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.
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.
What with the proposal that the government should force mortgage rates down to 4 percent, I mentioned to M’hijito that we should be prepared to re-refinance the Investment House, the place he and I are copurchasing partly as shelter for him and a paying roommate and partly as what we imagined would be an investment. He said he didn’t think we’d qualify, because we’re now upside-down in that house. Whence this intelligence? Zillow!
So I thought I’d better check Zillow to see what it claims the house is currently worth. Yup: the site estimates its value at $188,500, which is $46,500 less than we paid for it. But… Directly behind our house is a nearly identical cute little brick house in foreclosure. It has been partially renovated (ours has been completely renovated), but the owners dropped out of the picture before they could finish the job. Flooring is down to the concrete; bathrooms are unfinished; it needs a new roof. Zillow values that wreck at $225,000!
Our house has a new roof, new air conditioner, updated wiring and plumbing, and has been completely gutted out and rebuilt inside. Makes sense, eh?
If Zillow is figuring on a straight square-footage basis, at $188,500 our house is worth $143 a square foot. The house behind it has a 500-square-foot add-on. That should add $71,500 to its value, over the value of ours; in that case, it would be worth $260,00.
Interesting. I wondered what Zillow thinks my place is worth. Entering my address brought up an estimate of $284,500, or $52,500 more than I paid. Noticing a “recently sold” icon to the north, I clicked on it, thinking it was the rental house that Manny, the font of all neighborhood gossip, said was on the market.
But no! It was my neighbor Sally’s house, directly behind me. Zillow claimed it had sold in October for $192,500.
Say what?Sally is still very much in evidence. No “for sale” sign has ever gone up, though sometimes houses around here sell with no notice. But if the house had been sold last October, surely Sally would have moved by now.
Hmh. Well, these houses are on two parallel roads with the same name, one ending in “Lane” and one in “Way.” The street numbers are the same, so that packages and workmen meant for 501 West Erewhon Way often end up at 501 West Erewhon Lane, and vice versa. Clearly, someone got the address wrong, and Zillow picked up the error. Not enough, however, to post a picture of Dave’s house when you click on Sally’s: what comes up is a fine photo of Sally’s front elevation.
It gets better. Despite the alleged fire-sale price, Zillow values Sally’s house at $300,000, well above what any house in this neighborhood has commanded over the past two years. Her house is old and unrenovated, replete with the original harvest gold Formica counters and matching appliances. It’s clean and neat, but it needs a paint job, a new roof, a new air conditioner, and a full interior remake to bring it into the three-hundred-grand range.
Dave’s house is valued at $289,500, despite the $192,500 selling price. It is two square feet larger than mine, sits on the same-sized corner lot directly across the street from mine, has a pool about the same as mine, and landscaping comparable to mine (but lacking fruit and shade trees). It was built in the same year as mine by the same builder. It has a minuscule, dark kitchen, needs a new roof and new air conditioner, and soon will need new pool equipment. My house, in contrast, has a large, bright kitchen with a skylight (one of four in the house), sunny and open rooms, gorgeous tile floors throughout, a park-like yard with not one, not two, but three beautiful outdoor sitting and entertaining areas, a new roof, new kitchen appliances, new pool equipment, new bathroom everythings: Zillow values it at $284,000.
And this makes sense…how?
Zillow is the last place I would go to get a reasonable estimate on the value of a house. If you’re interested in buying a house, get your Realtor (and do engage one who alleges to represent the buyer, despite the speciousness of that claim) to run the comparables in the area and show you a printout. Visit those houses to be sure they really are comparable to the place you covet.
If you want to know what your house is worth, any Realtor will run the comps for your place. This is generally a free service, offered in hopes that you will list with the Realtor who is nicest to you. Ask a real, live Realtor, not Zillow, about the value of your house.
Rumor has it that Dave’s Used Car Lot, Marina, and Weed Arboretum has already been auctioned off. A neighbor called one of the numbers on his FSBO sign and was told the house just sold for $192,500.
If that’s true, it’s a disaster for me:just before the bubble started to inflate,I bought my home for $232,000. If Dave’s pigsty sold for any such price, it means my house is now worth less than I paid for it.
On the other hand, why do I doubt this story? Let me count the ways:
No real For Sale sign ever went up.
No “Foreclosed” stickers ever appeared on the doors or windows.
No “Auction” sign was posted.
Dave has been out of the place for less than a week.
