If you’re like me, and I know I am, you own a house that you owe more money on than could be made if you were to sell it. This is called being “underwater,” or having “negative equity.” It’s not the situation you want to be in as I’ve been told by the Pasadena property management and development. At best, it turns your home into an anchor and it’s galling to pay more than you otherwise might. At worst, the payment is more than you can afford and you’re looking at foreclosure.
This 4,500+ word post isn’t here to give you legal advice. I’m going to end the post by telling you to get your own real estate lawyer, and that I’m not your lawyer. Rather, I want to disabuse the reader of some common misunderstandings about economically inefficient residential real estate situations, based on things I have learned and experienced as a lawyer.
In a universe devoid of good options, your task is to identify the least bad option. And in my opinion, the least bad option available to an homeowner in an upside-down loan situation, by far, is… …to hold on to the house and continue making your payments. This is so easily the least bad option that it almost seems too simple to explicate it. You certainly didn’t need someone else to tell you that. Particularly if this is your personal residence, then come on, you’ve got to live somewhere and you’re at least getting the home mortgage interest deduction, so the current market price of a home that you live in and which you do not intend to sell is something of a chimera anyway. The market will eventually bounce back, no matter even if you bought the house at the very peak of the market.
This is what I’m doing.
And sometimes I think it sucks. Every month I wish I could somehow go back in time and tell my 2007 self, “Self, the market isn’t nearly done tanking yet. Rent for a few more months.” But I don’t have a time machine; if I did, I could be paying as little as half of what I’m paying now for a substantially similar house, and it feels like a gigantic waste to pay what I do. I have to tell myself now, “Self, it isn’t a waste.” It isn’t because continuing to pay is the least bad option for us. We’re in the game and we know that eventually, the game will catch back up to us. I understand that it will take a long time for the market to recover. But I suck it up and pay.
Now, I understand that continuing to pay is not always an attractive option and it isn’t the least bad choice for everyone in all situations. For instance, a homeowner might need to relocate for a job, and therefore can no longer live in the house. If that’s the case, now what?
Look really hard at renting the house out. Chances are, you are not a professional landlord. That’s what property management companies are for. Most larger real estate offices also run property management services. In my part of the world, property managers typically charge 5% of the rent collected, and apportion a part of the proceeds of rent collected to an escrow account to pay for maintenance and upkeep.
“But Burt, especially if I’m losing five to ten percent off the top, that means the rent on my house will be less than my mortgage!” Well, yes, quite a lot of my clients are in that position. And it kind of sucks. It means you’re holding on to the house at an operating loss. What you’re holding on to is the potential equity for that point in the future when the market rises again. It will. It may take a long time, but it will. If nothing else, inflation will eventually catch up with the market. But as much as this sucks, the rest of the alternatives I’ve got for you probably suck worse.
You may not be done protesting yet. “But Burt, I don’t want to own a house in location X that I’m renting to someone else, while I live in a rented house in location Y!” I realize this isn’t an ideal situation, but just look at it economically. Maybe it seems silly at first blush. But it may very well be the best play to hold on to house X until you can sell it later, while renting and living in house Y where you’re getting paid even if you’ve got to put money in to the monthly payment. House X will eventually be worth more than you owe again. At that point, it’s an asset that you’ll be glad you have.
Another reason that a homeowner might not find this an attractive option is if financial circumstances now are different than they were thought to be back when the home was bought. And that’s where things start to get difficult.
“Thought to be?” Yes. If you find yourself struggling to make mortgage payments, it may well be the case that you were caught up in the madness that was home purchasing in the 2000’s when money was so cheap banks lent it to anyone who could fog a mirror, and mortgage brokers affected oblivousness to the rank fraud prevailing in of “liar’s loans.”
