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Wednesday, March 25, 2009
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124 comments:
Some of you might be interested in this article on lowball offers, which I found linked at Patrick.net:
http://www.ajc.com/business/content/business/stories/2009/03/24/spring_lowball_homes.html?ref=patrick.net
ace,
ah typical fluff reporting
They try to "educate" the buyers, who keep "insulting" the sellers. At least one person got it right being happy to get the property sold regardless of the final price and telling others that they need to divorce emotion from the process.
I mean really, these low-ball offers are only "insulting" if you think the price of your home is a reflection on you as a person, rather than what it really is, which is a reflection on the market and your house. People need to divorce their self-worth from things beyond their control, or decisions they can't go back and change.
Price discovery is rough, but it does happen.
FYI for Kob & those working in DC or Arlington:
Subject: Notice of TV filming event-explosion planned
Please be aware of this planned simulated explosion in the DC area...
For the filming of a TV pilot, there will be a simulated explosion on
Wednesday, March 25 between 9:30 a.m. and noon near Key Bridge in the
District. The explosion will produce a 20 to 30' fireball that will last for
approximately 2 minutes.
The explosion will take place on the Potomac River just north of the Key
Bridge and Jack's Boathouse (K / Water Street, NW under the Whitehurst
Freeway). In the scene to be filmed, there will be six (6) sculling boats on
the Potomac River and one of them blows up.
Cara, agree completely. The confusion seems to exist more on the seller's side. Housing prices precipitously increased nearly three-fold. They cannot expect anything NEAR peak price, and shouldn't get upset if the offer is half that. It might still be a bubbled price there. I don't think I've heard of a case where the buyer offers a truly unreasonable or insulting price.
Good point, Cara.
The Anonymous,
We got that notice yesterday, but it was followed by a much tamer Arlington Alert version, and the Post also had a story about it. Turns out that nothing will be blown up, and they are just going to use some pyrotechnics upstream of the Key Bridge to make it look like one of the sculling boats will be blown up. The 2 minutes fireball mention is completely absurd.
Tomorrow March 25 between 9:30 and noon, CBS Paramount pictures will be filming a TV scene on the Potomac River near the Key Bridge in which special effects (loud noise and fire) will simulate a small water vessel being blown up. This will be a heavily monitored and controlled event lasting only a few seconds. There is no cause for alarm.
On lowballing:
From what I've been informed by RE Pro's that I know, right now, an offer 10% below list price is "normal & expected" and has been factored into the list price by the Sellers & their Agents
spunky,
yeah the norms have changed.
I like the advice in the article to drop the list price by 1% every month that it sits on the market. Good try, chasing the market down at that rate and you'll never catch up. (nor get to zero if you're doing 1% on the new price every time). That does a fine job of keeping up with a market that's falling 10% a year, but does nothing to repair the problem of being priced above market in the first place. "A" for effort though.
The Republicans are still trying to increase the homebuyer credit to $15k and apply it to everybody:
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/24/AR2009032402940.html?hpid=sec-business
Under the proposal, borrowers refinancing their mortgage would be eligible for $5,000 to help cover closing costs or to reduce their principal balance. The plan also revives a $15,000 home buyer tax credit proposal that Republicans pushed last year. This time, the proposal would require the borrower to have at least a 5 percent down payment. Both programs would expire in July 2010.
Fred,
Well as someone here said, if it's important enough then it should be introduced as it's own legislation, so more power to them for trying.
The $5000 for refinancing is bold. And the extended deadline is interesting... But like Harriet, I don't trust these government supported price levels to hold once the programs go away.
See, your house is too an ATM. If the markets take that away, the congress will bring it back. (Or somebody in congress will try)
Fred -
I think the 15K would be a great incentive to buy - much better than the measley 8K now offered. 15K is a better amount for the NoVA move-up market, I think the 8K is good for the first time buyers
What our market needs is a good move-up Buyer scenario to re-ignite the RE system (re-sales). The first timers are buying a lot of new Construction (I work with Builders)
I would use it - but probably in early '10 not in this "hot" Spring Market
When purchasing, I tried blatant low balling on one occasion. It was early in my 4 month journey and I was relatively naive at the time, thinking I had the market figured out and sellers would be lucky to even sell. I checked comps (good idea, but I had no idea what type of upgrades/updates or condition of each house except for the one I was buying, so that was a difficult comparison) and assessments (dumb idea, I now know) and submitted an offer that was 15% under list price. I thought the offer was definitely low, but I thought it was a negotiating position. I never got a counter, and they went with another buyer.
There is nothing wrong with trying the low ball strategy, but I think the market here is heating up a lot faster (for entry level homes) than it is in Atlanta.
Still does not mean you can't get it to work. Just because the one time I tried it, it didn't work, does not mean a thing. But you have to look at who you are trying it on:
A foreclosure or short sale (bank vs. individual)
An individual seller who is still living in their house vs. a vacant house?
A seller who has been on the market for 30 days vs. 120+ days?
A sale that is in "move-in" condition vs. one that needs several obvious repairs?
An individual seller who just reduced the list price by 5% last week vs. one that reduced list price by 5% 90 days ago?
All of those factors come into play. I tried mine on an individual seller who was still residing in the house, did not have to sell, whose house was in perfect move-in condition, and who was on the market for < 45 days.
I believe all of that played a role in their thought process.
Also, a big factor is what type of buyer are you:
Do you want a home to live in or are you simply trying to buy an investment? (survey this week)
Do you want to move into a new home in 3 months or 9 months?
How much free time do you have to hunt and peck?
Do you believe interest rates will rise or fall, and when? (this would play a role in "what you can afford" and when you might want to buy)
Where does this house rate for you in terms of comparing similarly priced alternatives?
At first, I was looking for an investment, had no real timeline needs, and wanted to grab a great, move-in ready house in a nice neighborhood for a bargain price.
After another couple of months of searching, offering on several other places, checking turnover and market activity, I realized a few things:
The market in the locations I was looking was gaining momentum. Interest rates were great. Many of the "investment" houses were not in the great locations I wanted, or were not in a condition I was willing to accept. More competition was out there for the type of houses I was interested in.
You guys are definitely right, as everyone knows, it is a buyers market. But you have to account for all of the above (seller prospective/buyer prospective) when considering how "low" you want to come in with an offer and how much success you might have with your offer.
The only other thing I can say, which might be that popular, is that it is easy to sit back on the sidelines and "call" out what you think an offer should be. It's a whole different game when you are on the field, playing, searching for that house, and experiencing the game first hand w/ interactions between realtors, banks, sellers and buyers. Making offers, having home inspections performed, withdrawing offers, repeating and repeating. Sometimes it is easy, sometimes you get lucky, sometimes it is not as easy as you thought it looked from the sidelines (in terms of how low you can offer and what type of deal you can negotiate). Everything from my lists above and then some play a role.
I have experienced the "easy purchase" in my life (one where you get a great price w/ little negotiation/giving on your part), because I didn't have as many desires or needs at the time, and because I got lucky and found the perfect seller who underpriced his house in a decent market (2002) because he wanted to close in 1 month from putting it to market.
The more you grow and add to your family, the more desires or needs you may develop, which definitely narrow down the pool of options. Someone w/ zero desires or needs and a lot of spare time can have a field day buying in today's market. They can afford to low ball everything and can be patient as they want, looking for that great investment property, regardless of specific city. But, not everyone is in that situation.
Not that I think the $8K or $15K or whatever is necessarily a good idea, but if they're going to do it, wouldn't it make more sense to make it an amount adjusted based on the FHA limits in the area if they really want to create incentives? Is someone buying in North Arlington with median SFH prices over $500K going to be swayed by the $8K as much as somebody in Binghamton, NY, where the median's less than $100K?
As an aside, take a look at this place, which has been sitting forever and gradually reduced from $750K to $480K. Sold in 2003 for $268,500, and it's in a short sale at $480K? Infuriating.
Wall Street got another small ray of hope for the housing market this week when the U.S. Commerce Department said Wednesday that new home sales unexpectedly rose for the first time in seven months.
Sales of new construction single-family homes rose 4.7% in February to a seasonally-adjusted rate of 337,000 units, the Commerce Department said Wednesday. Economists had expected new home sales to decline to a rate of 300,000 annualized units.
While the unexpected rise in new home sales might be seen as a positive movement for the beleaguered housing market, the February rate for new home construction is still the second-lowest reading since 2002.
Year over year, new home sales are down 41.1%. The median price of a purchased new home fell 18.1% to $200,900.
The reading on the new home construction market comes after National Association of Realtors’ report Monday that showed that existing home sales unexpectedly rose in February.
Existing homes sales rose 5.1% to an annual rate of 4.72 million units from 4.49 million in January, the National Association of Realtors said Monday. Economists had expected a decline to 4.49 million annualized units.
Existing home sales are the bulk of the nation’s housing market -- making up more than 90% of the economic activity in the sector -- but are considered less timely to track because of process to legally buy and sell property. New home sales are based on contracts signed, not on finished construction.