Houses in the neighborhood, even deeply discounted for-sale-by-lender houses, have sat on the market for weeks and months without moving; it’s unlikely Dave’s would have sold in less than a week.
As anxious as banks are to unload distressed properties, it’s unlikely that they’d let it go for $65,000 less than a similarly trashed house went for just a couple of weeks ago.
No. This story smacks of disinformation.
Well, we’ll find out soon enough. The place is not habitable as it is, so if someone bought it, we’ll soon see workmen swarming around. With any luck, maybe a speculator will clean it up and resell it at the market price (which still exists, after all).
My estimate for clean-up and updating: about $60,000. Thirty thou’ on the lowest end; sixty thou if you wanted to do a decent job of it.
Clean garbage and weeds off lot: $800
Disassemble and haul junk storage structures, the large, dangerously decrepit wooden children’s climbing set, and other large pieces of junk: $800
New air conditioner: $5,600
Reroof: $5,000
Replaster large pool and replace decrepit, probably broken pool equipment: $10,000
Scrape and paint exterior: $1,500
Paint interior: $2,000
Recarpet: $3,000
Stovetop: $800
Refrigerator: $1200
Dishwasher: $500
Cleaning service: $200 (no one in her right mind would clean out the sty for less than that!)
There’s the bare minimum: about $30,900. That would make the place rentable, but not for much. Now let’s make the place saleable for a decent price:
Wall oven: $1,200 (viewed through the haze of a filthy window, the oven looks relatively new and might stay if it’s functional and can be cleaned)
Yesterday I came very, very close to making an offer on a house in the tonier part of our neighborhood. The seller, an aged widow who has moved out of state, is offering a vintage 1957 three-bedroom ranch house in an area of $600,000 houses for just$400,000. My agent friend discovered from the seller’s agent that she would entertain not only a low-ball offer but also a contingency offer!
So, we concocted a scheme whereby I would offer $350,000 for that house and then try to get enough from my house that I would walk with $325,000, leaving me with a very small mortgage and enough room to borrow an extra $30,000 for fix-up.
For a brief, shimmering moment, it almost looked doable. Then sanity crept in: “Hey,” said I, “maybe we should run the comps in that subdivision before we present this offer to the guy.”
Oh. Yeah! Maybe so.
In recent memory only three comparable nearby houses have sold. One, a similar model but smack on Seventh Avenue, a hectic main drag, was purchased for $600,000 but just sold, in a short sale, for (hang on to your hats, dear readers) $261,000. Another went on the market FOUR HUNDRED DAYS AGO at $600,000. The seller lowered the price steadily in small increments, but only very recently did the house go under contract-after the price dropped to $450,000. No idea what the contract price actually is, since it has yet to be published.
Under those circumstances, $400,000-or even $350,000 or some compromise between those two prices-doesn’t seem like such a bargain for a fixer-upper, nice neighborhood or not. Add to that the fact that the most basic fix-up would run around $30,000 but still would fall far short of the $60,000 to $100,000 the house needs to bring it up to par with its neighbors.
Meanwhile, here in the low-rent district price drops have been nothing like that. Au contraire.
La Viajera, who bought my last house from me and then defaulted, actually ended up with the bank accepting a short sale of $261,000. She bought the house from me, four years ago, for $211,000, then refinanced to take money out of it as the make-believe value ballooned. That is a growth in value—as in “a house is worth what someone will pay for it”—of more than 5.5% a year. During a period when real estate values across the nation are dropping!
The average actual sale price in my tract is $271,000. My house is slightly above average in quality, with a pool, a new roof, four new skylights, lush xeriscapic landscaping, a watering system, an extra-large lot, new double-paned windows, a deck and a covered patio, renovated kitchen and bathrooms, new flooring throughout, and a custom paint job. The most realistic estimated sale price is about $300,000. I paid $235,000 for it: that’s an increase of a little under 6.5% a year.
It appears to be a matter of location, location, location. Some parts of the city have been very hard-hit by the real estate recession, particularly the brand-new instant “communities” recently tossed up on the far outlying fringes. Closer-in areas are also suffering: at our city councilman’s regular breakfast meeting with constituents today, we learned that 800 houses have been abandoned in our (overall pretty downscale) district alone. But in this immediate neighborhood, to my knowledge we’ve had two actual evictions and repossessions (one of which is presently undergoing a major renovation) and three short sales. That’s a lot for a small area, but it’s far from every second or third house, and in this immediate development, the losers apparently haven’t much affected property values.
Think of that. It pays to be in a centrally located lower-middle-class neighborhood.