I can recall back in the mid-2000’s, when my wife and I lived in Manhattan Beach and we decided to amuse ourselves looking at houses for sale. We found a very nice 3+2 house not far from the neighborhood where we rented a 900 square foot bungalow, which was available for purchase for the low, low price of $910,000. When I explained that this was far beyond our combined financial reach, the broker looked at me like I was crazy: why should my income even matter? I’d just refi after the teaser rate expired and sell it after the refi teaser rate expired anyway, and pocket a hundred grand for my trouble because the house would have appreciated that much in the intervening eighteen months or so. We passed. Maybe we were suckers to pass; certainly the broker thought so at the time. Now? Maybe she has a different opinion, but I doubt she possesses the insight necessary to admit that she was dispensing short-sighted, self-interested advice.
Sadly, back in the days of the inflating bubble, a lot of honest people didn’t really understand the loans that they were getting in to. To this day, a lot of people don’t understand that negative-amortization loans, ARMs, teaser rates, and below-interest recompounding techniques are generally not very good ideas for the standard single-family homeowner. They took the advice of professionals like this broker and thought, incorrectly, that the advice was motivated by a desire to advance the buyer’s best interests, rather than the broker’s.
I believe strongly that the financial product which got your parents into their homes back in the day is still the product that you should be looking at front and center: the fixed-rate thirty-year home mortgage. In fact, a fixed-rate thirty-year mortgage today is about as good a product as you are ever, for the foreseeable future, ever, ever going to get. It seems inconcievable that interest rates will ever be lower than they are right now. Any day now they’re going to increase. Lock in the lowest interest rate you can when you can.*
And I’m going to put in a caveat on the “keep on carrying the house” option. You probably don’t want to dip in to savings, much less divert money from retirement or cash out retirement accounts, unless you’re looking to remedy an obviously temporary cash flow issue, one with a certain solution on the horizon. You need to sustain these monthly housing payments out of what a business would call operational cash flow, and not from the one-time liquidation of assets. If you can afford your house payment after you divert money away from your retirement savings, then you can’t afford your house payment. Got kids? You probably want to send them to college one day. If you can afford your house payment but only after deferring saving up for their college, then you can’t afford your house payment.
If you can’t keep up, and you’re upside down, then sooner or later you’re going to have to confront the spectre of foreclosure. When you miss enough payments on your mortgage, the bank will step in and begin foreclosure proceedings. The exact mechanics of this vary from state to state but the economics, and therefore the strategy, falls into two categories: recourse and non-recourse.
If your state’s laws are such that you have a non-recourse rule applicable to foreclosures, that means that when the bank takes the house back, that’s it. They cannot continue to pursue the debt. I’m told that in nearly three-quarters of foreclosure cases in non-recourse states, the foreclosed party simply lets it happen — and this is a good enough result for them. They can’t afford the house anyway, so they get out from under the debt, walk away, and start over as best they can.
In a recourse state, or if there is a recoursable loan secured by the property (sometimes, if there is a junior or a second mortgage, and sometimes depending on what that money was lent for) then your strategy may well have to be a little different, because the debt can follow you around after the foreclosure.
The next option is a short sale. In a short sale, your bank agrees to have the house sold to a third party either at an auction or through a broker, and the bank takes all the proceeds of the sale, and calls it a day. You get nothing, but you do get to walk away. There may be tax implications, again depending in part on how much debt the bank is charging off and depending on the laws of your state. I’m not an accountant to offer even foggy advice about this, so I’ll have to defer to someone with tax expertise about that. Just be aware that there may be that implication, and seek out the right professional to advise you before making that leap.
I have some clients who buy distressed property; they have various strategies to make money at it. So I have to evict a lot of people who used to own the houses I’m evicting them from, which is often pretty saddening. The most saddening part is when they show up in court still not understanding the reality of the situation they’re in. The most common spell under which they come to court is the “loan modification mirage.” At some point, they were discussing some kind of loan modification with someone at the bank, and then they got foreclosed on so they feel cheated.
Let me disabuse you of some myths — ten of them, in fact — about loan modifications, born out of many stories told to me in the courtroom hallway by some very, very upset people.
