Sandy and Bill Goodheart, the Realtors who for years have dominated my part of town (Bill Goodheart actually built a fair amount of the neighborhood), send out a sporadic real estate newsletter to their clients. For many a moon, the news has been pretty glum. This month, though, they report some indications that real estate in the hard-hit Phoenix area may be starting to look up.
Here’s the good news:
We believe the market has bottomed out. In just the last ten weeks, we have gone from a 10.4-month supply of listed homes for sale to a 7.5-month supply. This has been accomplished by a 6% reduction in the number of homes for sale and a 30% increase in the number of homes sold…
We feel prices are stabilizing, although at a much lower price than last year. This new, lower floor will last for all of 2009, then we can expect an average 3-5% increase for the next several years.
This cheer is based on fairly scant evidence: in the past four months, Realtors in our area made only nine sales. Average sales price was $247,000, and it took an average of 156 days (over five months!) to sell. While this comes under the heading of “the bad news”—it represents a 12 percent drop in prices over the past year—it’s better than the overall market, which has dropped 35 to 40 percent.
Dave’s Used Car Lot, Marina, and Weed Arboretum sold for $247,500. That’s $15,500 more than I paid for my house five years ago, and $77,500 more than the speculator paid to buy the arboretum from the bottom-feeder who bought it out of bankruptcy. That place is two square feet larger than mine, on an identical lot with a similar size and quality pool, freshly out of foreclosure, and not renovated as nicely as mine. The people two doors down from Dave are asking $300,000 for the best model in the tract. It’s potentially a nice house (given a few tens of thousands of dollars in fix-up), but they’re original owners and the house is advertised as “lovingly cared for,” meaning everything in it still dates back to 1971.
In the past, the Goodhearts‘ observations have been pretty accurate. About 18 months or two years before the bubble peaked, they sent out a letter advising their clients to sell and move into rentals, then buy new real estate at what they expected would be greatly depressed prices.
They predicted the bust that much in advance, and in fact, Mr. B*** (the predatory landlord) made a nice little killing by following their advice: he sold his rentals in the neighborhood at the top of the market. Their timing was a little off—they jumped the gun by a few months—but their assessment of the market and where it was going was right on.
Their prognostication for the future:
Our best advice is to wait if you can, because time is now on your side. Ideally, when we have a 3-6 month supply, that is considered a balanced market and is the better time to sell. We do not see prices going up this year.
Define “up,” though: in terms of a traditional increase, absent the bubble, the increase on houses that have not been in foreclosure has been unimpressive but not unacceptable. A house similar to mine sold for $280,000. Assuming that five years ago it was worth about what I paid for mine, a 3 percent annual increase would have put its value at $268,950. So if you think of what it ought to be worth instead of what it might have been worth, its value has increased by a little more than 4% a year.
The rapid drop in inventory is a positive sign. Around here, a three-month supply is considered about normal. If this trend continues, we may begin to approach sanity somewhere near the end of the year. After that, we should begin to see prices rise at a stately but respectable rate.
Over at Room Farm, proprietor Chance is offering an article she wrote some time back for Living Almost Large, in which she argues that it’s better to stretch your finances (and by implication, to select a cheaper house) and get a 15-year mortgage than to pay for real estate with a 30-year mortgage. Readers at LAL squawked that it’s impossible to afford a 15-year loan, given the outrageous cost of real estate, and when last seen, Room Farm readers were echoing that and suggesting it’s better to go for 30 years and pay extra toward principal. This strategy gives you an “out” if you run into hard times, in the form of payments-due that are really smaller than what you habitually into the loan.
Let’s consider how affordable a 30-year mortgage really is when compared to a 15-year loan. Real estate has dropped so drastically, it’s now possible to find good housing at prices that allow buyers to consider the shorter repayment term.
