I’ve Been Watching Too Much Property Ladder

Along with the hot real estate market, there were a ton of different TV shows about flipping houses, where they would chronicle the attempts of pros and amateurs attempting to make some bucks flipping houses.

One of the shows my wife and I fell in love with was Property Ladder.  On that show, it focused on mostly amateur flippers who quickly got in over their head.

The show always started off showing the flippers describing what they wanted to do and in what time frame they wanted to do it in.  The hostess was usually very skeptical and the voice-over guy was downright snarky, usually ending something along the lines of “They want to gut the kitchen, remodel the living space, knock down walls.  If they get their asking price, they’ll make $50,000.  They think tey can do all thishis for just $40,000 and in just six weeks!”   The rest of the show would then show how the hapless flippers would usually spend at least twice that amount and would almost always bust their schedule big time. Sometimes they actually made money, but still, the snark is awesome!

Anyways, I think I’ve been watching too much.  My wife and I were on a walk in our neighborhood.  A house that has been deserted and in obvious foreclosure recently had a big dumpster appear in the driveway which was quickly filled up with the results of some sort of demolition.  Shortly after, a FOR SALE sign appeared in the yard.  I peeked in through the window, and based on the condition, surmised that whatever had been demolished was probably in the basement, since all of the living spaces looked intact.  My guess is that a pipe burst, destroyed a finished basement, and they returned it to it’s non-finished state.

Still, I turned to my wife, and said “Hey, why don’t we put an offer in on this for half the price?  We can remodel it for $40,000, make $50,000 in profits.  And all this, in just SIX WEEKS!”

Needless to say, my wife just kept walking!

Why I Think Housing Stands A Chance

One of my new blog reads is a personal finance blog called 20s Money.  It’s centered around personal finance for people, as you might guess, in their 20s.  Even though I’m in my 30s, I still enjoy it and think it’s a very well written blog that’s fun and enjoyable to read.I’m pretty sure that it will get moved to my blog roll next time I make some changes (hopefully in the next few weeks).

Kevin wrote a post yesterday where he expressed his opinion that Housing Isn’t Going to Rebound.  It goes without saying that the housing market sucks and that pretty much everybody that owns a home (including me) has seen the value of their home plunge.

So, I agree with Kevin on that point.  I also agree that we will not again see ‘values shoot through the roof’ again in our lifetime.  In fact, I think that’s a good thing because now that we’ve seen what happens when they do, that type of explosion does more harm than good.

Since, as you can probably surmise from the title of Kevin’s post, he feels the picture on housing is bleak, I thought I’d take a look and see if there’s reason for a little more optimistic view.

I think that there is.

Let me start off by saying that in order to judge housing and whether it’s worth getting into at any time, you have to reset your expectations.  If your measuring stick is the gains we saw in the last decade, or even that housing will be a big moneymaker, then I’ll agree that there’s no hope in housing for you.  Why?  Because those expectations are out the window.

But, if you’ve reset your expectations a bit, here’s a few reasons why I think there’s hope:

  1. Not everybody wants to rent – There are people who don’t look at just the financial numbers associated with buying a house, but they look at the fact that they don’t want to be renters or be around renters for their entire lives.  I’ve lived in apartments in the past, and while I had some great times there, I realized that it wasn’t the lifestyle I wanted to live in, especially as I looked ahead to when I might have a family (which I now do).  For some, renting is great, and if that’s you, I commend you.  However, there’s a big portion of the population that wants to be in something that they call their own and who want to be around others with the same mindset.  For this portion of the population, home ownership will have an appeal.
  2. There’s a built in incentive to owning a home – Inflation, in the long term, actually provides an incentive for home ownership.  How so?  It’s simple.  Right now, if you’re looking at the opportunity to buy vs. rent, your monthly payment is probably a big factor in making that decision.  There is certainly the down payment element to, which I’ll get to in a minute, but focusing on the monthly payment for a second, here’s what you might find.  The buyer might be faced with a payment of $1,000 where the renter gets a similar place for $800.  So, renting is clearly favorable, right?  Well, for now it is.  But, assuming the buyer got a thirty year mortgage, what that means is that their loan payment will be $1,000 for the next thirty years.  But, renters typically only lock in for a year.  So, if inflation goes up, that rental might cost $825 next year, $850 the year after, $900 the year after.  At a certain point, the person paying rent will actually start paying more than the renter, where inflation is ‘protecting’, if you will, the payment of the buyer.
  3. We’re starting to save more – People are finally getting the hint that holding lots and lots of debt with nothing to show for it is not a good financial strategy.  As such, people are paying down debt and trying to put money away.  Since we’re still in the middle of a recession, this isn’t going as well as it could, but I’m optimistic that even baby steps will help.  When this happens, eventually people will have money to afford a down payment.  As (hopefully) more and more people shed credit card debt and instead build a pool of money, this could open the door for more and more people to purchase homes.  Actually, this isn’t a new idea, because until the 1980’s or 1990’s, saving up a down payment on a house was the way it was done.