First — just because one department of a bank is discussing a loan modification with you does not mean that another department will not proceed with foreclosure. If you think that talking about a loan modification will keep the wolves at bay, think again. If you think someone at the bank has promised you that the bank will forebear from foreclosing while you’re negotiating a loan modification, ask for that promise in writing. If they won’t give you that promise in writing, then they haven’t actually made that promise to you.
Second — just because this bank did a loan modification for your friend does not mean the bank will do a loan modification with you. Your situation is different than your friend’s. There is no guarantee that the bank will agree to a loan modification and you should proceed on the assumption that the odds of this are against you. You have almost no leverage, and the bank will agree to the modification only if the bank thinks the modification is in its own best financial interest: is a lower monthly income stream from the loan better than foreclosing? Oh, and not all financial institutions do this.
Third — you’re waiving a lot of privacy rights when you ask for a loan modification. The bank is going to look at your complete financial situation. They’re going to want to see written verification of all your sources of income, they’re going to run your credit, they’re going to take stock of exactly how much money you can afford to spend on your monthly mortgage payment. Especially if you live in a recourse state, that means that should things fall apart for any reason, they’re going to know exactly how to come after you later if they’re able and willing to do so.
Fourth — it’s not fast. The average loan modification, I was told today, takes seven months to process. In the meantime, you might or might not be given a provisional payment. If the modification falls through for any reason, you’re going to have to make up the balance of payments, and probably pretty fast if not immediately.
Fifth — principal write-downs are the last, not the first, way loans are modified. The most common modification is a reduction in the interest rate. The second most common is to re-write the loan to start over for a new thirty-year, or sometimes forty-year, period of time. Only if both of those put together still don’t get you to an income-to-payment ratio the bank is comfortable with will the bank even consider writing off principal. I’m told that even with the Home Affordable Mortgage Program, less than 5% of all successful loan mods (which is less than half of all requested mods) result in principal reductions.
Sixth — the success rate of modifications is low. I’m told by another attorney in the field that more than half of all completed loan modifications result in default within twelve months. Part of the reason for that is, you’ve burned the bank once, so they’re going to watch you pretty closely. Miss one payment, make one payment late, and you’re in violation of your loan modification agreement, and now you’re in default again.
Seventh — the government is not going to make up the difference and the law does not require the bank to modify your loan. If you’ve got a Fannie Mae or a Freddie Mac loan, yes, there’s a program there, but it isn’t quite so generous as what I’ve described above. And some private lenders just plain don’t do them at all.
Eighth — if you’ve got a second (or even, Gods help you, a third) it is up to you to include that lender in loan modification negotiations — even if it’s the same lender who wrote the first. Again, you need to know if you’re in a recourse or a non-recourse state, so you know whether these junior loans will follow you around after you lose the property.
Ninth — you really can’t outsource the work needed to get a loan modification. You’re going to have to do this yourself. And it’s going to be a long, tedious, difficult process. I’ve seen so much fraud, so much incompetence, so many bad results, that I’m just plain going to condemn any third-party service that offers to negotiate a loan modification for you.
Tenth — once upon a time, some banks may have had policies by which they only offered loan modifications to people who were already delinquent in their mortgage payments. So according to some of the people I have evicted, they asked their borrowers to intentionally fall behind in payments so they could be in default and would only then begin negotiating loan modifications. When I am feeling charitable, I believe that these borrowers did not understand what they were actually being told. When I am not, I believe that they are lying. Regardless, don’t fall behind on your loan payments unless you have no other choice.
If you get the idea that I’m not particularly optimistic about loan modifications, there’s a reason for that. The reason is hundreds of families, usually headed up by people who aren’t particularly sophisticated about such things, that I’ve evicted from what used to be their homes because they put their trust in shysters, frauds, and thieves — some of whom, to my great embarrassment, hold law licenses — who took their money and betrayed the trust of their clients.