As an example, one of my research assistants and her husband just purchased a house in the high-rent district of my part of town. Buying the place out of an estate (it wasn’t a foreclosure—the heirs just wanted to unload it fast), they grabbed a nice house with a pool on a big corner lot amid a cluster of $500,000 homes. Their cost: $225,000.
The dollar difference between payments on 15- and 30-year loans is a lot when you’re talking about the $200,000 range. Let’s say the young people put only 10 grand down and finance $215,000. Right now a 30-year fixed mortgage from our credit union is at 4.625 percent: monthly principal & interest would be $1,105. A 15-year mortgage is at 4.375 percent: $1,631 a month.
However: On the 15-year loan, the first payment covers $847.18 of principal and $783.85 of interest. For the 30-year loan, only $276.74 goes toward principal; the remainder forks over $828.65 in interest.
Three years later, the principal on the 15-year loan is $962.26, and the interest is $668.77. The 30-year loan is applying $316.63 toward principal and charging $788.76 in interest.
How does this look halfway through each loan?
Seven and a half years into the 15-year loan, the buyer would be putting $1171.22 toward principal and only $459.81 into interest. The 30-year loan doesn’t reach its halfway point for 15 years (by then the person with the 15-year mortgage is having a mortgage-burning party!). After 15 years, the buyer with the 30-year loan is still shoveling half the payments into interest: $550.96 pays down principal, and $554.43 goes toward interest.
Let’s say each buyer stays in the house until the mortgage is paid off. At the end of the loan periods, assuming neither buyer has paid extra toward principal, the 15-year loan has cost its purchaser $78,526.24, but the 30-year loan has relieved its buyer of $182,948.10.
For the borrower, interest is money down the toilet. You might as well shred hundred-dollar bills and flush them. Seventy-eight grand is quite enough to fork over for the privilege of paying an astronomical amount to keep a roof over your head!
I would agree with Chance: you’re better off buying a lesser house and straining every muscle and sinew to pay it off in 15 years than you are to diddle away 2.32 times as much interest on the 30-year loan. The alleged savings in taxes are negligible compared to the amount you’re paying on interest over the term of the loan.
If, as some people suggest, you apply an amount equivalent to 10% of the monthly payment to principal, you’re not paying as much interest as you would on the 15-year loan, but neither are you knocking down principal much. Ten percent of our proposed loan payment is only $110: that’s +-$526 short of the amount needed to reduce the 30-year loan to 15 years. Although it is true that the extra payment toward interest would mean that 15 years into the loan principal payments would be higher than interest ($659.96 vs. $445.43), at the end of the loan this buyer has still paid $146,783.23 in interest. That’s almost twice as much she would have paid had she taken out a 15-year loan.
If our buyers can’t afford the higher payment needed to pay their loan in 15 years, maybe they would be wise look for a cheaper house.
Principal and interest figures calculated in Quicken 2006 for Mac.
If you’re still employed and you have some cash, now could be the time to invest in real estate. And not just because it’s cheap. The better reason is that when inflation happens, the real cost of interest on a loan drops. Let’s say you have a loan at 6 percent. If the inflation rate is at 3 percent, the “real” interest rate you pay is 3 percent (6% – 3%). But if inflation jumped to 20 percent, then your real interest rate would be -14 percent (6% – 20%).¹
In the near future, we’ll be seeing some serious inflation. This will come about because of the huge amount of money the government is minting and pouring into the economy. Dollars will be worth less—possibly lots less—and so we should be positioning ourselves to get into investments that will have some value.
SDXB sends a report that appeared in the Financial Times to the effect that China has proposed replacing the dollar as the international reserve currency; this is interpreted as a sign of China’s fear of the inflation that will likely result as the Federal Reserve prints money with abandon.
On a submicroscopic level, we’ve hit upon the very reason I bought a freezer, planted a garden, and started stocking up food and household goods. Prices may very well go haywire in the next few months. If I were living on a fixed income but still could dodder out to the workplace, I’d be looking for a part-time job. Now, not later.