“Sales remain incredibly weak but, as with the existing sales numbers, we are prepared to hazard the view that the post-Lehman meltdown is now over and the market is stabilizing,” said Ian Shepherdson with High Frequency Economics.
t,
good find, but that's an awfully small ray of hope, 37,000 more seasonally adjusted new home sales than they expected? Big whoop-de-do. What their expectations were that spring would never come? The earth would stop orbiting the sun and the school year would just go on forever?
As far as low-balling there's the other obvious plan. Let other people do it for you. Price discovery is painful and can be slow or rapid. Why fuss with it, when eventually the market will indeed stabilize and it will once again be possible to know what a home will sell for? This is why I'm so heartened by the TH's in Burke. The prices seem sane to me. I won't need to "low-ball", just find the right house from amongst the large pool of reasonable sellers. SFH's on the other hand... what's with the $499,995 prices for anything other than a run-down 1950's ranch house, regardless of condition? It's as if all the prices have slid down and are piling up on half a million.
Cara - I'm glad your experienced eye feels that way about Burke. It is a great place to live, and you will see how "convenient" it is for all your weekly needs. The minutes added to a daily commute to DC are well worth it, in my opinion.
"Cara said...
What their expectations were that spring would never come? The earth would stop orbiting the sun and the school year would just go on forever?"
Actually, yeah I think it was! The way I see it, recall that from Early feb to early march the stock market recently had that day after day unrelenting drop. It was WAY overdone & borderline irrational.
Now, I think they are realizing, gee, maybe housing markets do not go down unrelenting forever, maybe they do eventually stabilize. Thus, we have gotten back everything we gave up since early feb, but no more.
Keep in mind though, that if it holds, this turnaround is not a true "turnaround" as in V shaped. If anything, it looks like the L shaped recovery may just be starting.
Matt,
It looks like the owner tried unsuccessfully to get the TH developer next door to pay him $750K to acquire the land. I'm sure at one point the developer did make him an offer but he rejected. I bet he HELOC-ed big time thinking he'd get a payday from the developer soon. Now the THs are going up without his land (and hurting his home's appeal), yet he's underwater and facing foreclosure.
Poor soul. But I actually might like this house if inside is not too bad. Not at this price, of course.
Cara: "As far as low-balling there's the other obvious plan. Let other people do it for you. Price discovery is painful and can be slow or rapid."
Bingo! That's my game plan. I see listings and I think "well somebody else can present them with reality, it's not worth my time".
I won't low-ball a seller if they are reasonable in their listing, and don't want to waste my time with them if they're not.
CR's take on new home sales
Calculated Risk's graph of Not Seasonally Adjusted new home sales is quite stunning. It's amazing the power of a bar graph to illustrate simultaneously the ~4% increase from January against the 41% drop YoY.
I think, though that we need to wait and hear from the Case-Schiller report from the DC region, compared to the national data. Because I do think that jobs in DC may make us come out of the recession earlier and get a little rosier recovery. Not to say that "it's different here" but well, it is different here, every place is different.
Cara the only thing that worries me a bit about CS is the Maryland issue. Our price declines thus far havent been nearly as severe as other areas around the country, but I am beginning to worry thats only because NOVA tanked last year while the other 1/2 of the area measured by CS (namely MD) was still holding up.
Now, I think the reverse can happen. Northern Virginia will continue to show signs of stabilization, but now that MD is really starting to tank, CS will show its not getting better at all (and metrowide, thats probably correct).
Its a shame CS isnt broken down more than it is.
http://www.nytimes.com/2009/03/22/realestate/22cov.html?ref=realestate
A little OT, but I thought this was crazy -- an article in the NYTimes about people who put down deposits for condos in 2005-2007 (before they were built) and when they lost their financing because the banks required a higher downpayment, they couldn't get any of their deposit back from the developer.
"So, for a $1.12 million apartment — the median sales price for condos in Manhattan at the end of last year — a buyer who put down a 10 percent deposit of $112,000 about a year ago, now must come up with an additional $112,000 to $448,000 just to get a mortgage."
While it's a little unnatural for me to feel bad for someone who's in a position to buy a condo in this price range, I don't think it's right that they should have to lose such a large sum of money just because lending requirements change. On the other hand, as one of the commenters pointed out, they might be worse off if the purchase had gone through and the value of their condo dropped by more than $100,000....
Hi all. I'm a newcomer who posted more than a week ago about trying to decide whether to go through with a contract on a house in Chantilly. (Had to change my user name because I had trouble logging in again. I was HeadingToFFX without the asterisks.) We ended up not going through with the purchase because I was just too scared.
Now I'd love to hear thoughts on where to go from here if you all would like to share any.
We bought a TH in a nice part of Sterling, near Ashburn, when we moved here at the height of the bubble. (We were young and stupid and thought things would just keep going up.) We are currently underwater by about $70K above the assessed value (not sure how that relates to actual market value). We have a couple kids who are getting bigger, and family members who sometimes need to live with us, and we are cramped. We also will need to move to Fairfax within a few years to be within driving distance to a chosen school. Husband is absolutely set on this last point. And I am really hoping to not have to get another TH next time.
Our plan was to buy a bargain SFH while interest rates are good, and rent out the TH (will be at a loss each month) until the price rises and we can sell it. Is this crazy? A financial adviser checked us out and gave the OK. But I worry because if we had a job loss plus renter problems, we would really be strapped, so this plan has some risk.
I also worry because it could be a long time before the TH's value rises to any reasonable level. I checked out the past assessment history and after the last bubble, this TH went down in value for 7 years and then flat for 3! (Again, not sure how that relates to actual market value.) We have a mortgage that will adjust in 6 years so we will need to either sell by then or refinance.
I wonder if our losses would be less if we sold the TH this year (with possibly more buyers out this year than next year and beyond because of the government incentives), than if we held onto it for several more years?
My husband has it in his head that he will never sell the TH until he can get what we paid for it. I think he's crazy -- you win some and you lose some, and this loss will not become a win by being stubborn. But I do agree that it would be preferable to be able sell it without doing so at a huge loss (hence renting it out for awhile, though I know renting is a headache).
What would you do or recommend? Would you:
1. Find a bargain SFH soon while foreclosures are plentiful and interest rates are low, and rent out the TH?
or
2. Wait and buy something in several years (may have to be another TH if prices and interest rates head back up) and then either sell or rent out the current TH at that time?
or
3. Sell the TH now at a loss and buy something else?
Clearly I'd like to raise my kids in a SFH if we could make that happen without making our lives miserable.
I know we have made some mistakes, and maybe our current ideas are crazy. I can take criticism if that's what the reaction is. :)
Heading to FFX-
Option #3 - you don't want to own 2 pieces of Property in this market - either sell the TH or wait
Heading to FFX:
Hmm... this is tough. If the townhouse is not where you want to live now, I would sell it now. I think there are a lot of buyers out right now, and while prices might not fall that much more in that area, I definitely don't think they're going to go up in the next 3 years, and renting out for a negative monthly cash flow seems like a bad idea. And if you bought between 2004-2007, it wouldn't be crazy for it to take 10-15 years for it to be valued at what you paid for it (or for rents to rise to where you're breaking even on a monthly basis).
As to where to live after you sell your TH, if you wouldn't mind the hassle, renting for 1 or 2 years might make sense financially because prices probably have further to fall in FFX. Of course, renting with kids is not ideal, so if you can find a SFH you like and can afford, I would go ahead with it.
Heading to FFX,
I'm kinda glad that you are not considering option #4,
which is: buy a new home and then do a short sale/foreclosure on the TH. It seems that for some people their reputation is still of value.
Konstantin,
I was thinking about that too. Maybe not the most ethically upright thing to do, but would probably be in their best financial self-interest.
I wonder, though, why banks wouldn't start looking at buyers to see if they are underwater on a current property? If they are, I would think that debt should be treated like CC or student loan debt....
I couldn't make a calculated move to buy something better and then foreclose on the TH. If the bank would allow a short sale out of the goodness of their heart, that would be lovely, but I can't default on purpose.
So you guys think this year might be better than the next 3-5 years for selling the TH? Hubby most likely will never agree to that because he would rather wait till prices rise, however long that may be, but I just don't think that will happen in any reasonable amount of time and I don't want to be saddled with this TH for 15 years!
to FXX
"underwater" by 70k could mean a lot of things...
technically it's understood to mean that the sale price you might get is 70k less than the remaining balance of the loan. The total loss would then be greater due to transaction costs.
But I've heard many homeowners say "underwater" and what they mean is relative to their purchase price, not their loan balance.
If you can't rent it for the monthly costs of PITI, then you need to sell it. Monetarily that may not be "true", because it would take 5 years of 1000k a month losses to accumulate a 60k loss. But it still seems like a fools game to keep a rental if you bought at the peak.
So, I vote for option 3. Sell now, rent until SFH prices start to seem reasonable.
to FFX
also, the only way that prices will "reach" what you bought it for is inflation. Which means that you'd be getting back the money after that money is worth significantly less than it is now. It's better to go into a time of inflation with debt, that can be paid off in inflated dollars, than go in with depreciating assets which can eventually be sold for inflated dollars.
