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!

20 comments:

Adrian Smith said...

My parents bought a house in the area for $90k-something about 23 years ago. In the late '90s identical lots went for about $110k up the street. At the peak, a house near them sold for $680k (which appears to have been foreclosed on twice since then). Currently similar houses are going for $160k or so. I'll wait until they are back in the $90k range before I buy. Or the $40k range if that ever comes to pass, which I think is possible. Not likely, but possible.

Nice blog by the way, been keeping up for a few weeks since recently stumbling upon it. I worked in the housing industry for 9 years before lovingly getting laid off last summer. Glad I saw the madness years ago and continued to rent.

Kane said...

Perhaps not even so much the percentage or dollar amount, but how much one had invested in the house on the onset makes one more or less likely to default. Folks who had a bigger down payment are more likely to want to keep the house because of their initial investment, even if they're somewhat underwater now.

OTOH, folks who went in with little to no down look at the situation as "I don't have that much to lose except my monthly payments." These see their mortgage as a tax deductible rental payment instead ... and have little to care if they just walk away.

As for what's my breaking poit ... I dunno. My thoughts are more on the 5-digit check that was signed over yesterday to open escrow. If all goes well, I'll be a homeowner at the end of July.

Chad said...

I bought in Feb for $289,000. In the last 3 months, similar comps in my area have ranged from $270,000 to $300,000. The $300,000 was on 4/30.

Other sales in the neighborhood have ranged from $250,000 to $385,000.

I came into this expecting a 10-20% drop. Knowing that the market was going to continue going way down, we moved in my inlaws because we didn't want to keep renting. After two years, we were ready to be out even it meant we wouldn't time it to be at the exact bottom of the market. We plan on staying here 5-10 years but will keep it as a rental when we move so I'm not too concerned about it over the the long term. We could rent it out now and still have a positive cash flow if we needed to.

Jack said...

i love the picture... that is a very lovely restaurant in the maldives on rangali island... my wife and i actually sat in those chairs...

we also bought a house, we love it even if it is worth 10-20% less... not sure we're at 30% less but i can say the ~8 months that we have been living here has been priceless...

tim said...

When I DO find the house that I want, I'm going to buy it. The value of the house I buy can drop 'till the cows come home (this is funny because I really want to buy in Corona or Norco)... it doesn't matter to me because I'm buying to stay.

OSA said...

Just so everyone feels a bit better. I bought a house at the top of the market. Paid 450K. Housed own the street sold for 150K. That is a 66% drop. I had a 20% dp and I am still underwater by almost 200K.

Sara said...

Osa,
I feel for you. You played by the rules and put down a hefty down payment. And what do you get in return.
I blame those who are responsible for creating the bubble in the first place.
I hope that at least you like your house and that it's in your ideal location.
If it were me, I'd probably walk away.
Regarding how much underwater I could live with, probably around 30k on a 300k house. I'm planning to stay for a very long time, but it would hurt greatly to lose more than 30k. Toward the end of the year, I'll start looking seriously. I think we'll know a lot by then--shadow inventory, numbers from the spring/summer season, etc.

Tyrone said...

This is what we've been saying. People just don't get it.

Wait for the double-digit mortgage rates and the effect that has on prices on top of the high inventory. And if the rates don't get to double digits... god help the currency.

Rt.66 said...

You've made the big time!!! There is a link to this thread on Patrick.net. Did your traffic figures jump?

Great and timely topic.
At this stage of the game I'd say $50k under water would be my limit. You know prices are still going to fall for a few years so if you are already down that much then its time to cut the loss and hand the loss to Bank of America or whatever. Be sure and photocopy a picture of your middle finger to wrap the jingle keys in :)

I bet most people would be shocked if they knew just how many of their nieghbors up and down streets in CA have stopped paying the mortgage. Not exactly a favorite topic of conversation for the get-rich with my house, bubble crowd.

