Friday, June 5, 2009
How much underwater could you live with?
Most of the readers of this blog are interested in buying a home. I'm wondering how much of a drop in value can you live with? I know 3 people that have bought homes since late last year. All of them thought the market was at the bottom. Obviously it wasn't and all 3 of them now have homes worth less than they paid.
Home #1, purchased in Late Nov for $485k. Two recent sales of identical homes $424k and $440K. This buyer has already seen his DP money vanish and then some. If he had to sell he'd be looking at an additional loss of around $30k after fees. He's not selling but I know he is uneasy about his new home being worth 50K less than he paid for it 8 months ago. Plans for a pool are now on hold.
Home 2, Purchased in Jan for $235k. Recent listings/sales of similar homes are priced from $199k to $229k. His 10% DP is probably already lost. A forced sale would also leave him in a pickle. He's not worried since his payment is less than his rent was. Working at the post office his job is probably pretty safe so he should have no worries.
Home #3, They closed in Feb for $360k. Recent listings and sales for similar sized homes are in the $269k to $329k. Nothing over $320k has closed in the last 2 months. They don't seem too concerned which is scary since I know they are only planning on staying in this house for around 5 years. These folks actually think this house is going to go up in price in that time frame. I suppose it's possible, just like it's possible that earth will stop rotating next week. They seem oblivious to the fact that they are now at least $50k under water.
I plan on being in my next place 20+ years so for me being 10% or so underwater is no big deal. I can live with that. But could I live with 20% or 30%? Dunno, doesn't sound like much when you say 20 or 30%. But that's around $100k for the homes I'm looking at, factor in interest over the loan and it's closer to $300k. I know some of the houses I was very interested in early last year are now worth far less than they sold for. One home I liked sold for $525k. Recent comps sold for $420k and $415k. Kinda makes you take a step back, huh!