Cara, your comment about inflation makes my head hurt, but I think I follow you. The takeaway is that even if the value of the TH rises back up due to runaway inflation, she won't really come out ahead.
It sounds like the hard part is convincing the husband to sell. If he's far from ready to accept that he needs to cut his losses on the TH, it's probably futile trying to convince him. Maybe you could try to say something like, "Look, I don't think we're going to do any better in the next 5 years than the price we'll be able to get for it today. You disagree, so let's stay here a year and see how things look then. If it looks like the value of the TH is going back up, we'll stay for another 1 or 2 years. If not, we'll sell." And then hopefully after a year of events unfolding he'll see that housing values aren't going to shoot back up anytime soon (the recovery will be "L" shaped, not "V" shaped).
By $70K underwater, I mean the amount we owe vs. possible sale price (if we could even get that price with all the foreclosures around). Actual loss from purchase price is more like $150K. (Ouch!!)
Oh, and thanks to everyone for all the input!
to FFX
make your husband go read this:
Irvine housing Blog, timing does matter
It outlines what happens to your finances when you buy at peak and wait it out for those prices to return. your details are different, but hopefully you can extract useful financial perspective.
If that's not sufficient to change his mind, buy him the book.
The bottom line is, that this TH has already lost you money. No matter what the future brings, it lost you that money the day you closed. You can chose to realize that loss now, when the bank might forgive some of the debt (make sure you get that in writing) or turn it into an uncollaterilized loan (which it essentially already is). Right now there are buyers looking and we may not be at the bottom for Sterling yet. But throwing good money after bad is not going to improve the situation for you. Get on with your life now, rent a nice 5 bedroom house in Burke for under $2000/ month, and move on.
RE: Selling the TH
Could I ask how much your negative will be after tax? Are you phased-out of taking losses on rentals?
It is quite true that we may not have seen the bottom and/or that it might take years to get back to your original purchase price.
It's also true that being a LL has a learning curve. If you were to go in that direction, get as much good advice as you can.
Finding a house to buy while still owning the TH gives you alot of flexibility to look and also to move quickly. It can be a very quick process to get a tenant (certain incentives can help a great deal). If you are able to get qualified owning both and come across a tremendous buy - you can jump on it.
As you can tell, I happen to think that reo's and other distress sales currently present some tremendous opportunities. Converting your TH to a rental also converts any future loss to a tax deductible capital loss. There are limitations in yearly losses (carry-forward, if necessary) that you can discuss with a tax adviser.
If you are willing to put enough time and effort into the search for your new house, I believe you will have a good opportunity to more than make up your current "loss" (realized or not) of 150K.
Lansner on new home sales
so, that 4.1% MoM "increase" in new home sales?? Lanser went and looked up the real report and that "increase" is much smaller than the reported error 18%. So, yeah, typical reporting, there's no statistically significant improvement whatsoever, but who's to stop the NAR releasing their press release without the error bars and touting a new direction in new home sales.
Gah.
"Could I ask how much your negative will be after tax? Are you phased-out of taking losses on rentals?"
Um ... can you explain a bit? :)
If you mean the negative each month, it would be about $500 at current rental rates, not taking tax into consideration. I have no idea about the tax implications.
My husband, by the way, does not consider that a loss, because that is close to the amount of principal in our mortgage payment. He sees it as someone else paying our interest while we pay the principal (not a loss to him) until we can sell.
Do rents ever go DOWN? One other worry of mine is that if we were to buy while renting out the TH, more rentals may flood the market from other people who need to move but don't want to sell, pushing down rents.
Cara,
5 BR SFH for rent in Burke for >$2000? Nice! When my wife and I went looking for rentals we borrowed a Realtor friend of the family. Toured 11 properties of which only three were acceptable. None of them were 'searchable' though. That is, the research I can do for myself on homes for sale thanks to MLS access on the internet granted to me by Redfin, Frank, etc. does't include the rental details I need to see in order to make a good comparison.
If this recovery starts taking off, I'm going to continue to be priced out of buying for the foreseeable... therefore I'd love any sites or techniques you've got for finding those sweet rental deals.
"Do rents ever go DOWN?"
Yes. They can and are. But in this area at least, I wouldn't expect them to go down a *ton*. Just factor in the possibility of having to lower your rent by 100 or 200 a month, and/or having it vacant between tenants.
xpovos,
that was just on hotpads.com I haven't seen the interior. (and it was far from the VRE). Harriet recommended a good realtor's site for rental searching:
http://www.fairfaxrealty.com/
And to FFX? Yes, rents can and are going down. My complex has dropped the asking monthly rent on my unit $100 since I moved in in September.
Nice funny math. The kool-aid is strong with this one. I used to do math like that, where I was willing to pay interest+taxes+insurance up to my monthly rent payment and would allow principle to trade off for our current monthly savings towards the downpayment. That way lies to ruin.
Va_investor is talking sense though. Look into the way rental income is taxed and how you can deduct the capital losses on the property itself from that rental income to get the actual net income on which you would be taxed.
There are apartments in McLean offering three free months with just a one year lease. That's 25%. Rents are falling.
Will look into tax issues.
And Cara, that link a few posts back is very interesting.
Do you guys think rents falling are a sign that people have decided not to rent when they could buy at current prices/interest rates? Thus the landlords must come up with creative ways to compete?
Although everyone who lost their house (foreclosure/short sale) must be renting now, no?
and via that realty, the going rate (based on 6 listings) for a 4+ bedroom in Burke appears to be $2,200/month.
Funny, given that similar size properties are listing at half a mil to buy. Rental parity may being approached at the low end, but not for SFHs yet. Ah, the joys of paying for your own maintanence on a SFH, who wouldn't pay double for that?
FX
If the 500 is going to principal, then I tend to agree with your husband.
You can deduct losses (repairs, taxes, interest, depreciation, advertising, mileage, etc) from your ordinary income.
If you make more than 150K (AGI, I think) then you must carry these losses forward until you eventually sell the property. They will reduce any gain that you might have.
As for selling a rental at a loss vs a residence - I think this is a huge consideration.
Inexperienced LL's can suffer huge losses if you get the wrong tenant or fail to evict immediatley or fail to get adequate verifications and deposits.
You sound intelligent enough to avoid these mistakes. Turnover is the most costly. You want tenants that will stay a few years and there are lots of "predictors" in those rental apps.
As to your questions about rents dropping; it's hard to guess. I didn't see it in the 90's. You could research your commumity and neighboring ones to get an idea on rental vacancies and DOM. Get your agent to email you avail and rented for similar TH's in your zip.
I've not had any pressure to lower anything, nor do I have any vacancies. I'll be putting a Loudoun TH up for rent the end of April (spring is always a good time). Avoid the winter months if at all possible. If I have a lease start in winter, I'll usually require a 15 or 18 mos term.
Hope some of this is helpful.
t,
it's more people like movingtoFFX trying to become landlords to bide their time until prices recover, combined with investors buying up cheap houses and renting them out. So, mostly supply side. Although I must say, my complex is definitely having at least two apartments moving out each weekend to new digs, so there is some demand side slacking as well.
(most people who've already been foreclosed on move in with family or never lived in the place to begin with)
"As to your questions about rents dropping; it's hard to guess. I didn't see it in the 90's."
I think these times differ from the 1990s in some important ways....
Cara,
I wasn't able to use that site at all! But based on the rest of the posts, clearly Burke SFHs aren't in my price range yet (not that I expected they were). It would be nice though. I'm curious how my commuting options would vary from what they are now. I know FFX slugs, but it's not quite like learning a new bus route.
WOW @ contrarian. Force the rest of us to pay higher taxes to bail out banks because you think its your prerogative to not pay and make off with a "get out of jail free" pass. Pathetic.
T,
He's not saying he's doing it. He's recommending it to someone else. Therefore, he's (implicity) acknowledging his own higher tax bill as a result.
It's a rational act. Morality gets tricky, but it's probably the lowest cost for them, and therefore rational. If the end consumer acting rationally causes banks to have major problems with liquidity and solvency, that's hardly the consumer's fault. The question of the bailouts is totally separate.
I don't think I'd walk away, but I can't say I wouldn't. Short sale seems the best option to me, because it includes full disclosure on all parts.
Anon412,
I didn't see it in the early '80's either. That is, arguably, our present situation.
BLS keeps an index. Sorry that I don't have a link. I used to have some leases tied to regional rental increases and had to call Downtown (back in the day! I'm sure it's all online now).
HeadingToFFX,
I am very sorry to hear about your situation.
One other tax angle is that you can deduct the loss on the sale of a rental property but not on the sale of a personal residence. So if you rented the TH for enough time for the IRS to agree it really was converted to rental property (I think in the past this was at least 6 months but you should check this), then you could deduct this loss. This is separate from the monthly losses if the rental income does not cover your full expenses including depreciation. Also, you would have to recapture the depreciation under some circumstances. Certainly if your loss is $150K+, it's something you should seriously discuss with your tax expert.