I won’t say that loan modifications are impossible, and I won’t say that they aren’t appropriate in some circumstances. Generally, though, if you’re in a situation where the monthly payments are a little bit to heavy for you, the right thing to do is refinance rather than modify. Your refinance should be aimed at a fixed interest rate, and if you get it, you should make other financial sacrifices to keep that loan in place and current because, again, it’s hard to imagine interest rates ever being this low again.
It’s easy to understand how someone in financial desperation could grasp at a slim reed of hope, and feel embittered when that reed snaps. My advice is, don’t be that person. If loan modification is plan “A,” do not fail to also have plan “B” at the ready, at all times.
You may have heard of “foreclosure recission.” Entirely voluntary by the bank, and the same economic calculus should be applied to recission as to loan modification. A small number of banks will, in a small minority of cases, rescind a foreclosure and agree to either a short sale or a loan modification even after a foreclosure is completed. You’re going to need to work your way pretty far up the bank’s internal food chain in order to get this, and you’re going to need to offer a fairly compelling story to make this happen. The odds of this are pretty slim. If this is your plan “B,” then you need a new plan “B.”
Bankruptcy is of course not a pleasant word, and many people attach a degree of moral opprobrium to it. But over the course of the last ten years, something like one in seven Americans has filed. If you’re in a recourse state, a chapter 7 bankruptcy, in which debts are liquidated and discharged, may be the least bad option. If you are strapped for a place to live, it’s possible to do a short sale after beginning a bankruptcy. See a lawyer for the details on executing this maneuver under the laws of your state, but if executed successfully, this can keep you in the home you’re in for longer, and that buys you some time to land on your feet somewhere else.
I’m very, very down on Chapter 13 bankruptcies. The statistics are that about 1 in 20 (that’s five percent) of chapter 13 filers actually complete their partial payment plans and get discharges. I think one reason for this is that a lot of Chapter 13 filers are not particularly serious about their filings and are looking in a very short-sighted way to buy themselves only a small amount of extra time while they finish panicking about a desperate financial situation. If you have reliable, steady income, and take the time to put together a realistic plan, you could be in that 5% of successful Chapter 13 petitioners.
“But Burt,” you protest, “bankruptcy is going to murder my credit rating!” Maybe. Let’s take a look at your credit now. Are you current on your mortgage payments? No? How far behind are you, anyway? How are your credit cards doing — both in terms of the currency of the account and the balances you’re carrying? Any other debts? Student loans, car loans? If you’re in serious financial trouble, your credit rating is trashed already.
A significant number of bankrupt debtors find that their credit scores improve after they get discharges. You can get a credit card after you file for bankruptcy — indeed, there are lenders who particularly like lending to such debtors. The challenge after filing is not rebuilding permanently-maimed credit, it’s learning from one’s past mistakes so as to not create a cycle.
Remember those unhappy former homeowners I mentioned above that I’ve had to evict? Some of them have decided to sue their former lenders for wrongful foreclosure. In a few cases, my clients (the buyers) have been dragged into these lawsuits. I have never seen such a lawsuit succeed, and I don’t know any attorneys who have been involved in any such (successful) lawsuit.
“But Burt,” you say, “What about robo-signing? That’s fraud and it’s the bank not following the rules!” Which is certainly a theory. And it’s also certainly true that an automated process is vulnerable to mistakes in processing. But even if the letter of the law has not been followed in your case, what’s going to happen if you challenge robo-signing will be that a human being will scrutinize your case. Should you go into court and challenge a foreclosure on the basis that there has been a robo-signature and it turns out that indeed you are behind in your mortgage payments, chances are really good that the court is going to think that you’re trying to get a house without paying for it because of a technical error that’s been standardized into the industry. At best, you’ll buy yourself a few more months. And that may seem like a relief in the short run, but the shoe will drop soon enough.
“But Burt,” you protest further, wanting to hold on to the dream. “There’s class actions!” Yep. You tell me what you realistically think the chances are of a class action lawsuit resulting in hundreds of thousands of mortgages that are in default being torn up and the borrowers being effectively forgiven their debts are. California’s Attorney General might get herself in high dudgeon over robo-signatures, but I’m not nearly as offended by them as she is. I certainly don’t see a legal theory challenging robo-signed foreclosure documents as offering any lasting hope to people who are in default on underwater homes of actually keeping them in the long run.
