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.
I know you will scoff, but I STILL think you and your son should swap houses. You will then have a smaller house. He will have a house big enough for a roommate–where they won’t be on top of each other all the time. Roommate can ease the cost of the two houses, obviously.
Scoff away!
I scoff not.
It’s an excruciatingly cute little house with a lovely yard. I could live there quite comfortably. My neighborhood is a little nicer and he has a run-down rental across the street. But it’s still an awfully sweet place.
Watching the bubble crash in the US is nerve wracking. We have slowed considerably up here and some markets like Vancouver (which per sq foot is on par w/ Manhattan!) are due for correction. I don’t think all of Canada will crash however, especially smaller markets where boomers are retiring to.
I think you may be overly pessimistic. It may take a while, but the economy will most likely recover, the population will grow, the baby boomers will continue to get older (and want to move to warmer places), the price of heating homes will continue to grow (making everyone else want to move to warmer places, too) and the housing market, particularly in your area, will likely recover.
Or, on the other hand, the world may go to hell in a hand basket over the next decade and things may get even worse.
Either way, projecting with any degree of accuracy what real estate will be worth in 10 or 15 years is pretty much impossible. There are simply too many factors that are unknown, and at this point unknowable.
@ Pat: You’re very right about the uncertainties! The thing is, so much is riding on those uncertainties.
And it is true that Arizona, like other Southwestern states, has a boom & bust economy. But there’s something different about this one. The state’s economy is self-destructing and the people in charge seem to have no clue how to rescue it. I don’t think we’ve ever seen anything even vaguely like what’s happening here now, and, as you say, there’s no way of guessing which way to jump.
A couple of thoughts:
*Isn’t Arizona the state that is getting water from out of state? Or, am being overly pessimistic about the status of water availability and water costs where you are?
*”They ain’t making anymore land.”–makes sense to me that the price of land will not be going down anytime soon as long as the population is on the rise.
*There are two costs in figuring what a person has. Land cost is independent of home cost. This is why you should know these facts and insure the cost of your home instead of the cost of the whole package. In case of fire the land will still be there. Yes, I know you would sell or buy both together.
*Trading houses sounds ideal. Maybe you could be instrumental in making the rundown rental agreeable looking.
*If son can take in a boarder, he can take in two. Seriously, some person may be happy with less accomodations in order the have a place to live more cheaply. A relative (dental student) bought a house and rented it to two other dental students. All bedrooms had locks on the doors, so everyone kept computers and computer use out of the other areas. Don’t laugh, but a room that is tiny and not intended for a bedroom could be rented out by putting a lock on the door. Plenty of suitable tenants would rather have a little less room in exchange for less rent. Your son could reserve more room for himself if he wanted to.
*Older renters who are professionals or school teachers are more likely to hold up their end of the bargain. School teachers cannot have complaints coming in to the Central Office.
*Sacrifice could keep you both afloat, not that I don’t think you have sacrificed any at all.
Ooops, I am told that in addition to his living in his own home, he had three tenants.
@ Practical Parsimony: Arizona is part of the Colorado River Compact, in which the seven states in the Colorado River Basin divvied up the rights to the river’s water. This happened in the 1920s, long before Arizona, Nevada, and Utah had anything like today’s population. The figures on which the apportionment was based reflected the amount of water available during an unusually wet period, historically speaking. For a variety of reasons, there’s been ongoing argument over this apportionment, and when a real drought comes along, Arizona stands to lose. The “drought” we think we’ve been seeing is, some argue, actually the normal state in the region.
The Central Arizona Project pipes in water from the Colorado River to supplement groundwater, which has been mightily drawn down. For the time being, there’s plenty to supply the Phoenix area, but that is not necessarily true of outlying burbs and many of the small towns. If the region runs out of water, obviously, development will come to a stop and people will have to move to areas with adequate water supplies. But then, we know there’s no global warming, sooo… What, us worry?
The house is pretty small. It’s close quarters for two or more unrelated adults. My son in fact did have a boarder for several years. The guy paid a modest amount of rent and covered the utility bills. However, when he made a move on my son’s girlfriend, he had to go. After that episode, my son hasn’t wanted to share his space with anyone else.
We’re both working very hard to stay afloat. All of my teaching income goes to pay my part of the PITI, and to cover his share my son continues to hold a job that he absolutely hates, rather than go back to school full-time to prepare for better-paying and less annoying work.