If I were in your position (and I was in a somewhat similar position years ago) I would run all the numbers associated with each option. Then, given that your husband doesn't want to take this loss right now, I think I would weigh in the possibility that if you simply stayed put for a little while (let your relatives stay at a hotel or with another relative - you are under considerable financial stress and they should be understanding that you can't go out and buy a bigger house for them right now), your husband might become less satisfied with the TH and more accepting of the loss. Without seeing all the numbers and without living your life, and as someone who had tenants who lied to us and did over $10K worth of damage to our house (though they did pay on time - and what a disaster it would have been if they didn't), my inclination right now would be just to stay in the TH for awhile. Being a landlord/lady is as risky as being a homeowner in many ways.
The ONLY scenario I can see in which it would make financial sense to sell now + take a huge, non-deductible personal loss right now + rent another place would be if you had very strong reasons to believe that future declines in the TH's value would more than offset the cost of renting another place.
T: "Do you guys think rents falling are a sign that people have decided not to rent when they could buy at current prices/interest rates?"
No, I think tough economic times have motivated people to double up. More heads under one roof. It's the best method of increasing monthly cash flow in a pinch. Thus more empty units and a drive down of prices.
Heading to FFX, for background, you should know Contrarian is a wave theorist. His view is brought to us by the same people that thought Y2K would cause the world to catch fire, and that our upcoming downturn will be worse than the bubonic plague.
http://www.gold-eagle.com/editorials_99/mbutler120299a.html
Not saying hes wrong mind you. Its just you should know what shapes the outlook of those that are giving you advice.
Regarding rents - I happen to have a client who manages approx 1,000 units in NOVA. Heres there rent rolls Jan - Dec 2008. Just dont tell anyone you got this from me!!!
Arlington
Detatched/Attached +1.4%
Low Rise +4.0%
Hi Rise -4.9%
Total Market +0.7%
Alexandria
Detatched/Attached -0.4%
Low Rise +5.1%
Hi Rise -0.6%
Total Market +0.5%
Fairfax
Detatched/Attached +2.2%
Low Rise +1.3%
Hi Rise -3.3%
Total Market +0.9%
This is not definitive of what the whole market is doing of course, but its probably not far off. The biggest weakness everywhere is in the Hi-Rise sector, and this is likely thanks to the condo bust.
Regarding tightness, Arlington SFH & Lowrise are really tightening up, but hirise is still weak. Same with Alexandria.
Fairfax remains significantly softer than the other two (in all sectors), but not awful. Arlingon & Alex rents likely will start rising soon, but I dont see any upcoming rise for FFX.
Also, FWIW, we dont have anything outside Ffx county, but rumor is its awful.
Contrarian - yes I have been converted. However, I completely disagree with your reading of the scriptures.
As I explained to John Fountain, we are now starting the 3rd gamma wave, ushering in a 65 million year of immense prosperity, largely free of human/dinosaur suffering that we saw in the wave that just ended.
I also explained very clearly, that the best investments are tadpoles, cold fusion technology and housing in Arlington, Alexandria, DC and parts of Fairfax.
So its just like you said, the wave is correct, its just you Prechter & Dent are reading it wrong, just like Prechter did when he said the depression would start in 1991 and Dent did when dow would hit 40,000 2 months ago.
I think my reading is far superior to theirs. And to prove I am right, look at what I just found:
http://news.yahoo.com/s/afp/20090324/sc_afp/usscienceenergynuclear_20090324165017
xpovos
really? Is it a browser issue? Both IE and Safari seem to handle it fine, haven't tried firefox yet though...
Thank you for your responses to HeadingtoFFX. I am the husband. As she said if we sell now, we have to find 70K to pay off the debt. And the total loss will be like ~150K.
RENTING: Right now, I am paying $1600 towards interest and escrow, $400 towards principal. so if I rent for $1500, actual loss is $100, total loss is $500. So it will take more than 10 yrs to lose 70K, which won't be the case due to inflation. If tax deduction due to property depreciation is calculated over the purchase price, then most of the rental income is offset and hence safe from tax.
SHORT SALE: Bank won't accept it under current conditions since we are not under financial hardship, unless I put myself under one by buying another house.
ARM: One reason I might consider getting rid of the TH (I mean the loan) is that, the loan will become ARM in 6 years. I am unable to re-fi now for obvious reasons. With so much money being pumped into the markets by the FED, it is hard to see where the interest rates will be in 6 years.
Additional comments will be appreciated.
Even if leave aside the moral issue of walking away, Contrarian's advice to HeadingtoFFX leaves out the consequences to them--a permanent blot on their credit history and significant difficulties in buying another home.
t,
I hate to bring this up in a public forum, but you need to check out the rental listings from the site I just posted. There are an unusual number of homes for rent in your complex. This poses a few problems, (1) the potential for even more competition if these are unintential landlords who may become REOs (2) the rent price of 1500ish does not make your list price attractive, (3) If these are real landlords then that means the HOA is full of them, and as someone who grew up in a TH community that got taken over by landlords this can be a very bad thing for the HOA dynamics. Only the second one will be immediately obvious to most buyers. You can use the waPo or nytimes buy vs rent calculators to get the break even price from renting(given that tenants don't pay for maintanence this is fair).
Also, if you do put up more photos of your garden, you'll need to also change the price of the listing such that it will trigger an email alert.
Continued best wishes for your sale. It will make a great home for a family that needs space, values public transit and good schools, and doesn't need or want the hassles and expenses of a poorly maintained home.
StuckinLoudoun,
I think you are a little confused on the tax deductions for rental property. It appears that you will have a loss of $100 AND depreciation AND misc repairs and expences.
Depreciation is calculated over 27.5 yrs based on purchase price (plus items that increased your basis - such as new deck, finished basement, landscaping, etc) LESS the Land value.
So, there is a "paper" loss of depreciation that you take in addition to out of pocket loss. Certain items in the house (appliances, for instance, can be depreciated on an accelerated (shorter time-frame). There are IRS schedules that you can refer too.
A big question is whether you can take these losses annually or must carry them forward. It's based on your income. If you make more than 150K, you must pile up your losses unused until you sell the property.
There is always the added "back-pocket" advantage of selling an investment property at a loss vs selling a residence at a loss. The rental property loss (should you have one when you sell) is tax deductible. How much you can deduct in one year depends on what capital gains you have that year plus 3K. Anything you can't take is carried forward to future years.
tedk
Permanent? As in ,"this will go down on your permanent record" ?
Nah, just 5-7 years. Which may seem like forever, but it really isn't.
stuckinLoudoun
If it weren't for the ARM Va_investors plan of becoming a landlord for the long haul wouldn't make you a lot of money compared to other investments perhaps, but it would be a workable plan. (factoring in the probability of 100/month yearly decreases in rent for the next 3-4 years and 10/12 month occupancy)
Given the ARM, ACE's advice is particularly important, finding out from a tax advisor what would need to happen in order for you to be able to deduct the capital loss upon sale from your income (over what time-frame and how much).
What do we think will happen to interest rates you ask? I think they'll go up to somewhere between 8 and 10% within 6 years. What will that do to prices? Well that depends on your assumptions on income inflation. I've been trying to argue that home prices will once again appreciate with incomes once the bottom has been reached, while others seem to be picturing price inflation with wage stagnation and therefore predicting even deeper price decreases.
Cara,
What money to invest elsewhere? He has to bring $$$ to the table.
A good LL won't have a 2 month vacancy every year. And, I've yet to see stats on falling rents.
If he's going to sell, clearly conversion to a rental prior to sale (I'd do a year, just to be safe) is the way to go.
As far as the ARM, what is the lifetime cap?
Thank you all for the advice, and I'm looking forward to hearing more. Hubby, I'm glad you jumped in.
VA_investor,
I forgot the lifetime cap on ARM, I have to check the documentation which is not with me right now. My currently fixed rate is 5.25%, so it will be a significant jump when it becomes ARM.
Stuck,
Do you have a "conversion option"? If so, is it streamlined or does it require an apparaisal?
Worth checking. Even if you don't have one, perhaps your Lender would be willing to "lock" you due to your excellent payment record.
VA_investor,
:) Again I have to check. I did email them a few months back regarding a re-fi or restructuring. I didn't hear back yet. They say you have to skip a few mortgage payments to hear from them.
Cara,
It is true that the credit bureaus may keep the loan default only for 5--7 years, but a lender has other ways of checking older records. They may also ask an explicit question in their application form. If a person lies, that will lead to other consequences. It is not as easy to walk away as some people make it out to be.
StuckInLoudoun,
On the refinancing issue, are there ways in which you can refinance (go with fixed 30year) only the amount of the loan that is equal to the currently assessed value of home? I do not know about it, but you may want to investigate it with a lender. That way, you will have the current 'bad' loan for only the amount underwater, and it may give you peace of mind against ARM resets.
Stuck,
I wouldn't miss any payments if it were me.
fwiw - you have to judge whatever I say with a grain of salt. I've been a realestate investor for over 25 yrs. I tend to be more of a risk taker than most and found myself out on some limbs in the early days.
You should also know that my last "new money" RE purchase was 2/02 (my residence at a foreclosure on the Courthouse steps) until 12/08 when I started buying rentals again. So, I'm not a fool, either.