If you think you have been wrongfully foreclosed on, the real strategies available to you which offer real, permanent hope of turning things around are to:
A) Use your cancelled checks or other evidence of payment to demonstrate that you were current on your loan payments as of the date of the notice of default.
Now, I’ve double-checked that list and I’m pretty confident that this is a comprehensive list of winning strategies. Hopefully you’ve got the evidence to back it up. If someone approaches you and says that litigation can get you your house back even though you may not have made all your payments, my advice to you is not to walk away from that person. No, my advice would be to run because they are lying to you. And where before, a bank would almost always write you off as a bad experience and leave it at that, if you actually throw a punch at them you ought to count on them responding in kind.
As with so many other things in life, litigation ought to be considered the very last possible solution to a problem.
If what you want is some time to make other living arrangements and move in an orderly way, call the bank or its representative and agree on a short-term lease of the house, or file bankruptcy. Don’t wait until the bank, or the investor who buys the house from the bank, comes and evicts you.
If you do get sued for an eviction, you may have heard of this fantastic thing called “cash for keys.” When I offer cash for keys on behalf of my clients, it’s the result of a purely self-interested calculation: offering the occupant of a house money to move out will be easier and faster than an eviction. There is no law requiring us to do so. Don’t act like you’re entitled to cash for keys because you’re not. While you might bargain for a little bit more money or a little bit more time, don’t expect the new buyer to be particularly flexible — you are living in someone else’s house right now, which makes you a trespasser, and if you make a demand that is too far out of line with what can be accomplished in an eviction proceeding, the buyer will choose to go that route instead.
Trust me on this if nothing else — you don’t want to be evicted. It’s humiliating and it’s difficult to get a new place to live afterwards.
There’s some other things to avoid when your finances are stressed and your house is upside down. Don’t get divorced. Don’t co-sign loans for friends or even family. Don’t indulge in luxuries, fancy trips, or other sorts of things that your really can do without. And don’t fall in love with your house: the house is not the same thing as the experiences you’ve had in it. Do periodically survey the rental market: renting is often cheaper than buying, and if times are tough, then you can adjust your lifestyle accordingly so you can lay the foundation to bounce back in the future.
TL/DR?
- This is an economic decision, not a sentimental one.
- If you can keep up with your payments without disrupting savings plans, then that’s likely the best thing to do; negative equity is not something that should stress you out if you can keep current.
- If you can’t keep up with your payments, understand that there is no silver bullet.
- Loan modifications exist and are possible, but they are rarer than you think they are, and not nearly as helpful as you think they are.
- Avoid “services” and even attorneys promising to let you keep or save your house in a foreclosure or foreclosure-like situation because in my experience, 100% of them are frauds who will leave you worse off than you are on your own. Any offer that seems too good to be true is not true.
- “Wrongful foreclosure” lawsuits are functionally impossible to win if you were actually behind in your mortgage payments. The best you can realistically hope for in court is delay.
- If you’re looking to get out from under an upside-down house, you need, in chronological order, a) a good attorney to tell you your options, b) a good tax advisor to tell you what consequences there will be of the options your attorney gives you, and c) a real estate broker who has experience with short sales.
You must consult with your own attorney before undertaking any strategy. And that attorney is not me just because I wrote this post.
Good luck. Remember, there will be more money one day.
* Also, that boring old advice about no more than one dollar in four of your monthly income going to pay for housing, in one form or another? Yeah, that’s still true too. And I wish I’d heeded it when I bought my house, too. But then, I wish I’d known just how far the market was going to fall, because if I had, I’d have waited another year before things bottomed out in order to buy. And I wish that I’d been able to materially improve my income between then and now, too. But that’s not what happened, so I’m in the same boat as you — paying a little bit more each month than I really ought to, on a house that’s worth a fraction of what I owe on it. And there’s lots more people like us out there, so don’t kick yourself too hard. What you can do is if you’re buying now, don’t necessarily use every penny of money that your lender qualifies you for. It’s okay to spend less, no matter what your broker and your bank tell you — think about how they are compensated and you’ll understand their incentives.