Not since the American Revolution have Americans seen extreme inflation of the sort that occurred in Germany before World War II or, more recently, in Argentina and various Eastern European nations. Probably we won’t see it this time, either, because we have some mechanisms intended to keep this sort of thing under control.
However, I lived through the double-digit inflation of the 1970s. While it was not a period of hyperinflation, it still wrought plenty of harm for many Americans. My husband earned a good living as a corporate lawyer, and so we were not seriously affected. But I saw what happened to my father, who by then had retired on what he thought was enough to keep him comfortably set for the rest of his life: $100,000.
In the 1960s, a hundred grand was a lot of money. By the end of the ’70s, it wasn’t enough, combined with his union pension and Social Security, to keep him out of poverty. Having been burned some years before when the bottom fell out of the insurance securities market (in which he was overinvested), he stashed everything in CDs, which did not keep up with inflation. So, by the time he paid for his room and board at the life-care community where he moved after my mother died, he had no disposable income left. He and his wife didn’t travel, they didn’t go out, they didn’t buy anything more than the bare necessities for existence. Because the two of them had managed to get into the life-care place, they were safe and well cared for. But they were stuck there: they didn’t have much of a life during their last years.
This is why, I think, it’s necessary to accumulate lots more than you think you will need in retirement. Investments should be spread between conservative instruments that do not keep up with inflation but at least don’t go down the drain and somewhat riskier ventures, such as equities and certain kinds of real estate, that are likely to gain enough to keep you out of poverty in the event the value of the dollar drops significantly.
Cultivating frugal habits and staying flexible can’t hurt, either.
Disclaimer: I am NOT a financial advisor! I’m a little old lady with a blog. I have a Ph.D. in English, not an MBA! If anything you read here looks to you like advice, don’t buy it.
This month’s statement from Fidelity shows another $10,000 loss in my big IRA, despite my financial advisors’ having moved as much as possible into conservative investments, gold, and cash.
At the age of 63—damn! soon to be 64!—I’m watching my retirement investments melt away. That IRA has dropped in value from a high of $326,000 to $193,000. Total savings have dropped from over $600,000 to less than $420,000. Meanwhile, we owe $23,000 more than the Investment House is presently worth, and I took out a second on my own house to renovate said investment.
I’m wondering if it’s time to do something completely, utterly, totally contrarian. Hang onto your hats, folks, because this is one scary idea:
Maybe I should cash out that big IRA before it’s all gone. I have enough set aside in savings to pay off the small second mortgage on my house; if instead I combined that with the amount remaining in the IRA, I could use the money to pay off the loan on the Investment House. My son could then continue to pay me the amount he’s been paying toward the mortgage as a variety of “rent.”
I would repay him his share of our combined investment in the house so far. This would provide him enough to go back to school, which he would like to do.
If he decides to go to the University of Arizona, which has a better graduateprogram inpublic administration than the Great Desert University’s, I could either rent his house, providing a nice bit of cash flow, or I could rent mine for even more, move into his, use the rental on my house to cherry out the little house downtown, and collect a ton of money.
Because I no longer have enough in savings to support me in old age, I’m going to have to work until I drop. When the deans physically throw me out of the place (assuming I haven’t died before then), I would have the rental income from one house, Social Security, and income from taking out a reverse mortgage on whichever house I’m living in.
Hm. I wonder what that would look like?
Let’s assume a miracle happens and the Obamaites succeed in turning the economy around. Let’s assume that starts to happen in, say, three months, during which I continue to lose at the rate of 10 grand a month.
Several options present themselves:
1. Stay the course. Change nothing in the investment strategy
2. Pay off the house; have my son pay the amount he’s been paying, only to me.
3. Pay off the house; my son goes to school elsewhere and I rent his house.
4. Pay off the house; my son leaves for graduate school; I move into his place and rent my house.
I ran some figures in Excel. My math is not very good, so these prognostications may be out in left field. But if I’m right, it looks like I would be better off to pay the mortgage and have M’hijito pay me a monthly “rental” in the amount that he’s now paying the mortgage company. I’d still have enough to refund him his investment in the house, which would pay a big chunk of his graduate school tuition, or at least revive his Roth IRA.
