Coffee heat rising

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.

🙂

What Will Your House Be Worth in 15 Years?

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.

Wow! Real estate update…

The other day, as you may recall, I was ruminating about the wild range of prices for very similar houses in the tiny 1970s tract that is my immediate neighborhood. Asking prices just now range from $130,000 to $294,900. All the houses are similar in size, construction, and quality.

Well. The Mexican contractors who bought two houses just to the north of me and cherried them out with only the classiest of flair quietly put one of them on the market. La Maya spotted the selling price in the paper:

Three hundred and ten thousand dollah!

Holy mackerel! That’s what these houses were selling for at the height of the bubble!

They did do an exceptionally nice renovation. But still: no amount of style changes the fact that it’s just another aging three-bedroom tract house a block and a half away from the destruction that was once a light-rail project. Or that it is right next door to a run-down slummy shack that has been rented out for the past several years to an endless succession of down-at-the-heels men—often as many of six of them at a time. These guys use the front yard as a parking lot, so that one of them can use the garage to practice his drums. They have large barking dogs, and by way of making their neighbor Manny crazy occasionally shine lights directly into his yard.

I don’t know how the Contractors pulled that off, but whatever they did, it’s good for the neighborhood. As La Maya pointed out, it indicates that prices have held fairly steady here in spite of the crash.

And well they should have. Yesterday afternoon I spent an hour or so biking around the area, which surrounds a small park. It really is a beautiful neighborhood. Some of the houses are spectacular. Others are just very nice. Except for a few properties in my part of the ’hood and a few more in the tackier section just to the north, most houses are well maintained. The benefit of living in the low-rent section of a fancy neighborhood is you get to enjoy the swell ambience without having to pay upwards of a half-million dollars for the privilege.

I’m glad I didn’t panic and bolt to Sun City along with SDXB in the wake of the vandalism drama. And I hope I can hang onto my house in unemployment. This is a great place to live!

{gasp!} Property tax bill

The county finally got around to sending this year’s property tax bill, only a month or so late. They’re so close on the deadline that I’ll have to transfer the money out of savings instantly and ship off a check this weekend; otherwise I’ll be delinquent.

The tab: $2,058.86. Now…yes, I do realize that compared to property taxes in certain Midwestern and Eastern Seaboard states, this is as nothing. (But let’s remember: the educational system and other accouterments of a civil society are also as nothing here.) Compared to last year’s tab, it’s exactly $20 less.

That’s surprising. SDXB’s tax bill, which is rock bottom because his part of Sun City was never gerrymandered into a school district, rose by fifty bucks this year.

Everyone’s bill was jacked up, despite the large cut in property valuation occasioned by the busted real estate bubble, because our cash-strapped “no tax-and-spend” state legislators revived a defunct state property tax. So even though our valuations are in the sub-basement, where they belong, our taxes are just as high as they were at the height of the bubble.

We won’t comment on what they buy. Oh, what the heck…yes, we will: vast layoffs of state workers, grade school classes with 50 kids in them, reduced forces of emergency workers, closed museums, reduced library hours…all manifestations of a Killed Beast.

I’m grateful to get a bill that’s no higher than last year’s. Next year, it should drop considerably, because of various political promises to undo this, that, and the other device to raise funds. But by then, property values will have risen closer to normal, providing another reason to raise the tax bill.

Don’t mind paying taxes if we get some value received…but just now, that doesn’t seem to be happening. My two thousand bucks could keep a state worker on the payroll a good month (maybe more). Taken together, everyone on this block could keep her working a year or 18 months. So…let’s see that happen, boys!

What’s that light at the end of the tunnel?

Earlier this week I spoke with Audra, the loan origination officer at the credit union who helped us refinance the so-called Investment {snark!} House at a very favorable rate. Called her because I’m beginning to feel a little frantic about the drop in value in that neighborhood, and because M’Hijito, who presently occupies the place with a roommate, has expressed interest in going to graduate school in another city.

Our Realtor came up with an estimate of the house’s current price, which I will not repeat here because M’Hijito reads this blog now and again. If he knew what the guy said, he’d keel right over and we’d be sending him to Bottimer’s Funeral Home instead of graduate school. Realtor Dude thinks we could rent it for about $300 a month less than the mortgage payments, which would be OK, I think, because that amount would post as a loss on our income tax. So I expect we would survive. At any rate, these are among those factoids that grow horns at night and flutter out of the Night Closet to haunt your moments of insomnia.

Audra said their appraisers’ experience is showing that homeowners who can hang onto a property for a while should not worry about comparables based on large numbers of nearby foreclosures. That in fact is exactly the situation: the bank-owned house directly behind ours is on the market for a handful of peanuts, and a house on the corner has been in foreclosure twice since we bought our place. La Maya and La Bethulia bought a doll of a house for their nieces a block away and paid under $200,000 for it. Audra reported that when a cluster of foreclosures occurs, property valuations based on comparables start to creep back up about nine months after the last foreclosure sale closes.

She added that she’s confident centrally located real estate, especially houses located fairly close to the new light-rail line, will increase in value. She believes the house will recover its value within five years, although she agreed it’s unlikely our losses in the stock market will recover in that time frame. She thinks real estate, especially in-town real estate in reasonably healthy neighborhoods, will recover faster than we pessimists expect.

Wait, she said, about nine months before believing any Realtor’s estimate of the house’s value.

