Real Estate: Catastrophic

Lenten Thanks: Day 1

I thank God for my beautiful son, who has grown into a hard-working man with great common sense, a wide-ranging intellectual curiosity, and deep loyalty for his loved ones.

The dominant Realtor in the neighborhood just sent out her occasional newsletter. A house in the area just to the north, which is starting to look pretty blighted, sold for $58,900.

In my neighborhood, the best price was $222,000. But that was for a 2,013-square-foot house. Apply the square-foot price to my shack and you get $203,277. Not good, considering that I paid $232,000…before the bubble started to bloat.

At the time I decided to pay off the mortgage on my last house—the sale of which made it possible for me to pay for this house in cash—my financial advisers had their predictable litter of kittens. Conventional wisdom so values the tax write-off on residential mortgages that most people are convinced it’s best to be in debt up to their teeth, as long as it’s so-called “good debt.”

Well, one thing the present depression has shown us is that there is no such thing as “good debt.” Debt is debt, and it’s all bad for your financial health, unless you’re a major corporation or a government, in which case leveraged debt is a characteristic of the alternate universe in which you dwell. For the homeowner, mortgage debt is no better than credit card debt; in fact, it’s probably worse, because it’s so much more massive and because its collateral is the roof over your head.

If I owed on this house, heaven only knows how far underwater I’d be…and that wouldn’t count the $61,000 loss we’re taking on the downtown house’s mortgage. And of course, 61 grand isn’t the half of it: it’s not the difference between how much you owe and how much the house is really worth that counts; it’s the phenomenal amount of mortgage interest that’s swirling down the drain for every underwater homeowner in the country. If we end up stuck with the downtown house for 30 years, until the mortgage is paid off, we will have paid twice the amount of the loan for a house that’s worth about 64 percent its sale price.

We certainly will lose that house and all the money we’ve put into it. Unless a miracle happens very soon, we won’t have much choice other than to walk.

But at least I can say this: I’m not going to lose my own house, and it’s not costing anything in mortgage payments. Thank God I made that seemingly “foolish” decision, all those years ago.

LOL! Now, if only She had been watching out over us when we jumped off the cliff to buy the downtown house.

:-)

Be Sociable, Share!
frugalscholar March 9, 2011 at 10:54 am

I remember seeing ( in the previous incarnation of your blog) a photo of your beautiful boy! Much to be thankful for.

Quest March 9, 2011 at 3:13 pm

This whole tax write-off, mortgage deduction thing drives me crazy! Sure it’s a benefit of sorts but if I had the choice between a piddly deduction and never making another mortgage payment again, guess which I’d choose? Besides, there is talk in Da House of doing away with/restricting that deduction now anyway. Lucky you ~ no mortgage!!

Pat March 9, 2011 at 6:05 pm

The probablilty that real estate values will not inflate over the next 30 years is nil. Did you lose money on the house you owned before this one? I assume you did not or you would probably not have been able to pay $232,000 in cash for this one. It may take a while, but the market will turn. It always does. And in a few years a lot of people will probably be quite sorry they didn’t buy a house when they could.

101 Centavos March 9, 2011 at 7:06 pm

Hi FAM, good on you to be in this enviable, mortgage-free position, while your erstwhile financial “advisors” are knee-deep in kittens.

@ Pat, I admire your faith in the market’s resiliency. Presume that similar views were held by folks in Detroit and Youngstown.

funny March 9, 2011 at 10:00 pm

@ Pat: In 30 years, I will be almost 100 years old, assuming I’m still alive. More likely, my son will be saddled with a worthless piece of real estate in an inner-city slum.

My son had plans for his life. He didn’t sign on to be saddled with an expensive dog for most of the rest of his years and all the rest of my years.

You understand, my $232,000 house is paid for. Its value is irrelevant, since I intend to live here until they cart me off to the nursing home or the grave, whichever comes first.

His $235,000 house is not paid for; we copurchased it and we owe $210,000 on it. It is now worth $150,000 at most; probably much less than that. Houses in that neighborhood are selling for under a hundred grand. What is nil is the likelihood that real estate in Arizona will ever return to what we thought of as normal” five or ten years before the bubble started to inflate. At a 3% rate of gain, the value of that house will not reach what we owe on it in 15 years. Alas, though, we have a balloon payment in 12 years. We got ourselves into a 30/15 loan when we bought the house, thinking we would hold the place for five to ten years and be long gone in 15 years.

In the 12 years remaining before we have to pay up or refinance, we will still owe more than the house is worth. Whether we sell it or refinance it, we will have to bring a big chunk of dough to the table.

So…where do you think that chunk of dough is gonna come from? Out of my retirement savings, that’s where!

Middle-class jobs in Arizona pay wages that equate to working-class or working poor salaries in more civilized states. My son has a miserable dead-end job and, unless he can get back into graduate school for a vocational degree or get himself back to a state where decent work is available, he will never earn much more than he’s earning now. He lives from paycheck to paycheck — and he is a very effective frugalist. There’s no chance he can save up $60,000 or more to satisfy the lender when that balloon payment comes up.

As long as we’re saddled with those mortgage payments, he can’t quit the job to go back to school, nor can he easily get work elsewhere. Neither of us is in a position to wait 30 years and pour $235,000 of interest plus $235,000 toward the nonexistent principal into a black hole before we can get out of this mess. The situation is screwing us both, but he is the one who’s really getting the shaft. As you can imagine, neither of us is pleased. And as you can see when the facts are laid out, the only sane thing for us to do is to walk.

tmgbooks.com March 10, 2011 at 7:46 am

I do not see debt as a moral issue. I am of the opinion that we should all run our finances as if our lives were a business. Although, I understand that, as individuals, the bottom-line is not always the bottom-line

In your case, disconnect the emotions (not always easy, I know), and you have left is simply a business decision.

Banks make business decisions about people’s money every day; why can’t individuals make decisons about the corporation’s money?

Once you make the decision to stop making your mortgage payment STOP NOW! The interest meter is running. Do not lose another cent while you agonize over your decision.

I believe your son is living in the house. If that is correct, in his position I would also consider staying in the home until the Sheriff comes to evict; by doing so he will recoup some of his losses by way of rent he won’t be paying.

But he should continue to maintain the house as long as he is living there: The bank does not want it back and they will not keep it up! Another abandoned property will only add to the blight.

I would also try and work with the bank to do a short sale, then it becomes a matter of whether or not the bank is willing to take the loss now or will, for business reasons, decide to take the loss later — either way, they will take a loss.

If you stop making payments they probably will not work with you; this is nothing personal on their part, simply a business decision — see how that works? The bank has no — ZERO — interest in doing what is best for you or the community — it’s all about the Benjamins!

People first, then corporations!

Bret @ Hope to Prosper March 21, 2011 at 9:21 pm

Funny,

Phoenix is a brutal housing market right now, especially downtown.

If your son has a dead-end job, he would probably be way better off renting.

Bret

funny March 22, 2011 at 7:45 am

@ Bret–

Yes, in hind-sight it’s clear he certainly would have been. We didn’t know that when we got into this mess, though. At the time we bought the place, we thought the market was about to bottom out!

Comments on this entry are closed.

Previous post:

Next post: