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Real estate

Police Presence and Property Values

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Ever wonder whether frequent cop helicopter buzzing affects the property values in your neighborhood?

About ten minutes ago one of the cop copters came blasting in, low enough to rattle the windows in the house, and started circling about three lots to the west of me. This is a not-infrequent occurrence here, because my part of the neighborhood forms a buffer between some very upscale, Old Phoenix streets to the east and a cluster of slummy tenements to the west. The residents of the people kennels get up to all sorts of mischief, from petty theft all the way to shooting and killing Phoenix’s Finest. So as you can imagine, the police are somewhat sensitized.

I used to live closer to the tenements. Since I moved about three blocks deeper into the neighborhood, the cop flyby’s haven’t been so noticeable, but in the old house, which stood near the intersection of two main drags just south of a war zone, I could set my clock by the 11:00 p.m. Friday and Saturday night flyovers. They literally would park right over my house while they ran spotlights around the area and hollered down at perps from their bullhorns.

Besides shattering the peace and quiet (well…there’s not that much quiet to be shattered when you’re right on top of two six-lane thoroughfares), these episodes are disturbing. I figure if I were a perp and the cops were on my heels, I would try to get inside someone’s house and hide. If I were armed, I’d be well equipped to intimidate the residents—or worse.

So every time the cops come flying over (again!), I get up and go close and lock the doors and windows. Annoying, especially when the weather’s nice and you’d like to have fresh air moving through the house. This evening when I got up to do that, I found I’d left the back door hanging wide open the last time I let the dog out. Reassuring…

If you were to look at the city crime reports for this neighborhood, you’d see that the crime rate in this area is relatively low. It’s much lower than it is where my son is living, just two or three miles to the south, and we have fewer sex offenders living nearby. So, in theory, if a buyer were sensitive to that issue, the ubiquitous cop helicopters wouldn’t make much difference to the sale of your house. How, anyway, would a person know that we live under a cop helicopter traffic lane without being here to observe it?

On the other hand, middle-class residents’ nervousness about crime, especially in the presence of nearby low-income housing, has its effect.

When SDXB got up in the middle of the night and found two dudes climbing in his front window (he chased them off with a pistol…far as we know, they’re still running), the first thing he did the next morning was alert all the neighbors. Literally. He went from door to door telling the neighbors that he’d caught a couple of cat burglars in the act, after they’d quietly lifted out one of the windowpanes.

Within days, his next-door neighbor put his house on the market and moved away. He underpriced the place so as to unload it quickly, because, being a middle-class homeowner, he could afford to do so. He bought a house in Sun City, where property values are surprisingly low, and pocketed 60 grand in the exchange.

The buyer? Mr. B***, a.k.a. the suspected vandal.

As soon as this guy moved in, he started buying up houses in the neighborhood, often from elderly original owners who had no idea what they were worth. Before long he owned seven houses in this six-block-square neighborhood, five of which he converted into rentals. He added a tumbledown summer kitchen to the house next-door to SDXB, illegally connecting to the city sewer line. He did all the repair and fix-up on the other houses, always without benefit of building permits—apparently in the Old Country building codes, if they exist at all, are most honored in the breach.

These activities served to push property values down, leading to conversion of still more homes into rental properties; hence Biker Boob and Bobbie McGee in the house across the street.

You could argue that it was the absence of police protection that led to this state of affairs. It was an hour before the cops showed up after SDXB called 911 and said he had a .45 trained on two men who were clambering in his front window. And he made a big point of complaining to the neighbors about that, too.

At least nowadays the cops do show up (if noisily) when you call. A 45-minute to an hour’s wait used to be SOP; if someone actually was breaking into your  house, the trick was to open a door on the other side of the building and start screaming FIRE!!! This would usually bring the neighbors, who’ll come out to watch your house burn down but will hide behind locked doors when they think a crime is under way.

Still. There’s no question that when people who can afford to move don’t feel safe in a neighborhood, they will move. One of our long-term neighbors just moved out, before her house even sold, saying she wished to live “closer to people like herself” (read more white folks, less brown folks).

I wonder if too much police protection, especially when it’s conspicuous, is bad for business. The real estate business, that is.

The future of residential real estate

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Several weeks ago, one of the longtime choir members passed away. A widower, he lived in the neighborhood, in a very nice 1950s home just one lot away from the park. He probably was the original owner.

At least three adult children were at the memorial service. The house has not gone up for sale. Sometimes you see lights in the place at night. So it’s possible that one of the kids is living in it. Or it’s possible that the heirs are still trying to straighten out the estate and so aren’t selling the place until they reach some agreement on the distribution of the proceeds.

If I had several children and were affluent enough to live in that area, I’d probably will the house to the one who most needed a nice place to live and then distribute the rest of the estate fairly to the rest of them.

Just now I know of at least four houses in the neighborhood where people have died or gone off to the nursing home and family have moved in. One couple with a baby had moved into her parents’ home and assumed the mortgage some time before the crash. In the ensuing deprecession, they both lost their jobs. She started baking incredibly rich cookies and peddling them through farmer’s markets and gourmet grocery stores; although the enterprise took off and has now gone national through the Internet, it still doesn’t match what they earned when they both had full-time jobs. She said they managed to get by because the mortgage payments were very low, compared to what they would have been paying had they bought a newer place.

Another couple moved into her mother’s house with their two kids. That house was paid off, a true windfall for the young family. And a friend of La Maya and La Bethulia’s, now withering away in Hospice, had “sold” her long paid-off home to her daughter; to keep it legal, she was making “rent” payments to the daughter. The daughter and her husband, who live in Alaska, plan to keep the house to use as a winter home.

In all three cases, owners had bought the houses so long ago that even at today’s depressed prices the places would have sold at a considerable profit. All three houses are in neighborhoods where prices are not especially depressed, anyway. If any amount remained on the mortgage, the payments were ludicrously low compared to what you’d pay to buy the house.

I suspect this is going to develop into a pattern. Real estate, despite the drop in prices, is out of sight and unaffordable for many young people. Policy-makers are beginning to talk about encouraging people to rent rather than to try to buy property, and after the late, great housing crash, many people in their 20s and 20s see little sense in throwing money into residential property. Still, most Americans would still rather own a house than rent an apartment, and talk notwithstanding, some see evidence that over time, owning works better financially.

It makes sense, then, that if a parent’s home is in a livable neighborhood—reasonably safe with access to an adequate public or even private school—the heirs would want to keep the house in the family. If it’s paid off, with the savings you could put your child in a private or parochial school, rendering the quality the local public schools moot.

So, I wouldn’t be surprised to see more and more younger families moving into deceased parents’ homes. As the baby boomers start to pass, this could become a trend.

Sold! Real estate returns to normal in our neighborhood

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Incredibly, the rental house across the street, occupied of late by the obnoxious Biker Boob and Bobbie McGee, sold for $250,000. That’s dead center in the ball park of what houses were worth here before prices got stupid.

I was afraid it would be bought by yet another absentee landlord. But at that price, it’s unlikely they can rent it for enough to cover the mortgage—rental prices are still very depressed here.

Better yet, they’ve plopped a big dumpster in the driveway and sent workmen in there to gut out the interior! It looks like they’re rebuilding the kitchen—a decrepit dishwasher is sitting in the driveway waiting to be hauled off, and carpenter-like guys have been swarming over the place for the past two weeks.

So. This is a good sign. That’s twenty grand more than I paid for my house, and it’s about twenty-one thousand more than SDXB got for the same model. He sold way too low—the house was grabbed up  less than 24  hours after he put it on the market. So I’d estimate the price is about where it should be for that model.

Now…if we would just, please, see the same thing happen in the neighborhood where the downtown house resides…  We’re $75,000 underwater there, according to the ever-heartbreaking Zillow. But that’s because everything that’s sold there over the past three years or so has been a foreclosure, with the exception of one house that sold at a fire-sale price. Once all the foreclosures are cleared out, maybe values will begin to return to normal in that area, too.

Walking Away from a Mortgage: Is it immoral?

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Late last year, University of Arizona law professor Brent White stirred up some controversy by observing that underwater homeowners should feel no guilt about walking away from properties whose value has fallen way below the amount owed on them. Pointing out that the very lenders who cooked up questionable residential mortgages feel no compunction about walking away from underwater commercial properties, White pointed out that buying a residential property is no less a business transaction than buying a commercial one, and that mixing emotion and “morality” into the transaction has saddled homeowners with a disproportionate burden for the current real estate fiasco.

Cutting one’s losses when a property is no longer worth what you’re paying for it is called “strategic default.” Despite the clear fact that a real estate transaction is a real estate transaction, many people can’t get past the idea that individuals, as opposed to corporations, have some moral obligation to stick with a bad business deal. Others argue that what’s good for the corporate goose is good for the individual gander. Just check out some of the comments here and here and here.

The story’s not quite as simple as it seems on the surface. Depending on what state you live in, you may or may not be able to hand a property back to the bank without consequence. In some states, lenders can come after an owner who walks or does a short sale for the difference between the house’s selling price and the amount of the loan. Your credit rating, of course, will be trashed for several years to come. And if Soggy Bottom is not your primary residence, you’ll owe taxes on the amount you defaulted on.

IMHO, White has got something. If you’re stuck with a bad loan for your primary residence and you live in a state where a lender can’t sue you for a deficiency judgment (such as Arizona), it may be financially irresponsible NOT to walk. And there’s no reason to feel guilty or morally incompetent when the mess results from no fault of your own.

M’hijito and I copurchased a small house in mid-town Phoenix’s established, mostly middle-class north central corridor at a time when we believed the real estate collapse was nearing bottom. Our agent, a very smart older man with an MBA and many years of experience in business and real estate, thought the same thing. We estimated the house’s value would drop about $4,000 to $6,000, level out for a year or two, and then begin to rise at about 3% to 6% p.a., the historic rate of increase in that area before the bubble.

Neighbors were furious with our seller for unloading the house at what they thought was a rapaciously low price.

How wrong could we all have been?

The house is now worth (if you believe Zillow) $75,000 less than we paid for it and $51,000 less than we owe.

We planned to hold the house for five to ten years, with M’hijito living in it most of the time or renting it should he take a job in another city or marry and need a larger home. After no more than a decade, at which time I planned to retire, we expected to collect a small profit or at least break even, split whatever equity we recovered, and go on our respective ways.

Now M’hijito feels stuck in the house. Because we can’t even begin to sell the house for what we owe on it, he can’t move to another city in search of a better job (workers are famously underpaid in Arizona) or go out of state to pursue an MBA at a decent school. Having lost my job and seen my retirement savings plummet $180,000 when the Bush economy crashed, I’m in a different financial position (indeed) than I was when we bought the place.

Fortunately, we did have enough sense to get a loan through our credit union. Unlike the banks of recent infamy, the credit union has been willing to negotiate. But they resist even contemplating a cut in principal, which is what needs to happen.

In response to my layoff from ASU, the credit union arranged to prorate our payments over 40 years (instead of 30) and to cut our interest rate to 4 percent. This dropped the mortgage payments into a more affordable range—and to something close to what we could theoretically get in rent.

The deal is good for only a year, however. After that, the credit union will consider renewing it for another year or will give us the option to refinance.

Although of course I’m pleased to see our payments reduced to something almost within reason, I’m still unhappy with the underlying predicament: the house’s value has dropped so drastically that we may never recover our investment in it, and so money paid toward the loan amounts to money down the drain. In an optimistic scenario, it will be another ten years before the house’s value rises to what we owe on the mortgage—to say nothing of the healthy down payment we put down at the outset. And please: don’t even ask what it costs to renovate a 1950 cottage!

For the time being, M’hijito likes the house and is comfortable there. He rents one of the rooms to bring in cash to cover maintenance and repairs. And with the mortgage adjustment, the roof over his head is costing him no more than he would pay for a rental. But the point is, we’re both losing money on the property.

We did everything we could to make a responsible decision: purchasing a house that was certainly no McMansion, selecting a centrally located neighborhood ripe for gentrification and close to the much-ballyhooed lightrail line, buying within our means, avoiding shady mortgage instruments, and selecting a lender that was unlikely to rip us off. And we’re still behind the 8-ball.

A corporation’s board of directors would be remiss not to default under those circumstances. So…should a homeowner be held to a different standard? If so, why?

Image: Tennessee house, ca. 1933-36. Tennessee Valley Authority. Public Domain.

Financial Freedom: Own the roof over your head

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Life on the treadmill

We’ve been talking, on and off, about routes to financial freedom, defined as a life off the day-job treadmill that leaves you free to do what you want to do with your time, not what someone else decides you should do. It takes time to achieve this freedom. You need get enough education or vocational training to land a job that will produce enough income to allow you to build some savings, and you need to live not only within that income but below it. An important part of your early-escape strategy is to get a roof over your head that’s paid for.