I posited three mortgage-payoff scenarios and estimated my net income if I retired at age 66 (which ain’t gunna happen) or at age 70 (the earliest I can imagine being able to afford retirement). I assumed equity investments would continue to drop 10% a month for the next three months and then begin to rise at about 3% a year from now forward. In scenario 1, M’hijito stays in the house and pays me rent of $600 a month. In scenario 2, he goes to graduate school in Tucson and I rent his house for $950/month. In scenario 3, he goes to Tucson, I move into his house, and I rent my house for $1,000/month.
I listed all the bottom lines in Excel and then sorted to show the numbers ranging from least income to most income.
Compared with staying the course (leaving my investments where they are and continuing to pay the mortgage), all three pay-off-the-mortgage scenarios seem to look better, unlessM’hijito stays in the house and I’m forced to retire or am laid off at age 66.
The big unknown is whether I will keep my job. If I’m canned before I reach age 70, we lose a very big bet. But if I can hang on until age 70 and I’m not purely raped by the taxman, then I end up with a net income fairly close to my present net.
On the other hand, if I’m canned, we’re screwed anyway.
My son would get back the money he put into the down payment. He could continue to live in the house as long as he pleased, but he would no longer be chained to the thing: he would be free to go to school or take a better job elsewhere.If I moved to his house, when I really get desperate for money (which will inevitably happen as my health starts to fail and medical care costs soar), I could take out a reverse mortgage on the place. M’hijito would then lose that house after I die, unless he wanted to pay off the reverse mortgage, but he would inherit my paid-off house, which by then would be making a nice rental income for him, or (with some fix-up) would be a good place for him to live.
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.
As Cassie and I were walking home from an early evening stroll last night, a neighbor stopped me to report that a stray pit bull has been running loose in the neighborhood for the past week or so, and that he had just seen it go into my yard. The animal was gone by the time he and I talked, but it was a mildly disturbing exchange.
Dog fighting—which mostly involves “pit bull” type animals of indeterminate breed related to the Staffordshire terrier—has become a serious problem in Arizona. A common entertainment of toughs and hardened criminals, this lucrative gambling racket thrives on breeding aggressive dogs and abusing them to the point where they are truly dangerous. The problem is not so much in the dogs as in their sociopathic owners. Pit bulls have found favor among street gangs, who use them to protect their drug operations and intimidate citizens as well as in organized dog fighting. In fact, the pit bull has become emblematic of the Bloods, a widespread violent street gang. The interest in pit bulls among celebrity thugs like football star Michael Vick and rapper DMX does not help matters.
The dog shelter where I rescued Cassie was, like most shelters in Arizona, overrun with pit bull-type dogs. It is located in an area infested by gangs, and so the predominance of pit bulls there is not surprising. What is surprising is that I managed to retrieve her before she was “adopted” to be used as bait in training vicious fighting animals, a common practice among dog-fighting breeders and trainers.
The Centers for Disease Control caused quite a flap a few years ago when it released a report saying pit bulls are responsible for about a third of U.S. dog-bite deaths. Groups advocating bans on specific breeds succeeded in getting legislation passed in several states and cities. In fact, though, the CDC did not say the problem lies solely with pit-bull type dogs but that—given enough provocation—any breed will bite, and the study explicitly said the group does not support breed-specific controls. During the study’s period, Rottweilers were the most commonly reported breed in fatal dog attacks. Together, pit bulls and Rottweilers are responsible for more than half the fatalities from dog bites in the U.S.
