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Real estate

What Will Your House Be Worth in 15 Years?

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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.

Eine Kleine Estate Planning

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Update: Bear in mind that much of what follows applies specifically in the state of Arizona. Each state has its own laws and regulations about the way property is held by more than one person, wills, and how heirs and appointed representatives can access, manage, and dispose of a deceased person’s property. You should check with a lawyer in your state to learn the best ways to pass down real estate and financial assets and how to make your wishes apply when you’re incapacitated.

So, when my lawyer and beloved tax preparer announced that she’s retiring, it crossed my mind that it’s been quite some time since my will was redone. It sets up a trust that expires when my son turns 21…and he’s now almost 35.

This morning I met with a Scottsdale lawyer and learned a number of interesting things. My vast financial holdings, of course, are so…uhm, less than infinite that they’re not very complicated. The main things I learned are these:

1. When a house is held in joint tenancy and one person dies, the other person gets title to the property without having to pay taxes or jump through probate hoops.

For reasons unknown to me, M’hijito and I are tenants-in-common on the downtown house. That entails a little more complication after the demise of one person. I don’t remember why we elected to do that…there may have been a reason. But since that house is going to have to be dealt with sooner than later, I expect the reason is moot.

2. When you own a house free and clear and there’s a single person you’d like to have inherit it, you should designate that person as the beneficiary for the house. Then he or she gets it without paying taxes on it and without hoop-jumping.

3. Same is true with bank accounts. If the heir is designated your beneficiary in the bank or credit union’s records, all the person needs is a death certificate to get access to the funds.

4. And you should also designate a beneficiary to your 401(k), 402(b), IRA, and mutual funds. Similarly, this avoids probate and gives the person immediate access to those funds that aren’t tax-deferred.

5. You now not only need a medical power of attorney to go with your living will, you need a mental health power of attorney. This allows your designee to get mental health care for you should you suffer dementia to the point where you need hospitalization.

6. Of course, you still need a durable power of attorney to permit your designee to pay your bills and otherwise deal with financial matters when you’re incapacitated.

7. If you haven’t updated your medical and durable powers of attorney recently, you need to do so ASAP. Recently the laws were changed so that some specific paragraphs need to be set out and initialed to make these instruments do what they’re intended to do.

8. When you owe on a mortgage, it’s a good idea to have a term life insurance policy that will provide the heir with enough to cover the cost of the mortgage. In M’hijito’s case, it’s de rigueur, since most of my funds are now in tax-deferred instruments, and he would lose about half the money to taxes if he had to withdraw enough from my IRAs to make payments. Besides, I want him to be able to keep the IRA funds until he reaches retirement age, since it’s very unlikely Social Security will be available for him.

She urged me, however, to talk with a real estate lawyer before taking out an insurance policy to cover the upside-down mortgage on the downtown house. Since I won’t be able to work much longer—certainly not at the pace I’m doing now—it  may be in our best interest to consider a strategic default now, not later.

{sigh} Really, I don’t want to have to default. But neither do I want my son to be left holding the bag, which is where he’s going to be after I die, unless the credit union agrees to drop the principal to something near what the house is really worth. Even if he collects enough insurance to pay off the mortgage, all that means is he has to throw $210,000 of insurance money down the toilet. Better that than that he should be shackled to unaffordable payments that are also flowing into the same black hole. But neither option is good: they both amount to financial self-immolation.

Wow. What a world! Ten years ago, if you’d said I would ever seriously think about walking away from a debt, I would have said you were nuts. Now it seems like it’s nuts not to seriously think about it. Who would ever have imagined such a thing would come to pass?

Tiny Places of My Past

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The following is a guest post by Crystal at Budgeting in the Fun Stuff. Her blog covers living expenses, saving for your future, and the fun stuff along the way.

Nicole from Grumpy Rumblings of the Untenured left a comment asking if I had seen this post at a new blog, Step Away from the Mall.  It boiled down to a small rant about the fact that a couple looking for a $500,000 house in Texas could possibly complain about houses that were like mansions from the point of view of a guy that recently lived in a $1700 a month, 400 sq.ft. “apartment” in NYC.

Putting aside that the cost of living between NYC and Texas is amazingly different (and I assume the salaries are as well), his description of his 400 sq.ft. space brought back my memories of dorm living and right-out-of-college housing.

The smallest space I have personally lived in was a 10 ft by 12 ft dorm room that I shared with another girl in college.  We shared the tiny bathroom with the two girls in the adjoining room.  In short, I had a 5 ft by 12 ft space to myself—60 square feet.

You want to know the weirdest thing?  I LOVED IT!  I absolutely adored dorm room living.  I loved the fact that a bunk bed and an efficient use of storage could make me feel like an adult in her own digs.  I also loved the fact that I could poke my head out the door at any time—day or night—and find someone else to hang out with.  It was awesome.