Yes. Pay off your mortgage.

In some circles, that’s tantamount to sacrilege. But the fact is, the largest chunk of cash flying out most people’s doors is the mortgage payment, and most of that payment consists of interest. The putative income tax break, if you look hard at it, is negligible compared to the amount of money that goes down the toilet in the form of loan interest. Mortgage interest can more than double the amount you end up paying for your house.

If you have a program like Quicken, it’s easy to figure that amount. Using the loan calculator, enter your principal, the interest rate, and the number of months to pay-off, and the program will generate an amortization schedule showing, in detail, how much each payment reduces the principal and how much, in total, you will have paid by x or y date. You can accomplish the same calculation, though, with Excel or an open-source spreadsheet. Over at The Simple Dollar, Trent provides an easy step-by-step guide to setting up your own loan calculator in Excel.

However you arrive at the full picture, what you find can be startling. M’hijito and I owe $211,000 on the downtown house. At 4.3 percent, over 30  years we will pay $164,907 in interest alone, meaning that if we hang onto the place that long (and it this point it appears we will be forced to do so), we will pay almost $376,000 for the house. When I bought my first house, I paid $100,000 for it, borrowing $80,000 at 8.2 percent on a 30-year traditional loan. At that rate, I would have paid $169,200 for interest alone, way more than doubling the ultimate price of the house.

Whether it’s worth that much in 30 years is beside the point. The point is, a $211,000 mortgage represents $376,000 that doesn’t go into savings. It’s $376,000 that doesn’t go toward achieving bumhood. Every month that we pay toward this loan is a month that a principal-and-interest payment of $1,044 goes into someone else’s pocket.

If he were paying toward rent instead, that also would be money down the toilet: the renter puts money in someone else’s pocket with no hope of ever owning anything and no end to the outgo. At least when you buy a house, you have a chance of paying it off and putting a roof over your head that costs you little or nothing, from day to day.

(It must be noted, though that owning your house is never free. You still will owe taxes on it, and you’re crazy if you don’t buy insurance. Maintenance and repair costs can be significant. These expenses require most mortgage-liberated homeowners to self-escrow something each month in an account to cover such costs.)

The key to bumhood is getting out of debt, and that includes mortgage debt. A thousand bucks (or more) that stays in your pocket each month represents a large fraction of the amount a bum needs to live in comfort and contentment. Given that a person who lives modestly in a city with a reasonable cost of living really needs only about $2,000 to $3,000 net a month, a thousand dollars gets you a third to half-way there!

So…how on earth do you go about doing this? The cost of a house is crushing. What human being can possibly afford to pay for one in full in anything less than an adult lifetime?

Well, I suspect most people can. Here’s the strategy:

1. Buy a house that’s within your means.

Where is it written that you have to live like Pharoah? No one really needs a McMansion. Many smaller houses offer charm, comfort, decent neighborhoods, and ease of maintenance.

If living in a prestigious district is your thing, look for middle-class neighborhoods that border fancier areas. My house, for example, is in a very ordinary neighborhood that abuts a district of million-dollar homes, two blocks from a lovely park. Obviously, if you have kids the school district is important, and so you’ll need to add that consideration into your calculation. It’s worth investigating whether sending a child or two to parochial or private school might actually be cheaper than buying a more expensive house in an area with top-rated public schools, especially if you can qualify for scholarships or tuition assistance.

2. Get the shortest conventional loan you can manage.

Because interest rates on a 15-year loan are lower than those for a 30-year loan, the payments are not that much higher. For example, with a 6.5 percent rate on a 15-year loan for my original $100,000 home, the principal and interest would have been only $128 more than what I was paying toward the 30-year instrument.

Never take on a variable-rate mortgage. Adjustable rates always adjust upwards. Even when the prime rate goes down, banks find excuses to raise the mortgage payments.

And, given the communal experience of the past couple of years, we know never to accept anything “creative” from the loan department.

3. Pay extra toward principal.

Even if you have a 30-year loan, you can speed the payoff date by paying down principal each month or, if you’re paid semiweekly, by applying some or all of your so-called “extra” paychecks to principal. Another strategy is to apply all of one spouse’s net salary to principal, if you can afford to live on one partner’s income.

