Okay, CPAs and math whizzes, tell me this:
Am I right in thinking that projecting the value of a piece of real estate into the future is roughly akin to figuring compound interest? That is, the two calculations are similar in that they entail repeatedly adding a percentage back onto a base value, which increases periodically at that rate?
If this scheme is correct, to estimate the value of the house after 15 years you would guess at a projected annual increase (say, 3%) and then plug that rate and the current value into a compound interest calculator. This is the simplest scenario, of course: it assumes the starting value will increase. We know that the value of real estate, at least in my part of the country, will not increase and in fact is projected to fall another 6 percent in 2011. However, there’s an easy adjustment for that: simply plug a negative number into your formula for each year you expect values to tumble.
M’hijito and I have to renegotiate our mortgage, which was modified a year ago after I was laid off. To have even the vaguest idea what we’re doing, we need to have some idea what that place will be worth in 15 or 20 years. We’re pretty much resigned to the certainty that we’re going to be in the landlord business—when he’s ready to move on, we won’t be able to sell it, because we owe at least a hundred thousand more than we paid for it. So, we’ll be forced to rent it either until it regains some value or until we’ve paid off the mortgage.
Two Realtors have told us the house is worth $140,000 to $150,000. We owe $206,000.
I tried this first with an online calculator, using 3%, and then on my fingers and came up with the same figure: in 15 years at a 3% growth rate, it should be worth $211,763 to $233,695. Lovely. In the best-case scenario, that will be only $1,305 less than we paid for it. But at least it’s more than we owe on it. We won’t think about what the dollar will be worth in 15 years.
We know it’s unlikely the house’s value will go up by 3%, the typical rate of inflation, in 2011 or 2012. But it could (I suppose) start to rise after a couple of years. If you calculate a negative interest rate of, say, 6% next year and 4% the following year, then add on 3% a year, after 15 years the house’s value is $185,528 if it’s worth $140,000 now, or $190,829 if it’s worth $150,000 today. That’s $15,171 to $20,472 less than what we owe on it.
But of course, 15 years of payments at a low rate will have knocked the principal down to some degree.
Using an online amortization calculator rel=”nofollow”, I estimate we will owe $132,958 in 15 years, if we can get the credit union to come down to a 4% interest rate. In 15 years, assuming values drop 6% in 2011 and 3% in 2012, then rise at 3% a year, the house will be worth $185,528 to $190,820.
In five years, we will owe $186,322 on a house that will be worth $138,050 to $141,944.
In ten years, we will owe $162,295 on a house that will be worth $160,038 to $164,610.
This means the soonest we can get out of the loan without having to cough up tens of thousands of dollars will be in about 2021. That’s if we’re extremely lucky.
Our plan is to ask for a 30-year loan at a ridiculously low interest rate. Right now the original loan, which will come back to haunt us in February, is a 30/15 deal at something over 6%. The loan modification temporarily gave us the terms of a 40-year loan at 4%. With me unemployed, even the payments on that are too high—I’m using everything I earn at the college to cover my share, and I won’t be able to work more than about another four years. Some people are getting 2% interest on reincarnated loans, so that’s what we’re going to ask for. I think we’ll be lucky to get a 30-year loan at 4%.
Again assuming values drop 6% in 2011 and 4% in 2012 and then slowly begin to rise: In 30 years the house will be worth $289,047 to $297,306. Of course, by then he (or his renters) will have paid a great deal more than that for the privilege of holding it. I’ll be long gone by then, and presumably in 30 years what is now a 60-year-old tract house will have crumbled into the ground. With our luck, some developer will have decided to turn the whole area into a low-rent shopping mall, persuaded the city to condemn the entire tract, and bought the houses for 50 cents on the dollar.