I had a 1yr arm in the early 90's (without a conversion option). After a few calls and getting to the right person, they locked it for 30yrs (slightly higher rate) for $500 - no application, no appraisal, etc.
VA_investor,
I will give it a try. I guess the response solely depends on the goodwill of the person on the other end.
@StuckInLoudoun and FFX
I would seriously look at the walk away option. Please hear me out here.
When you bought the house you made a contract with the bank. The contract was that the bank would give you xxx amount in order to allow you to pay the seller xxx amount to purchase the house. In return for that xxx amount of money, you agreed to pay yy per month.
The contract stipulates (through lots of legal language) that if you do not fulfill that part the bank gets the house. To my knowledge no where in the documents does it say that you have to pay IF you can. It basically says if you don't pay yy amount (regardless of your ability to do so) they get the house.
Walk-away and letting the bank foreclose on the house IS NOT BREAKING YOUR CONTRACT. It is merely exercising an OPTION of the contract itself.
There is no "morality" involved. You had a contract with the bank. The contract is bank gives you money, you either a) pay bank-keep house or b)don't pay bank-bank keeps house.
Where does morality enter into the equation?
If you feel it is in your best interest to let the bank foreclose monetarily and credit wise then do so! Again, you are exercising an option of your contract-not voiding it or breaking it.
Now what I previously said is incorrect IFF (if and only if) there is a phrase in your contract which stipulates that if you CAN pay the mortgage you MUST. I would find that hard to believe but it's possible b/c who is the bank to judge whether you can pay or not, only you can make that decision. If the banks judged correctly on who could pay we would be in this mess b/c many people who got loans wouldn't have gotten them.
As far as a short sale goes . . . of course the bank isn't going to accept a short sale b/c it is outside the stipulations of the contract. No where does the contract state that if you sell for less than the mortgage amount the bank swallow the lose.
I'd read the contract over very well, but if you don't like the walk away option I'd start playing hardball with them. Look accept a short sell or you can just have the !#$ TH and sell it yourself in foreclose. From the banks perspective you are a great asset, pay on-time, have finances, they don't give a rat's behind about you so they will do everything they can to get as much blood out of you as possible. Start letting them know they can't keep bleeding you dry or they will get the house.
As far as TedK and a "permanent blot" BS. 7-9 years . . .that's it. From what I've gathered after 2-3 years your score will come right back. You might not have a 800, but you won't have a 400.
Think of it this way, so many people have entered into foreclose that if it is made permanently difficult for them to buy again then the housing market will take that much longer to rebound-i.e. you have shrunk the future pool of buyers. You might not be able to buy in 2-3 years but you won't be locked out forever.
As for LL, people say oh well I'll just rent it out it's easy . . . BS. Anyone who says or implies that it's easy being a LL is selling something. Renters will do anything and everything. You should expect that your place will go unfilled at 10% of the time. Sure you can deduct maintenance etc. But that's like spending 10k just to get 3k back . . . you're still spending 7k more than you would have otherwise. As you have mentioned the rental income is taxable, but you would prob. be able to offset it. If you rent it out you will most likely have to remodel it several times and almost at least before you sell it-or take a hit on it being sold "as-is".
IMO renting it out at any loss is unacceptable. You might be able to play tax gains and "make it work", however if you are already planning on renting it out at a loss (and the loss could end up being more than 100 a month-you don't know until you get a tenant), then you are already behind the eightball. You are living on the edge, taking a gamble that it will work out. Maybe it works for 2 years and then something happens and you STILL have to sell at a loss.
Banking on inflation is also a fools game. I have no idea what inflation will be like no one else does either. However, when planning for investments or expense you absolutely must plan on what the current conditions are. Inflation might be 10% a year, but that doesn't mean housing will go up with that. If inflation and housing prices were linked one to one then inflation should have been running at 20-25% from 2003-2006. You need wage inflation to help you not just inflation. Inflation is a non-uniform event and everything else can go up in price before wages do (in fact wages are generally the last to rise in the inflation cycle). The CPI is NOT tied to wages, high inflation w/o wage increases result in a lower standard of living-this is what I'm personally banking on. We will get inflation, it's just not going to be in wages.
The real issue with walking away has absolutely nothing to do with morality . . . it has to do with pride. In general, people are too prideful to admit a mistake and not only admit it but take corrective action IMMEDIATELY. Look, no one likes to be wrong, everyone likes to think the investments they made are the best and the correct ones. Selling at a loss or walking away is admitting you made a mistake.
From what you've described no way in hades I'd try and hold that sucker for xx years for rent. If you rented today and could rent it out for 1800-2000 . . . I'd take a look at it. Renting it out for a loss, that just smacks of not wanting to move on and admit a mistake.
So I'd either walk away or sell for a loss. It sounds like you have sufficient for a downpayment on other house so if even if you walk away and rent for 2-3 years chances are better that you could buy.
It's a tough spot, I wouldn't want to be in it . . .
As a side note. This is exactly why this market ain't coming back. Too many people in this exact situation. If they just walked away prices would bottom very quickly and would recover. Too many people holding out in hopes of getting their money back, this provides plenty of resistance points to the housing market going higher.
"Right now, I am paying $1600 towards interest and escrow, $400 towards principal. so if I rent for $1500, actual loss is $100, total loss is $500."
Apologies if this is a dumb question - I've never owned a house and haven't jumped into full research mode yet...won't you be paying property tax on the TH if you rent it? How much does that work out to per month? or is that included in your numbers.
Wait a minute -- what's the benefit of locking the rate and holding onto the TH for more than 6 years? Then we are just waiting for a price increase that may not materialize for 15 years or more, and meanwhile paying for the upkeep of two places, the slow bleed of cash each month, and being open to the risk of higher loss due to a bad renter, etc. I'm not so keen on taking this risk for an extended period of time since we have a couple of little ones and plan to have one more (which would increase our expenses, plus reduce our income because I would stay home with the baby).
Stuck is a risk-taker -- I am not. Not when this is our everyday livelihood we're talking about, as opposed to some extra cash. I was more comfortable with the advice to rent for one year for the tax benefits. We made a mistake in buying this house -- I don't want to extend the punishment for a decade or two.
VAInvestor or others, does it really make sense in this situation to rent the TH out for an extended period of time?
I didn't see the past few responses before posting my last post. I fully agree with this:
"Renting it out for a loss, that just smacks of not wanting to move on and admit a mistake."
I still feel that it's morally incorrect to default on purpose, though. And from what I understand, banks can pursue you for the difference. That may be unlikely in cases where someone is in financial hardship, but if we have been paying just fine and then suddenly stop with no job loss, etc., why would they let us get away with it?
Jeff B,
I meant tax+insurance with escrow.
I'll chime in on the "walking-away" option too :) I missed the last week or so's worth of posts but there an anecdote posted recently about an AIG employee being spit on as they left the AIG building. I agree completely that the employee in no way deserved that treatment - they didn't create the AIG mess. The question is, who DOES warrant responsibility for the disaster?
That's my problem with our current corporate culture. The CEOs just say they were acting in the best interests of the shareholders to maximize the stock price. They have no obligation to anyone else. So it's the shareholders' fault? It would be if they had any say whatsoever in how the company was run but in reality they don't and they have very limited access to honest information about what the company is doing anyway. The corporation exists as an entity whose only goal is to make as much money as possible. It doesn't have a single moral directive. There is no one to 'spit on' in this debacle. Everyone was just doing their job.
The bank won't hesitate to screw you over on your house if it will bring them the most money. Morality won't play any part whatsoever in their decision. They knew or should have known that they were getting collateral that was worth less than the money they were giving you and they chose to do it anyway. I have trouble feeling sorry for them taking some of the loss if the alternative is to stick you with all of it while they go unpunished.
Gte,
You are completely wrong. The Note and Trust are contracts. Walking away is clearly a breach of contract. It's not criminal, but it's most certainly a civil breach.
Morals aren't an issue here. VA is a recourse state and the bank WILL be coming after their assets. So no, walking is not a good option.
A negative of $100 per month before taxes is nothing. Tenant problems are something. Being a LL requires due diligence and keeping close tabs.
It's clearly not for everyone.
FX,
People are making worst case scenario's here. It would be interesting to know their LL'g experience. Rents are not the complete wild card being tossed around here.
We had a similar situation. The key was finding the great deal on the replacement. I knew we were making big $$$ going in. This takes much time and effort. We would have preferred to sell the old house, but already had 10 rentals and knew what to expect.
If things are so tight that you can't afford a vacancy or other problem - then, weigh taking your 150K loss.
As it turned out (and we started with a much higher negative) we decided to sell that rental after 11 or 12 yrs (17yrs of ownership).
I think we are far closer to a bottom than most people think. Who knows - the big one could hit next month.
You could end up with that rental until the tenants have paid it off and then sell it to put the kids through college.
I don't know if rents will fall or if any fall would be sustained. I don't know if the value will drop further. All I know is that eventually tenants buy the house for you.
Is it the best investment? Who knows. You are starting off getting $400 per month paid toward principle.