The downtown house, for example, cost so much that there was no way we could have made payments on a 15-year basis. However, if we added $130 a month in principal payments, we would pay the house off in 24 years instead of 30. Applying all of his roommate’s $400/month rent payment toward principal would pay the loan in a little over 17 years. Combine the two—$130 out of our pocket and $400 from the renter—and we could kill the loan in 15 years.

4. Build side income streams and apply that money to principal.

A spouse’s salary, a second job, a roommate, a hobby monetized: all these sources of cash can be used to pay down the mortgage. Because lowering principal cuts the interest portion of future payments, it’s helpful to pay extra toward principal on a regular basis (whether it’s monthly, quarterly, semiannually, or even just once a year). But no law says the extra payments can’t be sporadic. Whenever you get a chance to earn extra money, take it, and then use the net to pay down the loan.

5. Apply all windfalls to principal.

I paid off my first house by saving every post-tax penny of spousal support (having lucked into a decently paid job) and investing it. About five years after I bought the house, I used the cash I’d saved plus a small inheritance to pay off the mortgage.

Was it easy to break a chunk out of my savings to throw at the house? Nope. Have I ever regretted it? Nope.

It probably was the smartest thing I ever did. Once SDXB moved out, I could not have paid the PITI and survived on my net income without a roommate or a domestic partner, neither of which was in the cards. The house’s value continued to grow, so that when I was ready to move to a somewhat nicer house in a quieter corner of the neighborhood, I could pay for the next place in cash. And when I was laid off my job, there was no worry about whether I would lose my home.

6. Choose your house wisely.

Purchase with an eye to staying in the place permanently. That’s right: for the rest of your life. Consider whether the neighborhood is likely to remain stable or even improve over several decades, and whether the construction will stand the test of time.

Remember, your house’s value will increase in lockstep with all the other real estate in your area. While the place may appear to double in value over 15 or 20 years, so has everyplace else! This means that if you’ve paid off your mortgage and you want to avoid taking on new mortgage payments when you move, you’ll have to buy a comparable house. Paying off a mortgage means that you’ll be living in similar housing forever, unless you’re willing to take on new debt.

As you can see, this project entails some trade-offs. Unless you earn a ton of money, you likely will not be living in an elegant palace. To get into a decent school district, you may have to take a lesser house than you could have afforded in a neighborhood with weaker public schools. And you’ll need to seek contentment and ego gratification from sources other than real estate, downsizing your housing expectations to fit your long-term goal.

Freedom’s not free. But it’s worth it.

Financial Freedom:

• An Overview
• Education
• Work
• Debt
• The health insurance hurdle

Image: U.S. Air Force Photo/Staff Sgt Araceli Alarcon. Public domain.

Real estate prices, in progress

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On my old street, just two blocks north of the present palatial dwelling, five houses have gone up for sale. One is my favorite model in this development, and it’s offered through the dominant Realtor in our area.

She was having an open house yesterday, so I dropped by to say hello and check out the place…and, of course, to find out how much she thought she could get for it.

It is a beautiful house. She said the sellers are the original owners, but it sure didn’t have that stale original-owner look to it. All the cabinetry has been replaced with high-quality new cabinets, the expansive countertops (this model has a huge kitchen) remade in granite, the floors paved with a particularly handsome hard-fired tile. The yard is very attractive; a bay window was added to the breakfast room, a new master bedroom extends into the huge backyard, and the pool has been “dry-docked”; i.e., put to sleep and covered with a large, expensive-looking deck. All in all, to die for.

Asking price is $285,000. The Realtor said that works out to $117 per square foot.

Out comes the calculator!

That model was SDXB’s. Without the extra bedroom, his house was 2,100 square feet. In the same year I bought my present home, he sold his for $229,00. That was just at the start of the bubble, long before anyone realized how fast prices were about to run up.

At $117 a square foot, his house would theoretically be worth $245,700 today. Not bad.

My house, however, would only be worth $217,620; I paid $232,000 for it. So it’s still down $14,380 off its proto-bubble price. Better than it was—for a while, the house’s value had dropped to around $180,000. Today Zillow prices it at $236,000, but IMHO a house, like any object, is worth what someone will pay for it. If our Realtor’s estimate is right (she does tend to underprice, but she’s been around for a long time), then at a 3% per year increase, the house’s value will come back to what I paid for it in a little over two years.

Modestly hopeful, I think. Maybe.