Fast forward 3 1/2 years, and the smallest space that I ever shared with Mr. BFS was our first apartment out of college.  It was technically a one-bedroom 550 sq.ft. space that really felt more like an efficiency with an extra half wall.  The kitchen was too narrow to fit 2 people into at once and the only place to put the computer was next to the bed.  My favorite feature was a built-in book shelf next to the red brick fire place.

I loved the cozy feeling of that apartment too, but there were several times I came close to committing homicide while Mr. BFS played computer games 2 feet away from my head in the wee hours of the morning.

Fast forward another 2 1/2 years, and we own our own 1750 sq.ft. house.  I have no idea if I could live in such small spaces again and be as happy as I was those few years ago.  Hubby has his own gaming area and we have an adult bedroom with actual furniture and even a Tempurpedic (non-blow up) mattress.  I am spoiled to say the least but still have very fond memories of the tiny places of my past.

What are the most cramped quarters you remember?  Did you like them as much as I liked mine or do you think I’m nuts?

Oh, and Step Away from the Mall, you will hate this, but that 550 sq.ft. apartment we had in late 2004- mid 2006 was $399 a month.  😛  Feel free to join us low cost of living folks whenever you wish.  🙂

Real Estate: We thought it couldn’t get worse…

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Homes in my neighborhood are now selling in the $150,000 range. I paid $232,000 for mine…before the bubble.

About 17 years ago, I bought my first house in this neighborhood—same model as the one I’m in only not updated, no pool, smaller lot, and close to two hideously noisy main drags. I paid $100,000. The seller was asking $130,000, but a recession was on, the house had been on the market for three months, and it was in an estate, so my Realtor talked him way down on the price. Except for a HUD house across the street, that was about as low as values got…I got a smokin’ deal on the place.

So. What this means is that property values in my area have dropped into the range where they were more than 15 years ago.

It also means I no longer can sell my house, use the proceeds to pay off the mortgage on the downtown house, and move in there when my son is ready to move on. This uptown house is not worth enough to cover what we owe on that house.

Annoying. It cuts off a key strategy for dealing with the difficult position the crash has created for us. Even though the neighborhood is not as nice as mine, the downtown house is quite charming; I like it and was willing to move into it, because it’s easier to maintain and has no expensive pool to care for. That’s now no longer an option.

Mulling over what we’re going to do in the long term…heaven help us!

First, I’d like to get my son’s name off that mortgage. They have him on there as the primary borrower, because I’m unemployed. Next year I should be earning more than I’m making now, plus of course, my retirement savings could pay for the house in full if I were forced to use them that way. Once the government permits me to earn a living wage again, it might be good to try to engineer a sale of the house to me. At least then he won’t be stuck with a financial black hole when I die—debts aren’t inherited, and even if they were, this is a no-recourse state. So once I’m gone, he can safely let the bank take it.

It remains to be seen, however, whether anyone will let us do that. Values have dropped commensurately in the downtown neighborhood. There, houses are selling for under $100,000. We presumably would have to get a new mortgage, and of course no one is going to write a new loan for $211,000 on a house that’s worth about $130,000, if we’re lucky.

We can’t rent the house for the amount of the presently reduced mortgage’s monthly payments. However, when it comes time for him to move on, I think renting will be probably our only option, other than walking and destroying his credit as well as mine. The rent would cover enough of the mortgage to make the remainder affordable, if galling. Problem is, it wouldn’t be enough to build a repair and maintenance fund, indispensable for an old place like that. But because we’d be running at a loss, we probably would pay no taxes on the rental income. LOL! We might not pay any taxes, period, at the rate things are going!

That’s about it for our future options:

Rent it.
Default on it.

In the present, however, about all we can do is count our blessings. We have two pleasant little houses in acceptable neighborhoods. One of them is paid for. They’re both very pretty, they’re both conveniently close to work, school, and shopping, and they’re both reasonably sound. Things could be worse.

I guess…

Good-bye to the American Dream

Image: dvs’s photostream on Flickr. Creative Commons.

Real Estate: Don’t worry! Be happy!

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Here we go again! The Arizona Republic, admittedly a joke of a paper that often gets the facts wrong, reports that young parents are snapping up “bargain” houses in the bedroom communities on the east side of hard-hit Phoenix. These smokin’ real estate deals cost upwards of two hundred grand and are at least a half-hour’s drive away from the center of employment in this area…to the extent that any employment is left.

We have here the young couple who bought a $270,000 Meritage home, thrilled at the give-away price. In passing, I would note that I know a painter who used to work for a company that went around to developments and repaired and rebuilt the flimsy construction, which often left details like keeping out the rain for someone else to fix. He said Meritage was one of their richest sources of business.

So let’s think about this bargain.

At 4 percent with a 20 percent down payment, the happy young buyers will pay about $1,350 a month—that’s with a very conservative estimate of the cost of homeowner’s insurance. Their down payment will be $54,000. Every young couple has that laying around the apartment, right?

