Coffee heat rising

home values

What Will Your House Be Worth in 15 Years?

by

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.

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

by

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: What does the future hold?

by

One of my Realtor friends says that not so long ago, he seriously considered declaring bankruptcy to get clear of the three properties he bought at the height of the bubble. He’s dropped the plan, seeing that things are slowly turning around, but he’s skill skeptical about the future.

Meanwhile, some speculators think real estate is set to grow at a fast clip. Yeah: any time now. Yale economics and finance professor Robert J. Schiller reports on surveys of home buyers’ attitudes. In 2009, 311 people responded. Asked how much they expect their property value to change annually over the next decade, their average answer was an increase of 11.2 percent; the median response was 5 percent.  Asked about short-term prospects, respondents answered, on average, that they expected a 2.3 percent rise in their home value over the next 12 months.

He who thinks his single-family residential property value is going to increase 11.2 percent per annum over the next ten years is stuffing his pipe with some mighty potent happy weed.

Over the decade I owned my last house, its value rose about 8 percent a year. But I got a good deal on it when I bought it out of an estate at the tag end of the recession that followed the savings and loan fiasco, and I sold it just as the late, great bubble prices were starting to run up. A four-bedroom house with many designer remodels, it stood on a nice street bordering a prime central neighborhood, within walking distance of an acceptable public school.

My guess is we’ll see a plodding annual increase of about 2.5 percent for the next several years, followed by a rise to 3 percent for a couple years, then settling into to 5 or 6 percent for the duration. More optimistically, I can imagine a 3 percent growth rate for several years that then drifts past 4 percent and 5 percent to arrive and stick at a steady rate of 6 percent per annum.

If you owe, say, $211,000 on a house for which you paid $235,000 and that’s now worth $160,000, what does that mean for you?

Scenario 1. Sale value rises by 2.5 percent for four years, then 3 percent for two  years, then 5 percent for 3 more years:

• Value rises to $176,610 after 4 years.
• It reaches $187,366 two years later, after a total of 6 years.
• And it hits $216,899 3 years later.

You’ve held the property for 9 long years. Interest has picked your pocket thoroughly and you won’t get your down payment back, but if you sell the house, at least you don’t have to bring any greenbacks to the table.

Scenario 2. Value rises at 3 percent for three years, then 4 percent for a year, then 5 percent for a year, then 6%:

• In 3 years, it’s worth $174,836.
• Another year later, at 4 percent, it reaches $181,830.
• The next year, as appreciation shifts upward another percentage point, it’s worth $190,921.
• The following year, at 6 percent, it reaches $202,377. Six years have passed. You’re still upside down, but today if you try to sell it you only have to bring $8,623 to the table, far better than the $41,000 you’d have had to come up with if you sold it in a panic at the outset.
• With appreciation holding steady, you hang onto it for 3 more years at about 6% p.a. (simply by way of comparing it to the first scenario), and it’s worth $241,034.

Because you’ve had to pour a lot of interest into the thing, when you sell it at the end of year 9 you don’t walk away with anything to make Uncle Scrooge proud. But at least you can unload the place without having to pay cash to the bank to get out from under the loan.

IMHO, that’s about the best we can expect. If that’s so, either of two strategies can help turn this lemon into lemonade:

1. If it’s a decent house in a safe neighborhood, live in it and enjoy it for nine years.
2. If it’s not anything you’re comfortable living in, rent it and use the rental income to turn the house into a gigantic tax deduction. Use the revenue to pay the mortgage bills, defraying some of the losses on the investment. If, as expected, inflation goes into the stratosphere, over time you’ll be able to charge enough rent to cover the payments and have some left-over cash to put in savings. Assuming you have a fixed-rate mortgage.

Let’s suppose a miracle happens and houses start to appreciate at 4 percent. This puts you right-side up in about seven years. Well, what the heck! If a miracle like that can take place, surely an immediate annual appreciation of 6 percent isn’t impossible. That would haul you out of the deep end in a little over five years.

There’s another possibility, of course: massive inflation. In that scenario, the real purchasing value of the money you owe on your monthly payments drops. If you manage to get and hold a job, the payments become more affordable over time. The dollar value of your house rises, but then the dollars are worth a lot less. You reach a point where you can sell the house for the number of dollars you paid for it, but those dollars won’t put a better (maybe not even a comparable) roof over your head.

Back in the days when bankers were bankers, they used to say real estate should always be seen as a long-term investment. Guess those old guys knew what they were talking about! And the only thing they smoked in their pipes was tobacco.

Image: Bungalow in Darien, Connecticut. Public Domain. Wikipedia Commons.

Eight strategies to protect your home’s value when neighbors are foreclosed

by

Contemplatingthe Wreck of the Titanic across the street, I decided to see if there are any broadly accepted ways to protect your own property value and preserve something like peace of mind in the face of a nearby foreclosure. Here are a few strategies you can use to cope with a disastrous property devaluation that will degrade your investment in your home.

  1. Remember that you haven’t lost money yet. Loss of value in real estate is not realized until a property is sold.
  2. Stay informed by estimating the value of your home. You can find a valuation calculator at the Office of Federal Housing Enterprise Oversight, along with some other interesting information. Zillow will give you a rough estimate of your home’s worth, if you have an idea of which properties in your neighborhood are comparable to yours in size and quality. OFHEO and Zillow provide only crude guesses; another way to get an idea is to ask a Realtor to run the comparables, view your home, and tell you what he or she thinks the home will sell for, realistically.
  3. Keep an eye on the foreclosed property. Pull weeds, mow the lawn, or have your own lawn service maintain the yard so that it doesn’t turn into a jungle. If you live next door to the house, use your own hose to water the plants enough keep them alive. While it’s true keeping up the house is not your responsibility, this step will help the value of your house by contributing to the value of the vacant house.
  4. Report code violations to your city’s code enforcement or slum abatement office. Most cities have regulations meant to fight illegal signage and unsightly deterioration. A call to your mayor’s office will give you the phone number. Enlist the city and the law to force the lender that now owns the house to keep the property up.
  5. Band together with the neighbors to form a specialized block watch for the purpose of protecting the house from prowlers, vandals, and squatters. Report prowlers to the police immediately. Banks commonly board up foreclosed houses that have been burgled or vandalized, creating eyesores that cause even more damage to neighboring homes. So, it’s in your interest to keep this kind of thing from happening.
  6. Keep up your own home. Tend to your landscaping, keep the paint looking fresh, and refrain from parking your rolling stock on the yard or in the street. If the neighborhood looks well maintained and appealing, the foreclosed property is more likely to attract buyers who will take care of the house and not let it deteriorate further. Such buyers often can afford to pay a little more for the house, which will help your neighborhood’s property values.
  7. On the other hand, put a hold on any elaborate home improvement projects you may have in mind. Limit improvements to maintenance, paint, and unavoidable necessities. This is not the time to add on a room, gut out and replace the bathrooms, or change out the HVAC system just to get a slightly more efficient unit.
  8. Don’t sell unless you have to. Just as selling stocks and mutual funds on the downtick locks in your losses, so selling your house when prices are at a low ebb guarantees that you will lose on your home investment. Stay put. Sooner or later the housing market will recover.