The sociopaths who breed pit bulls for dog fights use savagely brutal “training” techniques, and they will shoot dogs that lose or back down during a fight. The result, of course, is a dangerously mean-tempered animal, and over time, a breed that has been selected for aggression and viciousness. Anyone who thinks such an animal is not potentially dangerous is fooling himself. Fighting dogs that are not killed are often simply abandoned after a lifetime of horrendous abuse that inclines them to attack anything that comes their way—there’s a chance that’s how our visitor got here.
So, I wasn’t pleased. A street pit bull, which will not back down when confronted by a human and is usually impervious to pepper spray and blows from a well-aimed kick or stick, poses far more risk to Cassie than do our urban coyotes, which are fairly easy for an adult human to scare off.
And more to the personal finance point: I wasn’t pleased because this is yet another indicator of the encroaching slums.
Though my immediate neighborhood and the district just to the south and east are nice enough, these centrally located enclaves are surrounded by blight. One of the reasons that for years I felt a nagging sense that I should move someplace else is that when I worked on the West campus, I had to drive home and into the neighborhood from the north. Coming in from the north and the west takes you through miles of working-class neighborhoods and downright slums, which get crummier and more menacing as you approach our neighborhood. The northern fringe of our neighborhood has been dragged down by the noise and crime from a seedy shopping center, now mostly vacant after its anchor, a Fry’s grocery store, finally closed. The departure of the Fry’s, however, did nothing to help improve that area, mostly because as the real estate market deflated there was no way for the home values to go up. Values in that section of the neighborhood were already depressed, and as they have fallen further, a worse element has moved in and the properties’ deterioration has accelerated.
Driving in from the south and the east, as I’ve been doing since I started working on the Tempe campus, carries me through the middle-class and high-income neighborhoods that line north Central Avenue. These are pleasant areas, and so one tends to forget that everything to the west and the north is a dangerous slum. Out of sight, out of mind.
You can’t keep it out of mind forever, though, when the denizens’ rejected pit bulls are wandering through your front yard and when your neighborhood is under siege from burglars and home invaders.
My problem with moving, besides the fact that my property values are as depressed as anyone else’s, is that I happen to like living in the city’s central core. I don’t want to move out to the suburbs. I dislike Tempe, Mesa, and Chandler and don’t want to live there, and I have exactly zero desire to move to the only affordable middle-class venue I can find, which is Sun City. Except for my specific six-square-block neighborhood, which because of its status as a buffer zone between the rich folks and the gang-ridden slums to the west has always been underpriced relative to similar houses a block or two to the east or south, there is no other desirable part of the central city where I can afford to live. A one-bedroom apartment closer to the center of the city costs more than my four-bedroom house on a quarter of an acre with a pool.
Last night I crawled the online real estate listings and found three short sales or foreclosures over in the “good” part of my area. One potentially attractive house that was completely gutted many months ago is still on the market—the bank is asking $175,000 and entertaining any offer. My guess is the fix-up job will require about $100,000. You’d still end up with a nice house for about $100,000 less than the (former) value of surrounding properties. But it’s not livable—no kitchen, no bathrooms, no flooring, no nothin’—and so you’d have to live somewhere else for the several months required to rebuild the place.
Another house, about as far north as mine but only a block from swanky Central Avenue, is on the market for $230,000. It’s a short sale. This, too, is priced well below the value of neighboring homes, but it’s on the upper end of my price range.
The backyard is nowhere near as nice as mine, and heaven only knows what’s inside.
Deep in the heart of North Central—must be just one or two houses in from the coveted tree-lined boulevard—is this little gem:
It appears to have a nice kitchen. Two fireplaces, one of them in the master bedroom. What look like real wood beams in the family room. They want $289,900 for this, as is. In that part of town, they’re practically giving it away.
But that’s still way more than I can afford. I’d be surprised if I could get $230,000 for my house today, and that’s before I fork over Realtor’s fees and closing costs. The truth is, I can’t sell my house for enough to get into any better area that is not on the far-flung fringes of the Valley or in Sun City.