Take a look at RealtyTracs foreclosure map and prepare to re-insert your eyeballs.

Justin said...

The "Sure I'm upside down, I can wait for my home value to come back up" line of thinking is an economic fallacy. Yes, eventually, if you keep paying, your balance will fall below the market value, even if it takes all 30 years to pay off the note! But that is naive financial thinking.

The real issue is the money you are losing by not taking advantage of the lower market. If you are underwater 100k, you should get a cheaper house and use that 100k for other investments.

If you can't take advantage, you might as well just keep paying. Renting would hardly help, because rents are not falling as much as home values, not even close. Investors are scooping up homes for cheap, but they are not lowering rents to match. Why should they? They are going to try to squeeze everybody who is being forced into the rental market.

TimH said...

Great comments..
Its interesting to hear folks voice their concerns about housing...as in IF owning a home should ever be part of their lives. Homes should no longer be looked at as 'investments'. Check out this NYTImes article from Dr. Shiller http://timandjulieharris.com/2009/06/08/real-estate-coaching-training/

We buy cars KNOWING they will lose money....housings should be seen as what it really is..just another consumable. By because you want/ need a place to live. Don't buy thinking you will make any money (and in fact you WILL lose money). Add in the PITI, the upkeep, buying and selling costs...very very few people actually make money on owning.

ojedalive said...

For how many more months/years do people believe Riverside and Corona prices will decline?

It would seem like these 2 cities would hit bottom before other cities due to the rampant foreclosures.

Drew Eckhardt said...

The bottom for a given property should be where rent coverage the mortgage, taxes, insurance, maintenance, and management.

With that sort of situation when you need to move for work you have the cash flow to rent the property temporarily.

TimH said...

With regards to depreciation. My wife and I are from Ohio. In Ohio there are (many) neighborhoods, cities that have lost value and will simply *never* be worth what they once were. There is an excellent chance that Riverside, San Bernardino (and many others)will be never be worth what they were at the top of the bubble. Again, I would never buy real estate again with any hopes of appreciation. Your true ROI on owning vs renting is still waaaaaay out of wack. In virtually every part of SoCal renting is cheaper vs owning...and there is NO RISK.
Not to be a link hound here but, we talk about this all the time on our blog http://www.TimandJulieHarris.com

OSA said...

i know it makes no financial sense but i have looked at all angles. i don't have rich enough friends / in-laws that can buy my house. i can't buy another house cause i don't make enough. my only option it seems is to stay or let the house go back to the bank, rent for 7 years then try again

TimH said...

7 years?
Not true....24 months post short sale and 36 months post foreclosure.

golfer_X said...

I have a buddy that bought 3 years after a foreclosure. That should be right about at the bottom of the market. Plus you can stay in your house for probably a year or more for free if you work the system right (like everyone else). List it as a short sale or buy time playing the mortgage mod game. Bank the cash that you are not paying on rent or mortgage payments.

Allison said...

We canceled a few months back after deciding we really couldn't live with being underwater at all. It was so hard to put that $$ down knowing we would lose it within 6 months.

Glad we decided to rent for now.

WunderPit said...

TimH - I think that you are right on about a home being considered more of a consumable. The bubble gave many a false sense of what a home really should be...a place 'where you call home'. All these stupid amateur flippers thinking that it would last...yea right. Some people capitalized on it, but many people bought these homes that were so easy to finance and now they are are screwed. It's a shame for what it has has done to our country, and I have no mercy on them (or the banks). I am happy to see these greedy people's credit get smashed to bits.

A home should be a place in which you are happy to settle down in. I'd like wine with my cheese, please.

Chris said...

"Working at the post office his job is probably pretty safe so he should have no worries."

USPS:RIP -- Many job cuts, office closings, and the end of Saturday Delivery are on their way....
http://blogs.moneycentral.msn.com/topstocks/archive/2009/06/15/u-s-postal-system-rip.aspx