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…
Image: dvs’s photostream on Flickr. Creative Commons.
I think the lesson we’re all learning is to not count on real estate as an investment or income vehicle unless you specifically buy places as rentals. Too many people got caught up in making their houses part of their retirement plans, and now we’re seeing the consequences.
I hope you find a way to avoid walking away from either one of your places. I understand the economic reasons for doing so, but I’ve outlined before how I feel that until this stops, the problem will just go on and on and on. The only way we ever get an end in sight is for people to stop walking away. The $8000 homebuyers credit was a waste of time, in my opinion, because the real problem isn’t getting people into homes, it’s getting people to *stay* in them.
From what I’ve read, Arizona is especially bad. So is Florida, where my mother’s condo is worth less than what she paid–also before the bubble.
I’m wondering, though, if your son couldn’t make peace with Phoenix. There must be some like-minded people for him to hang out with!
My kids were in Birmingham AL last weekend and both remarked on the up-and-coming arts district and the neat restaurants. I’m wondering if such cities will start attracting the young….
@ frugalscholar: Even if M’hijito decides to stay here, which he may or may not do, the house won’t be right for him forever. It’s OK for a single person, OK maybe for a couple in which both parties are very much in love. But realistically, once he finds a wife and they start to have children, they’ll need a bigger place.
Unless the state’s economy gets a lot better very soon — an unlikely proposition — this is not a place you would advise your son or daughter to build a career. Pay is absurdly low, but except for housing the cost of living is no less than it in any other large city. Leadership here is retrograde; the prevailing mentality troglodyditic. A smart, well educated thirty-something quite rightly craves to live some place where elected and appointed leaders are also smart and well educated and where citizens at least keep their bigotry, fear, and mean-mindedness to themselves instead of spewing it out all over everyone within arm’s length.
If I were a young person, I’d be looking for greener pastures…mine would be overseas, but if staying in this country is what you want to do, you could do a lot better in many, more enlightened states.
If your house is paid for, why don’t you rent that out? Also, what about a roommate (yes, I know how unappealing that is!)? Maybe that person could do the lawn and pool maintenance!
If you rent, your house becomes a depreciating asset.
@ MoneyBeagle: The problem is, it’s not rational to keep throwing good money after bad. The very lenders who sucked people into loans they couldn’t afford (we were not among those: at the time the house looked like a good buy at a competitive price) would never think of hanging onto a bad investment. A corporation that finds itself in the same situation defaults; it would be bad fiduciary management to do otherwise.
What’s sauce for the goose is sauce for the gander. Why should an individual be held to some “moral” standard in the marketplace when a corporation is not? Not only not held to the same standard, but held to a standard that dictates that the corporation should walk from a bad investment?
@ Karen: Renting my own house out carries a significant risk: an unfenced pool. How I would get insurance to cover that risk beats me! Besides, I’ve paid my dues, in spades, in the roommate department and am not going to do that again. So has my son: the last one pulled a very nasty stunt on him. He’s in the market for a serious girlfriend now, and it’s not easy to date seriously when you’ve got some guy hanging around all the time. 😉
Sorry, no sympathy from me on this. “They” didn’t put your son’s name on that mortgage, you & your son did, for whatever reason you both wanted to buy that house when you did. Sounds like you were each stretching even at the time of the purchase.
I agree with Money Beagle – things won’t turn around until people stop walking away from their responsibilities they took on themselves. It sounds to me as though your son can’t afford to move, no matter how badly he wants to, unless he or you are willing to take the hit credit-wise.
@ valleycat: He doesn’t especially want to move; however, we do need to consider how we will deal with the fact that we are grossly underwater on this property and that the situation likely will never change.
Things won’t turn around until lenders drop the principal on these loans into the realistic region. Taking the results of a gigantic economic crash resulting from poor judgment by leadership out of the hides of innocent people who bought properties in good faith and then were left holding the bag has no moral validity, nor will it do anything to improve the economy or the future of this country.
Funny – I’m no huge fan of the big banks & cc companies these days either, but you and your son decided to buy the houses & apparently agreed on the price at the time you bought it & signed on for the mortgages for the amount. IMO, if you paid an overinflated price, that was your decision, and you owe the $ you agreed to pay them. I don’t see how it’s the bank’s fault now that you’ve lose money on the deal but think you shouldn’t have. If it is, as you say, galling, then cut your losses & take the hit sooner rather than later, so you can put it behind you & get on with your lives. (enough cliches for you? 🙂 )
If your stocks drop in value — will the companies return your original investment? Of course not.