If you find the right replacement house - not just the average % off peak, but substantially more - why would you care about some rental losses in the near term?
"If you find the right replacement house - not just the average % off peak, but substantially more - why would you care about some rental losses in the near term?"
Because 1. The "near term" seems to be at least a decade, which is most of the rest of our childrens' childhood, and the amount of extra money we would be putting into the TH each month will significantly lower what we can do with them during that entire time, and 2. there is the risk of even higher loss due to bad renters, time between renters, etc. We do not have a lot of extra money as a buffer if that happens.
headingtoffx and stuckinloudon
Okay, just to weigh in on the other elephant in the room. SFH prices.
You've already made a poor decision on when to buy a home once, don't repeat it. TH's and condos are near rental parity prices now, and soon will be at cash-flow positive, that's as low as they "can" go. (check out other things at IHB). SFHs??? Not so much, there's at least another year of price capitulation yet to happen in SFHs. You can rent as big of a place as you need for 2,300 -- 2,500 per month with ZERO downside risk of loosing another 150k. Do that while you're renting out your place for the tax advantage (if after consulting with an actual tax advice person this works out right). This way you can check out your new commutes, go ahead and move into the best school district that your kids need and get totally familiar with the nieghborhood, with no obligations other than rent.
Besides, moving isn't all bad, it's a great excuse to cull stuff (I know, I'm strange, I'm the anti-pack-rat)
Just my two cents.
FX,
Sounds like you've got your answer.
I was just giving you (biased) 2 cents!
Best of luck!
Va_Investor et al,
Hi I'm new and have been recently following this blog. I have a question about buying investment properties. Looks like you have experience. Does it make sense to buy a rental unit knowing that it is negative cash flow but going towards the principal? I have yet to find desirable properties that are fully cash positive. What would you recommend? Also you mentioned about buying foreclosures on the courthouse footsteps. How does that work, I went to one recently but I still don’t; understand it. Do you have to pay cash and deal with the people that live there? I'm looking to learn more and would appreciate any input/advice before I do something foolish for I’m sure many have travelled this path before me. Thanks in advance.
Cara, that idea sounds like a good one to me.
VA Investor, I do really appreciate all the input and info you've shared. Thank you very much!
addendum,
I'm not advocating you walk away, however if I were in your shoes and from what you've said-I'd take a hard long look at it.
Oh and I'm not for bank bailouts, walking away is a completely separate issue. If banks want to be stupid and make stupid loans (ARMS, IO, etc) to people who shouldn't get them and they exercise an option on the contract, too bad so sad for the bank, next time they should know better.
Bailing banks out just gives them incentive to make stupid loans. Not allowing people to exercise an option on a contract that will free them from massive debt so they can be debt slaves for the rest of their lives is pretty dumb IMO.
I know walking away isn't a piece of cake, credit ding, must make sure non-recourse loan, etc-there are lots of hoops and repercussions . . .but which is worse sell at loss, rent at loss, or walk away at loss (both money and credit scores)? Only the person in the situation can make that decision.
Oh and don't forgot, Japan went through a massive housing bubble from 86-90, they have yet to recover nominal prices! Not that we are Japan . . . just saying.
va . .
correct, I'm not in the situation or signed the docs, you're absolutely right if it's a recourse loan . . . walking away is a no-go.
From what I've gathered just b/c the state is a recourse state doesn't mean it's a recourse loan-maybe they all are . . I haven't investigated it.
Do non-recourse loans occur in a recourse state?
Sure losing a $100/month is "nothing", but you've done RE/LL for a long time, you're experienced at it and know what you are doing. Take someone w/ no experience at it in a bad situation . . . I don't know if banking on only a $100 monthly loss is reasonable. Tack on all the additional learning experiences of being a LL, headaches, hassles . . .
Just like anything you should do as much research as possible and then buffer in more cost estimate/overhead. You'll never have a great estimate of the actual costs unless you've done it before or until the bills come due. If it were my 1st rental place and I already knew off the bat I'm expected to rent it out at 100 less than my mortgage, I'd personally expect to take a 200-300 dollar loss per month. Double, triple or more the expected loss and then run the numbers. If I decided to rent it and my actual losses come out to less great if not no big deal b/c I've already budgeted that.
But then again, that's me I don't own, I rent, I don't have RE and I don't invest in the stock market (still needs to drop some more in value not necessarily in nominal numbers). I didn't buy in 2005 (when I could have) I just saved my money like a miser, but hey I can put 50% down on a place I would like to buy tomorrow-if I found it. I guess I'm conservative . . . maybe too much.
I'm sure I'll get burned in the next bubble whatever it may be.
gte811i,
I think your analysis of how "walking away" can be a good decision / not immoral is actually very well put. It also gets to how the system is totally screwed up. I mean, I don't see how you can judge someone for doing what is in their own best self-interest. If a number of individuals doing what is in their own best self interest leads to an outcome that is bad for the collective, than we need to re-align incentives. If we really want to prevent foreclosures we should either make the penalties for foreclosure stiffer (e.g. instead of just dinging their credit, you have to pay back at least part of the debt, even if this means wage garnishment ... I would not oppose this for high-income buyers who bought expensive houses), or make it more attractive for people to avoid foreclosure ... I guess that is what the Obama plan aims to do by letting people re-fi even if they are underwater by 5% but that doesn't do anything for those who are further underwater.
I also agree with Cara re: waiting to buy a SFH. If it's not at rental parity, it probably isn't a good buy (I go buy the crude rule that price should be roughly 150 x monthly rent).
@Anon412
Thanks . . . I think :-).
"If a number of individuals doing what is in their own best self interest leads to an outcome that is bad for the collective, than we need to re-align incentives."
I do fundamentally disagree with this statement. I don't agree that massive foreclosures is bad.
With regards to housing what do you want? I personally believe that the objective of having the most people owning their own house most desirable. When I say own, I truly mean own, not renting from the bank (or a mortgage).
If you have a completely paid off mortgage the only thing you have to pay to be able to live in the house is property taxes . . . maybe 3-5k a year. The actual price of the home is then irrelevant (it's only relevant when comparing the relativistic values across homes).
If everyone completely owned their own place the gyrations wouldn't matter. You bought and paid 500k for a house-you own outright. Housing drops to 200k. You have a paper loss of 300k, but all housing has gone down in general also (barring population leaving like Flint). In this case it's no different than buying a car at 50k and then car prices dropping to 30k. It sucks you didn't wait, but if you could afford a 50k car (bought outright), the price drop of 20k isn't going to kill you.
When assets are leveraged, then the gyrations become much more pronounced. Up until the 20-30s home loans were 5-10 year loans. We didn't have 65% home ownership, it was around 50% (I'd get back to you on the source if you care). In fact a lot of the GD goes back to the "new" invention of credit (well most depressions in the history of this country revolve around debt and credit).
So back to foreclosures, walking away. By tightening credit, allowing people to walk away, foreclosures etc, prices will drop. If allowed to continue unabated, things will eventually get to a stabilization point-even if that means a lot of foreclosures-the debts are defaulted on. But without a massive overhang of debt real production, innovation and wealth can be built. If for example there were no 30 year mortgages and only 5-10 year mortgages, prices would naturally adjust to a clearing point. Overall prices would be much cheaper and instead of being in debt for 30 years you're only in debt 5-10 years.
The ONLY way the 30 year mortgage is made possible is through the "magic" of inflation. Without inflation the 30 year mortgage is just dumb . . . and in fact you need inflation greater than your interest rate, but you can't even have general inflation you need wage inflation-wage inflation in not a 1-to-1 correlation to general inflation, and wages can stay stagnant and inflation rampant.
People argue about a self-reinforcing cycle of deflation, absolute BS, at some point it will get to the market clearing point and the bad massive debt will be liquidated. Deflation naturally will/can go on as long as there is bad debt.
(as a side note-the natural state of affairs w/ no government intervention even in the good times is general price deflation)
What do you want want debt liquidated through inflation and more debt, thus causing people to be debt slaves for the rest of their lives, or defaults/liquidation of bad debt and prices at a level where you are not a debt slave?
While debt can be used to generate wealth (education/business, i.e. things that produce something which housing does not) . . Debt is not wealth.
@Anon,
I believe you are right when you say the entire system is messed up. I'd for one start by revoking the FDIC "insured amount" . . . it gets back to the entire fractional reserve lending, the fiat dollar, etc. . . but that's another topic for another day.
I'm most concerned with protecting property rights; property rights of the creditors (banks) and debtors. With walk-aways the house is the collateral, so the bank is protected in that aspect and the money they lent out has been created through the magic of fractional reserve lending so most of it really wasn't there to begin with-created from ether goes back to ether.
Credit card debts . . . that I start to take issue with. . . . anywho. Yes the system is really mucked up.
Cara & Others,
You might find this article of interest regarding prospects for wage inflation.
http://online.wsj.com/article/SB121935236568761377.html?mod=rss_whats_news_us
I've read other similar articles that suggest the stronger presence of Unions in the US during the last inflationary period was the leading reason for wages keeping pace. Today, unions in the US are in a world of hurt. Some of the biggest include those in the much maligned auto industry.