The theory behind buying in the part of town where the house stands indeed has to do with the value of the land. The neighborhood was (until the depression hit) on the cusp of gentrifying, because the new lightrail track passes within walking distance (but is far enough away not to add noise and seedy traffic), and because it is (or was) one of the few remaining middle-class neighborhoods in the central part of the city. Clinging to the edge of the North Central district, it’s directly across the street from one of most upscale segments of Old Phoenix. There always will be people who are affluent enough to put their kids in private school and who don’t want to commute. If you can afford to put your child in any school you please, you’re not constrained to living in the suburbs. The upscale central-city neighborhoods here are filled with lawyers, doctors, and business executives, and some of them are very upscale indeed. This land along the central corridor in fact is valuable.
Younger doctors, lawyers, and entrepreneurs can’t afford to pay a million dollars for a sixty-year-old ranch house, but they can afford to pay elevated prices for cute little “historic” houses such as the one we picked up. That’s what creates the pressure toward gentrification: young DINKs or affluent young parents moving into central areas, fixing up the houses, and dubbing them chic and historic.
We figured, especially with the ballyhooed train construction, that neighborhood was ripe for gentrification. What we didn’t figure on was a depression, which is what we got. Official unemployment rates here are now almost 10 percent; real rates are around 20 percent. Those who still have jobs have seen furloughs and permanent salary cuts, and anyone who owns a piece of real estate purchased within the past 10 or 12 years owns something that’s worth less than he paid for it.
It’s not outside the realm of possibility that sometime in the future the area actually will gentrify. But it will be a long, long time from now. Meanwhile, the neighborhood will decay, because it’s expensive to keep up those old houses, and when people are out of work, they can’t afford it. And people who buy houses for $90,000 don’t generally have the money to maintain aging properties. The line between “historic” and “blighted” is thin.
I was thinking of him taking your house, the larger as I understand it. You both want your privacy, you and your son. But, could you rent the larger of the houses to three people to cover the payment. Then, could you and he share a house and he could go back to school? I know it is not ideal. My child would rather live anywhere than with me…lol. He might only be able to go part-time, but it would be a move in the right direction. Some of the historic, yet blighted, homes are worth ten times what they sold for not long ago. Yeah, I know it’s a whole different ball game now!
I had a boarder threaten to “kill the f***ing b***h,” meaning me. I decided any amount of hardship was not worth that. I packed up his drunk ass and drove him back to Mama. He would have killed someone if he had driven himself. The boarder’s rent covered the mortgage, so I gave up lots to be safe, totally worth every dime I lost by not renting again.
@ Practical Parsimony: Yes, the situation with his roommate was not far off from that, though no threats of violence were exchanged…at least, not that I know of. Before the girlfriend incident, a number of unsatisfactory circumstances had already arisen, the result of which is that he really doesn’t want to room with anyone again.
My son is long past the point of being able to live with his parents, and not to the point again of being able to tolerate the thought of dealing with an elderly parent on a daily basis. If he decides to go back to school, he’ll need to borrow enough in student loans to help carry the mortgage — it’s possible his father will help out, I suppose. If he decides to go back to the City, then we should be able to rent the house for something close to the mortgage. Renting it would not cover the entire mortgage, but it would cover enough that I could afford to carry the rest of it — and of course, it would turn the house into a gigantic tax write-off.
Rental on my house might cover the mortgage on the smaller house. However, my pool is unfenced, a vast liability. I really don’t think I could take a chance on some renter’s child — or niece or nephew or child of a friend — drowning in the backyard. If I moved into his house, it would be better to sell my place and use the proceeds to pay off the mortgage. Problem is, my house now will not sell for enough to cover what we owe on that place; that’s how far prices have fallen. Some observers, including major players like Fiserv, think housing prices in Phoenix will drop another 16 percent next year.
Oh, the threat was the last straw. He had broken my washer that he was not supposed to touch, eaten food, got drunk and made about 10 gallons of tea that were pitch black…needed major diluting, made something in a sandwich with my food and fell going up the stairs. I had to clean food from stairs!
He was also jealous of my having male company, a platonic friend. Well, find your own guy, guy!
Well, there seem to be solutions in my mind that you have already considered. Maybe it will all work out. I am not dismissing your problem, just out of thoughts.
FAM,
I know the post was mostly about your frustration….
You forget while investing in this house that your rent will increase while your payments stay the same. So not only is the value going up (i.e. that compounding number you calculated) your cash flow should increase too.
Short sell it. Move on, be happy and don’t put the burden on your son or yourself. It’s an investment- that didn’t work out. There are plenty of creative ways to buy… Without credit. How will the economy recover with true unemployment at 15%?