Why should banks care if your house ‘investment’ went south?
Walk away? Sure, but two wrongs don’t make a right.
As you have written about in the past, you have plenty of cash in the kitty. Take the hit and move on.
@ valleycat: Where did I say it was the bank’s fault? Where did I say we paid an overinflated price?
I said neither of those things, because neither was ever true. The credit union — not a bank — made a rather conservative loan on a piece of property that appeared at the time to be UNDERvalued, not overvalued. The lender, my Realtor, I, my son, and an independent observer believed we were buying as the market was bottoming out. No one, but no one, could have imagined values would drop so dramatically that they would fall below a level that was deflated 15 years ago. No one imagined that values would drop to such a low level they may never return to what was a NORMAL — not a bubble-inflated — level.
And @ Leah: There is no “fault” here! What is, IS. It’s the way things are.
And here’s the way things are: having purchased, at what we and the lender had good reason to believe was a fair, even a low price, a piece of property whose value has dropped through the sub-basement, we are now throwing good money after bad. We’re paying on a worthless loan.
“Plenty of cash in the kitty” happens to be my retirement savings. If I fork over $100,000 to the bank so we can get rid of a house that is now worth less than half of what we owe on it — not what we PAID for it, which happens to be about $80,000 more than we owe — then I will not have enough left to support me through old age.
We have seen that I can’t live on Social Security alone. We know that if I live more than another five to eight years, I will reach a point where I can’t continue to work. Who is going to support me if I hand over my retirement savings to cover a bad loan?
Do we really think there’s some moral high ground in sacrificing an old woman’s retirement savings and asking the taxpayer — that would be you, my friends — to support her for the rest of her life? Do we think there’s something morally edifying about her living in desperate poverty for the rest of her life?
I for one do not. Especially when I know and you know that no corporate board of directors would ever allow its entity to do any such thing. That would violate the directors’ fiduciary responsibility to their stockholders. When a bank or corporate investor sees a loan going south, the entity cuts its losses by defaulting or declaring bankruptcy. That is the way of the world.
There is no moral issue involved in this.
We really need to get past that idea. A house mortgage is the same kind of business deal as any other business deal, and the same rules apply. A mortgage is a secured loan. When the borrower defaults, the lender gets the security: videlicet, the mortgaged property. If the lender guessed wrong about the future value of the property, then the lender loses just as the borrower loses. That is in the contract: it’s the agreement the lender and the borrower made when they BOTH signed on the dotted line.
With values deflated to such an extreme degree, everyone loses all the way around. But given the terms of the contract, the individual who took out the loan is under no obligation to absorb all the loss. To expect the borrower to fall on his sword just simply does not make any kind of rational sense. In fact, it violates the terms of the mortgage agreement.
If the lender does not want to be stuck with a worthless property, then what does make sense is for both parties to come to the table with a willingness to compromise. The credit union could keep us in the deal by adjusting the principal to something close to reality. Drop the loan principal, and they get out of having to take over the property and unload it for far, far less than what the house is presently worth, even at its deflated value. Drop the principal, and they keep us paying interest for next 15 to 30 years. The credit union doesn’t lose its collective shirt and we do not lose our individual shirts.
How does that not make sense?
If you can get your son’s name off the mortgage then I would walk away without a second look back. He future isn’t in AZ, your future may not be, why sweat it?
We paid $244K for a coop in Westchester County at the peak. Our monthly maintenance is insanely high. I think MAYBE we could get $130K now. It’s really depressing. Plus the place turned out to be crazy noisy, so I basically haven’t slept for five years. It’s like being in a very expensive prison.
@ Liz L. {gasp!} At least one thing we can say about both these houses, they’re pleasant places to live. My sympathies on the dorm/prison digs.
Something’s gotta give here. If it’s true that values will never approach the figures of six years ago, which essentially represented the inflation-adjusted value of housing, then lenders are going to be forced to adjust principal on these bogus loans.
Too bad we’re not living in the 60s, when people were willing to take to the barricades over stuff like this. A few riots in the streets might get our august leaders’ attention…