Jaime,
There is a significant move afoot to expand unionization via "open" ballots, etc. I believe that this is distructive to American business. It's insane that auto workers have a package that results in an hourly wage in excess of $70.
gte,
I can't disagree more with your idea that people should pay cash for houses or put 50% down with 5-10 yr am schedules.
I wouldn't throw 80 yrs of history out the window over a 5 or 6 yr time frame of crazy lending.
The fact is that the vast majority of individual net worth derives from Home Equity. Your suggestions would vastly reduce the ownership rate and the percentage of retirees that own their home free and clear. I think you fail to account for the poverty and societal burden that would ensure when the elderly must keep paying rent in perpetuity.
You also fail to account, anywhere, for the increasing cost of rent due to inflation. Locking-in one's housing cost and allowing inflation to actually reduce the real cost as each year passes is a very real future cost savings. Frankly, I see incentivizing (sp?) home ownership as a very good thing. It's akin to forced savings.
I've had alot of experience with mortgage loans in Virginia. They are all recourse. In addition, many in this area require security clearances which will be impacted by your suggestion to "walk away"; ignoring the severe credit hit which will affect many aspects of financial life including insurance rates and borrowing costs in any form.
I certainly question the doubling or tripling of expected rental losses. In addition, we still don't know if FX can take depreciation losses.
Anyone, by now, knows my position.
On another note, Forbes recently came out with a very upbeat article concerning employment gains going forward in this region (second best job market in the Country going forward).
Apologize for the mispelling/grammer. I just woke up (3AM -ugh) and am still groggy.
Star1,
If you ask again tomorrow, I'd be happy to share what I think vis-a-vis buying a rental in the current environment.
toFFX and stuck,
On the buying versus renting a SFH, you'll need to run those scenarios through your tax benefits calculation as well, in the sense that it's possible that the law is stupidly written such that you must buy a new home in order for your rental to qualify as a rental. I'm reasonable sure that's not the case based on how many stories I've heard of people owning a home, renting it out and renting themselves someplace cheaper, but I haven't looked it up.
If you find out that you must buy another, then... you need to wait it out in this TH a while longer until the SFH's have also bottomed before starting the rental plan to offset your losses with lower taxes.
Hopefully this is not the case. But renting a SFH in the nieghborhood you think you want to buy in is a great way to make sure you'll be happy and confident in your new purchase and avoid the butterflies you had over that place in Chantilly.
Cara: "You can rent as big of a place as you need for 2,300 -- 2,500 per month with ZERO downside risk of loosing another 150k. Do that while you're renting out your place for the tax advantage...."
Best advice I've heard so far!
The fact is that the vast majority of individual net worth derives from Home Equity.
Imagine what it would be like if we didn't have 30-year loans. Then most of our worth wouldn't be tied up in home equity, but could be tied up gold, or savings accounts, or investments that make the world a better place.
Be careful of the tax consequences on the conversion of residence to a rental property:
http://tinyurl.com/dc7t9g
Novawatcher,
Again, like others, you fail to account for the fact that rent has to be paid. I don't see where all this extra money for investment is coming from.
Of course, people shoud fully fund all available retirement vehicles AND save additional monies for retirement, but when renting and owning are a wash...
We are getting close to parity in owning and renting cost.
I forgot who raised this (Cara?), but there is no need to purchase another home to convert the existing to rental.
Also, Novawatcher you do realize that FX would have to bring substantial cash to the table (70K) to sell the TH right now.
zerodown, holy moley:
"Caution: When a personal residence is converted to business use (or for use in the production of income), its starting point for basis for depreciation is the lower of (1) the adjusted basis on the date of conversion, or (2) the property’s fair market value (FMV) at the time of conversion (Regs. Sec. 1.168(i)-4(b)).
Example 1: J purchased a home in Boston in 2004 for $250,000, of which $50,000 represented the cost of the land. J lived in the home until 2008, when he moved to New York. Rather than sell the house, he converted it to a rental property. The property’s FMV, excluding the land, on its conversion to rental property was $185,000. J’s basis for depreciation is $185,000, the FMV at the time of conversion, since it was less than the adjusted basis. (Adjusted basis is generally the cost of the property plus amounts paid for capital improvements, less any depreciation and casualty losses claimed for tax purposes.)
Property converted from residential to rental use must be depreciated using the method and recovery period in effect in the year of conversion (Regs. Sec. 1.168(i)-4(b)). The method that applied in the year the property was originally acquired is irrelevant. Thus, a home that is converted from personal to rental use during 2008 is depreciated over 27.5 years (39 years if the rental is not residential) under the modified accelerated cost recovery system (Sec. 168(c)).
"
so... that 150k loss? it's not going to be tax deductible, because it's already happened before the conversion to a rental.
There goes that aspect of the plan. Which means you're back to your original assumptions on how long is it going to take before you can "recover" your investment by price increases. Run the numbers.
Va_Investor: I'm not talking about renting, I'm talking about owning. More specifically, if loans were only 5-10 years, prices would be much, much, cheaper, and the money saved on housing could be put to better use.
Cara,
Excellent catch. My mistake. And I've long held that misinformation. It would be important to get an appraisal (a high one!!) in case of audit.
va_investor
Zerodown found it really. But there's no reason you would have unlearned that misinformation since you've always been buying near rental parity (hence near the bottom). So, why would you have known if it's never been relevant?
"NoVAwatcher said...
Va_Investor: I'm not talking about renting, I'm talking about owning. More specifically, if loans were only 5-10 years, prices would be much, much, cheaper, and the money saved on housing could be put to better use."
Actually, we had that in the timeperiod before the great depression when the typical mortgage included a land installment sales contract with a 5 year term and a balloon payment on the end.
If you look at this chart from Shiller, it looks like houses were no cheaper then (on an inflation adjusted basis) than they are now.
http://mysite.verizon.net/vzeqrguz/housingbubble/united_states_1890-2008.png
Really, it looks like the big difference was not prices but homeownership rates which were much much lower then.
If loans are short term, they become I/Os and usually floating rate I/Os and you get a new one at the end of the term. You need to have very excellent credit because the bank must ensure that you'll still have good credit at the end of the term (to roll the loan). Figure anyone with a FICO below 800 wouldn't be able to get a mortgage. Renting would be much more common then.
Next time you watch It's a wonderful life listen to what they're talking about, moving people from Potterville rentals into homes they owned (via Bailey building and loan mortgages). You'd go back to an era where bankers/lawyers/doctors and successful businessmen owned and everyone else rented.
"Adam said...
You'd go back to an era where bankers/lawyers/doctors and successful businessmen owned and everyone else rented."
Agreed Adam. There is this notion which is common among the blogosphere that a "world without debt" would be just like it is now, only improved - yet that is not the case.
The world without debt existed for us for thousands of years, and gave us feudal systems with indentured servitude (usury was prohibited). The result was to concentrate the wealth in the hands of the few at the expense of the many.
Even now, we see the vesgiges of the "no debt" world. Islamic banking only allows it reluctantly, and then under the convoluted systems like Murhaba. http://en.wikipedia.org/wiki/Murabaha
Sub-Saharan Africa has had no access to capital for centuries, and only now with programs like Microcredit, do you see their Gini indexes start to rise:
http://en.wikipedia.org/wiki/Micro_finance
So yes there are problems with it. People get overextended, bubbles develop, the poor are exploited, fair criticisms all. However, its no surprise that the countries that have access to capital for the longest time have the highest standards of living.
The WAPO map is way too general.
These numbers vary greatly within those areas. As always folks; location, location, location.
Of course, there has been a general correction that most saw coming - but the huge drops are another story. There are certain neighborhoods that got creamed that shouldn't have. That is where I would be buying.
Cara,et al,
I'm glad that you have given your conditional blessing to CRT and his investors. Pardon me if I am not comprehending your post. Is there something wrong with making a profit on real estate?
Do most people work for no compensation? Should re investors and landlords be doing charity work? People have career's and some of those are real estate. Cara, I'm sure you don't work for free.
As far as the attitude that abounds here about foreclosures; I am quite perplexed. Stupid is as stupid does. I bought my house on the Courthouse steps. I've had rentals since I was 23 or 24.
There are many professions and/or investments. People who think reo's and re are bad investments and are on this blog daily are truly an enigma.
va_investor
Um, what?????
What possible offensive message did you get from my comment? My comment was that I'm all in favor of someone taking the risks involved and reaping the rewards. My only condition on that was that they're not (a) engaging in fraud, there was a lot of that going on in the free money days (b) that they don't make their tenants or future buyers sick from shoddy repairs or ineffective mold abatement (c) that they don't somehow manage to grab such a huge percentage of the market that they're able to manipulate it into inflating another calamitous bubble.
It seems to me as if all I'm asking for is responsible, sustainable and ethical business practices. What the heck offended you about that??
I felt it necessary to praise this action because it might otherwise be conceived like you fear as bottom-feeding, so I was pointing out the societal good it does. But I literally can't recall a single instance on this blog where we've objected to people buying properties up at the bottom for investments. I can recall you taking things that way before, but I think you're reading in too much.