Then, incredibly enough, we have the tale of the freshly divorced mother of two, unemployed and a brand-new import from California, who picks up another bargain at $200,000. No job—she thinks she’s going to find work at a shopping center about ten miles from her new home.

Maybe she doesn’t realize that in a right-to-work-for-nothing state, any job she may find as a shop girl won’t net enough to cover the $1,250 PITI payments. Assuming a 25% tax rate—oh, let’s give her the benefit of the mortgage deduction and make it, say, about 15%—she would have to gross $34,500, just to pay the mortgage. That’s before she eats and before she feeds and clothes the kiddies. Sales clerks earn about minimum wage, $7.25 an hour. Assuming she works 52 weeks a year or she lucks into a job where she’s given a few paid days off now and again, that comes to $15,080 a year. If she lands a job as a waitress, in Arizona employers are allowed to pay her as little as $3.00 an hour; the feds assume she earns enough on tips to make up the difference between that and minimum wage and so tax her on $7.25 an hour, whether she really collects that much or not.

Has no one told this lady that there are no jobs in Arizona? Let’s hope ex-hubby is cheerfully sending her a hefty alimony check each month. Doesn’t seem likely, IMHO; if the court allowed her to bring her kids to Arizona, it means she got sole custody, which doesn’t sound like Dad is going to be in the mood to pay through the schnozzola to support her and the expensive offspring.

Maybe it’s not that Arizona’s school system is so bad it can’t teach the most basic common sense; maybe the issue is that we have a population of lunkheads. Six thousand buyers, some of them unemployed, grabbing $270,000 bargains? These folks—and their lenders—don’t learn even after they’ve been hit upside the head with a two-by-four!

Tiny Houses of Yesteryear

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The other day I was cruising some of those sites plugging tiny houses and the occasional blog whose proprietor daydreamed wistfully of chucking all the junk and living in one of them. At some point in the course of this junket through the Internet—I don’t remember how—I stumbled upon this amazing site in the archives of Sears. Check it out, especially the voluminous collections of photos and floor plans.

As it develops, between 1908 and the start of World War II, Sears marketed houses built from kits. You could order up the plans and precut materials, and what you got was everything you needed to put a home together, right down to the nails, delivered to your site by freight train. Apparently it wasn’t hard to put one of the things together—a single skilled carpenter could do it.

These packages were made possible by the invention of drywall, which took the place of the much more work-intensive (and beautiful…) lath-and-plaster system, and enhanced by the invention of asphalt shingles, cheap to manufacture, easy to install, and fireproof. The prices today look astonishing. The Arlington (a.k.a. Modern Home No. 145), an elegant two-story model with indoor plumbing, cost $1,294 to $2,906.

Quite a few of the houses were bungalows. Meditating on these charming little structures, it occurred to me that some of them look suspiciously like my great-grandmother’s house in Berkeley. Could it be…?

Her house was built in 1922. Nothing like it appears in the 1921–1926 set, nor in the 1927–1932 collection. But in the last group of plans, 1933–1949, lo! What should appear but the Collingwood:

The exterior didn’t look at all like that. There was no dormer, the steps leading to the front door were different, and where the front porch is, my great-grandmother’s house had a small enclosed entry hall. But the floor plan is very similar, almost the same except for a couple of details:

The railroad-car layout is identical: the two bedrooms and bathroom stacked one behind the other on the right side of the house, and the living room opening through an archway into the dining room, which sat adjacent to the kitchen with its little eating nook at the far end and the back stoop off a little service porch. If the front porch were enclosed, the fireplace on the front wall instead of the side wall, and the living room and kitchen extended out as far as the “bay” in the dining room, it would the the same, identical floor plan!

The striking thing is how small this house is: only about 890 square feet. Some were much smaller; the Hathaway, for example, looks to have been about 410 square feet, when you add both floors together.

According to Zillow, my great-grandmother’s house, still standing on Hopkins Street in Berkeley and now valued at $733,500(!), has 1,265 square feet under roof. An average double-wide trailer is 1,700 square feet.

The house never seemed small to us: in fact, we regarded it as a normal sized home. My parents, in all their 38 years of wedded bliss, never lived in a house that had more than two bedrooms. People lived in larger houses, of course. But they were for larger families, people who had four, five, six kids. When my father moved them to a two-bedroom, two-bath house in Sun City, I recall my mother wondering why anyone would want a second bathroom to have to clean.

Today’s voguish “tiny” houses would have been cramped, even back in the day when people occupied lots less space. Tumbleweed is mounting 65- to 140-square-foot “tiny houses” on trailers. I couldn’t live in a 140-square-foot shed. But I would find many of the Sears floor plans quite comfortable. For one or two people, the Collingwood could certainly fill the bill.

Given the growing enthusiasm for small dwellings with small footprints, wouldn’t you think someone at Sears would think of reviving these kit houses?