales decline 22% in state
Orlando area sees an even bigger drop in sales but the median price rises 5% to $267,100.
The worst plunge was in the Fort Myers metro area, where the median price of homes sold fell 44 percent to $249,200 from a year earlier.
Orlando's median price was up 5 percent to $267,100, according to the statewide report, though 29 percent fewer homes changed hands in October as many buyers continued to take a wait-and-see-approach compared with a year ago.
Earlier this month, the Orlando Regional Realtor Association reported that the number of homes for sale in the core Orlando market rose in October by 1,005 to 21,324 -- nearly a year's worth at the recent sales pace.
Even in some stronger areas, such as Orlando -- where the volatile median has crept up in recent months -- a closer examination shows that prices are stagnant or declining for similar-size homes, according to some industry specialists.
The median can still rise in such situations if a large number of newer or larger homes change hands in a given month, making it appear as though the area's homes are rising in value overall.
David Lereah, chief economist for the Realtors national trade group, said he expects home prices to continue falling in coming weeks as sellers reluctantly cut their asking prices.
"Many buyers remain on the sidelines," he said. "After a period of price adjustment, we'll see more confidence in the market and a lift to home sales should be apparent in the first quarter of 2007."
SOurce: Orlando Sentinal
Twice a year that nasty little note from the bank would arrive. All this for a 2 bedroom, 1 bath, 985 sq foot house on a busy Alameda street, peeling paint, old roof with dryrot rafters all on an upside mortgage.
sounds like the $400,000 houses in Chicago i look at.
The money supply is growing at 10+%. Credit is available to anyone with a pulse. Price inflation is 2X-3X the official numbers. Once the excess inventory of houses gets cleared out over the next 12-18 months, prices are going to shoot up like a rocket. All you HPers who think we're in for a repeat of the 1930s are dead wrong.
Bernanke is going to inflate away this mess.
Getaclue said:"The money supply is growing at 10+%. Credit is available to anyone with a pulse. Price inflation is 2X-3X the official numbers. Once the excess inventory of houses gets cleared out over the next 12-18 months, prices are going to shoot up like a rocket. All you HPers who think we're in for a repeat of the 1930s are dead wrong.
Bernanke is going to inflate away this mess".
Have you read the history of interest rates in the late 1970's?
Vockner raised the interest rates through the roof, RE immediately dropped. No one could afford to buy to home with interest at 11-18%. What will make it different this time? House prices are maxed out just like they were in 1979.
"Inventory will clear out in 12-18 mo". How?? Anyone willing to pay these inflated house prices is already in the game. No more buyers. (except the ones on this blog) It will take years for new inventory to sell. 60% of Homedebtors have adjustable mortgages. Guess what will happen to most of them next year? add these homes to the ones not even completed and sold.
I say-Great depression II here we come.
"Have you read the history of interest rates in the late 1970's?"
No, I lived in the 1970s and saw first-hand how prices for condos in DC and MD dropped 50%-75%. But condos are not houses, and people here on HP should stop trying to equate the two. House prices may get spanked with the current inventory glut, but there is no way they will be hurt as badly as condo prices.
I knew people in 1981 who bought homes with an 18% mortgage. My first home in '83 had a 13.5% mortgage. Why did they do that? Because inflation was chugging along at 12%-15% -- that's 1% a month, and mortgage interest is tax deductible. People earning a decent wage could justify the difference between rent and mortgage payments on the tax savings alone.
As for prices being "maxed out", that is nonsense. Price inflation caused by money supply growth eventually affects everything. Wages go up, rents go up, and yes, even RE prices rise. In 1986, I sold that house I bought in '83 for a gain of 29% - so much for your maxed-out theory.
getaclue, do just that, get one!!!
Inflation will rage, you are correct, but housing? We just saw the biggest bubbble the world has ever seen, in the housing market, prices are coming down.
As for inflation, it will ravage the NECESSITIES of life like oil, gas, food and clothing, which will put even MORE downward pressure on housing since people will have less disposable income to spend on a new or another home.
So, it looks as if you are 1/2 correct. Inflation yes, home prices, NOT.
I just discovered that my home is worth $35,000 more than I paid for it. Good news, of a sort.
I think in order for home prices to collapse we'd have to have a corresponding economic collapse and contraction of credit and soaring interest rates. During the peso crisis in Argentina even rich people had their savings stolen if they were in a bank in Argentina and they were forced to accept the government's exchange rate on dollar accounts, in the governments favor.
Like Ecuador in 2000, Argentina had a credit crunch and a cash crunch. Buenos Aires use to be one of the most expensive cities in the world. Now? About a 1/3 the cost as NY city. I looked at a hacienda in Mendoza with a 40 acre vineyard, fruit trees, etc, small house, barn, you could buy for cash $25,000. Now it is back up to about $125,000 as the economy continues to grow. In Ecuador I saw apartments across from the Metropolitan park (the Central park of Quito and the condos the 5th ave) for as low as $15,000 cash.
That is what a currency collapse and credit crunch can do to home values. The middle class in both countries was devastated. The poor have always been poor and the rich, they usually know how to keep their gold.
If we have a 40% meltdown nationwide it is hard to imagine similar stories not unfolding here. Can Bernake, the Congress, afford to take that risk?
As for inflation, was at COSTCO today. Haven't been for awhile. DVDs were $18-24, use to be $9-14. The only things I see cheap these days are "made in China" and the retailers can mark them down 50% to $9 and still make a profit.
The only thing I see dropping in price are electronics, which historically always happens even in inflationary cycles as the cost to produce them keeps going down, but who needs more Tv's? Coffee pots? Radios? etc
Anyone got a good feel for rent prices per sq ft? Are they going up? Here in Austin rent is high but people seem willing to pay it for the freedom to leave when they want since owning a home anywhere can tie you down if you can't afford the carrying costs if you move and don't sell it.
What are rents going for in Phoenix? When I left in May you could rent an apartment for about $1 a sq ft (central city) and about .75 out in the WV, of course I'm talking class A apartments. Class B/C in central phoenix went for about .50 a sqft.
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