I know that there will be people that remain pessimistic.  I also know that some people will probably say my possibilities are unrealistic.  That’s all fine and good if you do, but I’m just putting out there some possibilities that I see that I feel are realistic and, if they happened to play out, would lead to some cautious optimism in regards to the housing market prospects.

I will be the first to admit that things do look bleak, but I also hold in mind the old saying that it’s often darkest just before dawn.

What do you think?

Did The Banks Force You To Sign Your Mortgage?

My Two Dollars posted an article last week that made me see red.  In the article, David (the author) said that he’s changed his mind and that he now thinks that it’s OK to walk away from your mortgage if your property value has declined to where you’re underwater on your mortgage.

Even if you can afford to pay.


His argument (and he links back to another article in the NY Times that advocates the entire thing) is that the banks have been unwilling to help the borrowers out who they know are underwater, so turning around and ‘sticking’ it back to the banks is fair play.

I think that’s baloney.  I actually think it’s a lot more than that, but the words I’d like to use are ones that I try to stay away from in a public blog.

First, two wrongs don’t make a right.  Just because the banks are being ‘big meanies’ doesn’t mean that walking away will somehow wrong that right.  There are other ways to go about dealing with this issue.  Keep working with your bank.  Try to sell your house.  Or, keep making the payments.  I mean, to act all flabbergasted that the banks are not jumping up and down to work with you, are you serious?

If anybody really thought that the banks were their buddies just because they acted all buddy-buddy to get a mortgage deal signed, well, give me a break.  Banks are in the business to make money, and they do so largely in part by signing loans.  Why do you think that the bank owes it to you?  Let me ask this of anybody who thinks that it’s OK to walk away: If the value of your home had continued to go up and you sold it for a nice profit, would you have ‘shared’ that profit with the bank?  Didn’t think so, but how is anybody throwing a tantrum because the bank won’t ‘work with them’ any different?

Second, nobody forced you to sign the papers in the first place, did they?  As far as I know, a lot of people signed a lot of papers agreeing to pay a lot of money for houses that, as it turns out, were not going to hold their value.  While I agree that this is bad news, the fact is that there was nobody from the banks or the mortgage company holding a gun to anybody’s head (except maybe on the Sopranos).

Let’s face it, many of the same people that bought houses inflated in value was because they saw it as an investment.  Just like any investment, a stock, a bond, whatever…there’s a risk.  But, instead of these people dealing with their losses like they would in any other investment, they would now rather  leave someone else to deal with their losses.

That’s baloney.

Third, the short-sightedness is unbelievable in the logic that David uses. Why? Because banks aren’t the only ones that lose here.  Yes, you might be ‘sticking it to the bank, but let’s think for a minute of all the other people, real people that aren’t hiding behind corporations or skyscrapers, that get screwed every time someone walks away that could afford to keep paying:

  • Neighbors – Anybody around the vacant home now has to deal with an empty house that will, more often than not, turn into an eyesore as the lawn goes uncut, the snow doesn’t get shoveled, and gets open to all sorts of problems such as infestation, scavenging, broken pipes, or any other number of things that even a few months of neglect can bring on.  And usually these sit for more than just a few months.
  • Neighbors – Yes, I’ll mention the neighbors again because now what happens is that the bank will have to foreclose and this will usually lead to lower values in the neighborhood.  So, every one of your neighbors watches their own home value drop when you walk away.  You think the bank is the one eating your loss, but chances are your neighbors are even more.
  • The municipality you live in – I’m guessing that when you walk away, you’re going to stop paying the property taxes.  Since most municipalities rely on property tax collections to fund their operations, you’re leaving them with less for as long as the foreclosure process goes on.  That means less money to provide police and fire safety, less money to keep up infrastructure such as roads and other essential services in a time when many cities are barely scraping by as it is.
  • The kids in your school district – Where I come from, property taxes also fund the public school system.  You leave, and there’s less money to fund the schools.  At least here in Michigan, educational spending has already been cut a few times, largely in part because of declining property values AND less property taxes collected because of people who enter foreclosure.  To think that there are people contributing to this willingly is simply nauseating to me.

I wonder if anybody that walks away simply to screw the bank  looks in their rearview mirror as they’re driving away and sees all the rest that they’re leaving behind.  Because, there are a lot of other people affected by that selfish decision, not just the bank.

Let’s also mention the circular effect. As I mentioned, walking away typically leads to a foreclosure, which more often than not leads to a decline in the home value on the abandoned property and all the properties around this.  These declining values will then lower values so that someone else goes underwater.  Then, they walk away and that depresses the value even further, which leads to someone else walking away, and so on and so forth.

When does it end?  Are we supposed to become a nation of renters because if things kept going and going, that’s the end game.

I think I’ll pass on that one, thanks.

If we want this real estate mess to stop, there has to be personal responsibility.  There has to be sacrifice in order for this cycle to stop and for us to start the process of stabilizing the real estate market for good.  It amazes me when I see blog posts and news stories like David’s who either want to delay this process, or want to make it someone else’s problem.  In the end, that’s all it’s doing every time someone walks away is making it someone else’s problem.