Yes, there is a general objection to speculators who were taking the heads I win tails the bank losses approach, and banks that were taking the any business is good business as long as I don't hold the loan approach. These would constitute unethical "business plans". CRT's client represents a breath of fresh air.
There's a big difference between unsustainable business practices like selling credit-default-swaps when you couldn't possible pay them off if they came do, and solid conservative business practices that will pay in the end.
Or is your gripe that you're here presenting the example of a money-making landlord/investor and no one seems to want to follow in your footsteps?? I don't get it.
Cara said:
"I'm all in favor...'my' only condition is..."
Just seems a little pretentious (sp?) to me. Your comments regarding CRT's clients tend to reflect a common perception among many "lay" people that investor's and LL's are out to profit at the expense of others (mold, shoddy repairs, etc).
This is hardly the general rule. I don't know any LL's that would jeopardize the health of their tenant or any investor that would defraud a purchaser. I certainly acknowledge that there are dishonest people in all walks of life. The last time that I recall "investor" being a dirty word was in the early 90's.
Perhaps I am overly sensitive to your comments and mistake your words. Whether someone buys an reo or not has nothing to do with societal "good" and should not have to be approved by anyone.
I meant for my earlier comment to be on the thread where the initial remarks were made.
There are indeed good and "bad" people in all walks of life. I've had mostly very good landlords, some of whom I both admire and miss very much. (Man what I wouldn't give to have the Pitas Construction Company build my house some day). But I've also had two really stupid ones. One that couldn't comprehend that if the heater only functioned if you kept the heat set above 78 in Boston MA in the winter that it meant you needed to fix or replace it, not have your tenants run up a $500/month utility bill (this was not a heat pump, where that makes some sense). They risked major damage to their property through frozen pipes, because the heat would just shut off in the middle of the night if you didn't keep it at broiling. Another who built two new apartments one in the basement and one in the attic, without permits, and shutting the gas on and off without telling us while we lived there (and our stove was not the kind that relights automatically). All of this so that he could overcharge (by a factor of 2!) other Puerto Ricans who spoke less English than him. If this joker is buying up properties now, I guarantee he will not pay to have the renovations done right before he tries to sell them off to the greater fool. And if he hasn't killed himself with such stupid moves as playing with gas lines, or impoverished himself speculating during the run-up (probable) than he's buying now.
So, what I'm saying is, I hope (and think) that CRT's clients are more like the Pitas. Given their huge investment, one would tend to assume they must be or they would already have gone under or gotten indicted.
But you're right, I do have a bias towards business that perform a societal good, or at least provide a service that people need. I happen to think it's a good way to insure that the business will make money and get customer loyalty. But that could be post-facto justification.
As for "investor" being used as a derogatory term. I prefer to reserve "speculator" for the derision. And investor for those making smart business decisions at any stage in this cycle including those helping the market to find a support level. So, when I use "investor" I specifically don't mean it in any negative connotation. However, I can see why you read that into it, because that's my personal distinction not one that's being widely used in the media. It's more of a irvine housing blog thing. There we've been talking about the investors as providing the floor for the market all along. And I forget that it has been much less widely discussed in this forum.
In any case, I'm sorry. I did way overreact to your last comment and ended it with a unwarranted ad homenim (sp) attack. Please accept my apology. I should not comment late at night.
Cara
Cara,
I, too, apologize to you. I'm am just so used to be attacked on other forums that I tend to take anything said in the worst possible light.
As you can see, on the most recent thread, Tom and LeRoy are already coming out with outright lies about my prior statements on Bubblemeter. These are propbably the same people who do this on Craig's List HoFo. They can never provide a link - because there aren't any.
I wish you (and anyone else) only the best in your housing search. I notice that you and many others here never "cheer lead" bad news and I find this very refreshing.
I was at a Title Co. this afternoon. They are getting contracts like crazy. Said something about a record number.
I overheard one buyer talking about her 8K tax credit.
Agents are complaining about inventory.
We'll have to see if the new foreclosures come on in large numbers. I heard it will be June before we see the bulk of them.
Cara,
The wapo article was interesting, but certainly nothing new to me. The surprising thing was that the couple featured waited so long in life (60's?) to become LL's. I've been a LL since my early 20's. It's always been the basis of our retirement planning.
I'm not going out of my target areas. I have several places in three different geographical areas, all of which I know quite well. I've spent over 25yrs investing in RE and there are plenty of reasons that I buy what I buy.
Imagine the amount of time it would take to learn the specifics of a bunch of different markets. As you know from your own process, it takes a great deal of time to learn the "market" and the neighborhoods, and the values, etc.
As an investor, it's very important that I know an area inside/out so that I can move immediately when the right deal comes along. Having rentals within a 10 or 15 minute drive of my home (or second homes) is just plain practical.
I don't know that the lower tier is going any lower even if we do see more reo's come on the market. Some of the lowest prices have come and gone.
Jeez - I keep forgeting to go back to the current thread!!!!!
My experience, in general, is that most money that comes in goes out. Rquiring 20% down has long term societal ramifications. For the vast majority, home equity is their largest asset at retirement. Making it difficult - impossible, in some cases - to purchase because of the inability to save 20% plus reserves will potentially create a class of retiree's that are practically destitute.
While your short-term goal of lowering housing prices may be accomplished; but at what cost?
Mortgage payments are akin to forced savings. If rental parity for first time purchasers and/or lower than median income purchaser is available (which it is in many locales), I see no reason to slam the door shut.
After-all, it will be the prudent among us that will paying for seniors who end up in a position where rent has become unaffordable and retirement funds are meager.
What exactly is the risk to new FHA (and VA loans). Prices have adjusted. It makes sense that risk has also adjusted. Premiums on mortgage insurance and interest rates are fully in place.
I have no problem with an increased renter society provided more money is saved for retirement, but in the real world this is not the case.
By the time this years 40 yr old retires, rents will far exceed today's mortgage payment. There will be no reduction in living expenses in retirement because there will be no paid-off house.
Look at those being foreclosed upon. They could not afford the payments to begin with and, due to a number of reasons, wildly overpaid and bought over their means.
For the most part, FHA loans WERE NOT being utilized - check the stats. Liar loans and no income/no-asset and teaser rates are the culprets. Not FHA.
Utilization of FHA has increased due to the lack of this financing and these FHA loans require proof of income and other standard underwriting practices.
S@#%,
I did it again. A long thoughtful post that I am loathe to re-write.
S@#%,
I did it again. A long thoughtful post that I am loathe to re-write.
Au Contraire (ian),
"Personal attacks"? RUNUTS?
Cara,
Obviously, month to month gives you the greatest flexibility. I can see where the LL is coming from; trying to find a tenant after september is bad, winter is horrible, spring/summer is best.
I'd ask about the nine. It's not that easy to find an acceptable sub-lessee. You will definitely be on the hook for lost rents AND rental fees, etc., if you break your lease. Not many landlords are going to care about containing your loss.
I'd, personnally, go month-to-month. In the scheme of things, the extra cost is insignificant. If you feel you will need a couple months to fix-up the place and ease your move, then go 6 months. It's nice to have overlap (not from a $$ standpoint, but a stress standpoint).
I've never done this raising the rent tactic and have always let people go month to month at no extra charge.
This info is valuable to me and I intend to do the same thing.
va_investor,
Two cautions
1) One of the most appealing and mind-easing things about signing on with the Pita's in Attleboro was that the lease was explicitly 1 year + no-cost month-to-month thereafter. This gave both the security that your landlord is not out to get you and the ease of movement at the end. But the Pita's were also builders so had a vested interest in you buying a home. (Their TH rentals were a fantastic advertisement for their building quality).
2) A more typical increase for month to month is 50-100, not 300-400 dollars. A 300-400 increase puts you in the realm of "evil" landlords which in this day and age of the internet would be a good reason to stay anonymous here.
Which reminds me, btw, my landlord is Legend Management Group.
Thanks GT,
There's also an REO on that same street, but with potentially serious problems if one can judge by the foliage growing out of the roof.
The one you noted has no basement under the right hand side, just those 3 split levels.
These are the competition that may help bring the THs down in price. But $359k is probably close to what that one will go for, no lower than $320k if it really is in good shape.
I hope other people do "trade-up" to a small SFH rather than the THs, because at our current stage in life we really don't want the yard-work and stuff, and would just like our TH to be cheaper. But a nice small SFH is tempting if it entered our comfort-zone price range.
It was really foolish of them to list at 359 rather than 350 where they'd be in more people's searches.
I just think that it's a recession. Just like we have seen before. Perhaps it's a generational thing. When I got out of college in 1980 it was hard to find a job. Then interest rates on mortgages went to 18%.
Been there, done that. Our lives are not defined by 5 yr time spans. I doubt many here remember "black monday" in the late 80's. This is nothing new.
Does anyone here remember the odd/even days to purchase gasoline in the 70's?
p.s. my Dad never put more than 1/4 cup of milk in his cereal - ever. Depression stuff.
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