Hope she’s right! It’s true that the value of my house, which cost about the same as the Investment House, is still higher than what I paid for it. Despite the foreclosure of the house across the street, we’ve had many fewer repossessions here than in M’Hijito’s neighborhood.

Meanwhile, though, she said that the credit union did not yet have guidelines for how to deal with the economic recovery legislation, but that she would call when she finds out anything. And she advised that if either of us loses our job, we should call her immediately and the credit union will make temporary changes in the loan terms so that we can hang onto the house.

Well… Since the kid is running a bit late in his graduate school applications and so probably can’t start a credible program in the fall, nine months would just about work out: we’ll have a better grasp of where we stand, and if he wants to go to Tucson, by then maybe unemployment will have dropped enough that people can afford to come up with the security deposits and rent payments we’ll need to extract. It’s an awfully cute house in a very convenient neighborhood, and so I expect we’d do OK renting it.
***

Speaking of the foreclosure of Dave’s Used Car Lot, Marina, and Weed Arboretum, yesterday a Sears delivery truck pulled up in front of the place. What should be trundled out but a VAST, expensive-looking, stainless-steel side-by-side refrigerator.

This I take as proof positive that the new owners intend to live there and not rent the place out to another Biker Boob. BB’s absentee landlord tricked that house out with the cheapest, chintziest appliances he could get his hands on, as most of the the real estate “investors” around here do.

The former junk-heap is still vacant, but the owners are keeping it maintained—nary a weed in sight, and all the trees and ornamentals are green and happy.

Zillow is full of beans

What with the proposal that the government should force mortgage rates down to 4 percent, I mentioned to M’hijito that we should be prepared to re-refinance the Investment House, the place he and I are copurchasing partly as shelter for him and a paying roommate and partly as what we imagined would be an investment. He said he didn’t think we’d qualify, because we’re now upside-down in that house. Whence this intelligence? Zillow!

So I thought I’d better check Zillow to see what it claims the house is currently worth. Yup: the site estimates its value at $188,500, which is $46,500 less than we paid for it. But… Directly behind our house is a nearly identical cute little brick house in foreclosure. It has been partially renovated (ours has been completely renovated), but the owners dropped out of the picture before they could finish the job. Flooring is down to the concrete; bathrooms are unfinished; it needs a new roof. Zillow values that wreck at $225,000!

Our house has a new roof, new air conditioner, updated wiring and plumbing, and has been completely gutted out and rebuilt inside. Makes sense, eh?

If Zillow is figuring on a straight square-footage basis, at $188,500 our house is worth $143 a square foot. The house behind it has a 500-square-foot add-on. That should add $71,500 to its value, over the value of ours; in that case, it would be worth $260,00.

Interesting. I wondered what Zillow thinks my place is worth. Entering my address brought up an estimate of $284,500, or $52,500 more than I paid. Noticing a “recently sold” icon to the north, I clicked on it, thinking it was the rental house that Manny, the font of all neighborhood gossip, said was on the market.

But no! It was my neighbor Sally’s house, directly behind me. Zillow claimed it had sold in October for $192,500.

Say what? Sally is still very much in evidence. No “for sale” sign has ever gone up, though sometimes houses around here sell with no notice. But if the house had been sold last October, surely Sally would have moved by now.

A little further investigation showed Dave’s Used Car Lot, Marina, and Weed Arboretum (now under new management) also sold last October, for the same price.

Hmh. Well, these houses are on two parallel roads with the same name, one ending in “Lane” and one in “Way.” The street numbers are the same, so that packages and workmen meant for 501 West Erewhon Way often end up at 501 West Erewhon Lane, and vice versa. Clearly, someone got the address wrong, and Zillow picked up the error. Not enough, however, to post a picture of Dave’s house when you click on Sally’s: what comes up is a fine photo of Sally’s front elevation.

It gets better. Despite the alleged fire-sale price, Zillow values Sally’s house at $300,000, well above what any house in this neighborhood has commanded over the past two years. Her house is old and unrenovated, replete with the original harvest gold Formica counters and matching appliances. It’s clean and neat, but it needs a paint job, a new roof, a new air conditioner, and a full interior remake to bring it into the three-hundred-grand range.

Dave’s house is valued at $289,500, despite the $192,500 selling price. It is two square feet larger than mine, sits on the same-sized corner lot directly across the street from mine, has a pool about the same as mine, and landscaping comparable to mine (but lacking fruit and shade trees). It was built in the same year as mine by the same builder. It has a minuscule, dark kitchen, needs a new roof and new air conditioner, and soon will need new pool equipment. My house, in contrast, has a large, bright kitchen with a skylight (one of four in the house), sunny and open rooms, gorgeous tile floors throughout, a park-like yard with not one, not two, but three beautiful outdoor sitting and entertaining areas, a new roof, new kitchen appliances, new pool equipment, new bathroom everythings: Zillow values it at $284,000.

And this makes sense…how?

Zillow is the last place I would go to get a reasonable estimate on the value of a house. If you’re interested in buying a house, get your Realtor (and do engage one who alleges to represent the buyer, despite the speciousness of that claim) to run the comparables in the area and show you a printout. Visit those houses to be sure they really are comparable to the place you covet.

If you want to know what your house is worth, any Realtor will run the comps for your place. This is generally a free service, offered in hopes that you will list with the Realtor who is nicest to you. Ask a real, live Realtor, not Zillow, about the value of your house.