Let me put a disclaimer or clarification on all this.  If there are circumstances where you can’t afford your house, say you lost your job or you have a medical expense, or something else that’s put your finances in the tank, none of what I said applies to you.  I understand there are thousands of people who had to walk away from their homes because they had no other choice.  I’m not chastising you in this article.  What my comments and my anger are centered around are those people who still have their jobs, who can still afford the payments, but choose to consider not making them simply because things didn’t work out like they planned.

One of my favorite bloggers is Funny About Money.  Funny lives in Arizona and until the end of 2009, she worked for Arizona State University, but found herself out of a job due to budget cuts, and is now effectively retired.  She now lives on her banked time and unemployment, and will soon be living on Social Security and a small-to-modest retirement account.  She will be scraping by.

She also has a house that is worth a lot less than she paid for it a few years ago.  Yet, she plans on staying there and in all the months that I’ve read her blog, she’s never once seriously considered walking away.  It would be the easy thing to do.  It would probably help her out.  But, she’s never considered it because she knows it would be the wrong thing to do.  I feel bad because she’s definitely feeling a big impact in her life as a result of the real estate declines.  But, I’m proud of her because she makes the right choice, even if it’s the difficult one.

If someone in her position can make the right decision, even though it puts her in a tough circumstance, why is it so hard for others to comprehend doing the right thing even if it means sacrificing?  People in generations past made a lot of sacrifices that, while they were tough, led to opportunity.  Now, people want the opportunity without the sacrifice, and there are way too many people encouraging this mentality.

So, please, can we stop already with the sympathy to those who choose to walk away from their mortgages even though they can afford them? OK?  It’s baloney!

Mortgage Refinancing Is Not A Viable Option For Us

We moved into our home in June of 2007. At the time, we got a 30-year mortgage rate of 5.875%, which was pretty good since the average rate was around 6.25%. Luckily we had locked in the ‘lower’ rate a few weeks prior.

At the time, we put down 20% of the purchase price of the house. I had hoped that this would create a comfortable cushion because prices in the Detroit area had already been dropping. In fact, we purchased the house at a price 13% lower than what the previous owners had paid for it just a couple years before.

Unfortunately, the market has continued to trend way downward, and the amount of equity in our house has decreased tremendously to the point that we are nowhere near the level where we have 20% equity in our home.

If we were to refinance, I’m certain that a lender would do a new appraisal on the property given the change in market conditions over the past two years. This would definitely show that we do not have the 20% threshold of equity required to avoid personal mortgage insurance (PMI).

When I ran the numbers, we would probably be able to get a rate about 1% lower than what we’re paying now. This would save us about $225 per month. However, PMI would take away a huge chunk of it. And, if I recall, it is also not tax deductible, so I think our net cost would actually be higher for the short term.

While it’s true that PMI would be dropped at some point, it could be a long way off before prices stabilize and before we paid enough to get to that point. Too long where I’m not comfortable making the move.

Our other option would be to basically make another down payment to get us to the 20% equity level. While we have cash available to perhaps swing this, I don’t like the idea of having little cash on hand, especially in this day in age.

While I would love to write some articles about us refinancing, I simply don’t see it as a viable option for us.

My Former Residence Is On The Market….Sort Of

I found out that the condo that I used to own is up for lease. I purchased a condo at the age of 24, and lived there for over eight years before selling it last year so that my wife and I could move into our wonderful home. It was a great place, and held a lot of wonderful memories and fun times, and became a hangout for many of my friends and I. But as I was giving up bachelor life, I also decided it was time to give up the bachelor pad.
I found out by pure accident over the weekend that it is up for lease. I missed a call on my cell phone, and when I checked the message, there was somebody inquiring about the ‘condo for rent’. I would have thought it a wrong number, but they asked, by name, for the new owner that purchased the condo from me. I recognized her name from the closing and some brief conversations that we had afterwards about the condo.
After hearing the message, I immediately entered my old address into Google, and found that it is indeed listed through a real estate agent for rent. I figure that the call may have come from someone else in the condo complex. They might have seen the sign from the realtor, but decided to try to go direct to the owner, perhaps to get a better deal. I’m guessing that the lady that bought the condo didn’t give the association her updated phone number, so although they have her name, they still kept my number.
Seeing the condo for rent made me hope that everything is OK, and that there’s no financial trouble for the new owner. She was a single lady with a college-age son, and it was her first time owning. I know that she ended up financing almost all of it, and probably got one of the very last ‘virtually no money down’ deals out there, as the whispers of big problems in the real estate market started not more than a month after we closed.
I also know that since she didn’t put a lot down that she’s probably underwater (owes more than it’s currently worth) because even though I sold it on the downswing, the market has still gone down over the past year. Still, she was very excited, had a good job, and seemed very responsible, and seemed to be in it for the long haul regardless. I hope that everything is OK and that there’s a good reason that she’s got the condo for lease, and not because it’s no longer affordable. After I told my wife, she told me the next day that she’d dreamt that the lady had found a significant other and no longer needed the condo as she was moving in with her new beau. I hope that it’s good news like that!
I wish her and her son the best, and also hope the best for the great place that I called home for quite a few years.