Solid advice I’m sure. But what a depressing post.
Here is what I don’t get…
For folks who are fully capable of continually making payments AND are not seeking to move otherwise… what the F does it matter what your house is now worth? If you were happy and willing to pay $X/month to live there when you bought it, why would you suddenly be angry and upset about doing the same just because the fair market value has changed? I really don’t get that logic, though it seems to pervade so many people when making so many different decisions. People seem to think, “Why am I paying for this house like it is worth $Y when it is really only worth $Z? That’s crap. Fish that.” But ya know what? If you’re not selling your house.. it is still worth $Y! It is worth whatever someone will pay for it. And right now, that “someone” is “you” and you were and should continue to be willing to pay for it like it is worth $Y. It isn’t worth $Z until you accept an offer at $Z.
We were fortunate to get our house at the very bottom of the market (bought it at the end of 2011). But even if our house were to decline in value, that wouldn’t have a practical impact on our lives unless we needed or wanted to move, an idea we’ve toyed with but realize is not realistic for us barring major changes.
Regarding the $1 in 4 number, is that pre- or post-tax?
I do hear from some aquaintances and friends that they’re angry that their house is underwater and consider it deeply unfair that they have to keep paying the “high” rate. It’s understandable that they feel this way, everyone wants a deal, but, like Kazzy, it bugs me when people make a deal, can afford the deal, and still think they’re wronged because their house is underwater.
Now, people who are underwater and can’t afford the home, that is quite unfortunate. The obsession that we, as a society, have with home ownership is problematic.
Yes. 75% of the people who think they own a home, don’t actually own the home. They are paying rent to the bank.
They got “cheated” the way that anyone who made a bad trade gets “cheated” out of money. They were dumb, and got burned.
If they’re smart, they at least realize that they got burned. Contra Burt, you should be upset to have made a bad trade on a quarter of a million dollar (or more!) leveraged asset. You don’t make trades that big very often in your life, so getting burned on it means that you’ll have less money to retire with. Or to spend on your kids. This is REAL money!!
Re: one-quarter ratio – we’re worried about the system’s inputs and outputs. So it’s post-tax. At one time pre-tax numbers were used and that makes it confusing, but remember what we’re looking at here: actual cash flow.
Re: it was worth it when you bought it. This is correct but a lot of people lack the rationality to apply it to themselves until they are reminded and even then they still look longingly (and incompletely) at what things are like today. I confess to vulnerability to that kind of thinking myself when I see my own home’s value on estimations like you can get through Zillow.
So I should probably have said “Resist the temptation to look up your own home on Zillow.” Except you and I both know that the temptation to do this is immensely strong so you’re going to look it up anyway. That means falling back on what Kazzy and Jonathan said.
Hmmmm… we probably bought a bit more house than we should have. Then again, we were fortunate enough to have zero debt (no student loans, no credit card debt, no nothing). We’ve since added a car loan to the situation, but that was because we got great financing and it made more sense to take the loan than pay cash, which we could have done. We also got a great rate on a VA loan that allowed us to minimize out downpayment and invest those savings as well. We were/are quite uniquely situated.
I Zillow the house from time to time, but then remind myself that unless it was significantly more valuable, we’re not selling unless other things drastically change. So it really is just fruitless.
So, you bought a home, and you’re going to, in 30 years, pay $YZX to own it. (YZX being more than your mortgage, because, interest.)
So, having paid out YZX+CompInterest, you get $ABC (which is less than YZX, and way less than YZX+CompInterest). That was probably a bad investment.
The trap that most people have fallen into is thinking of housing as an investment.
Most people who bought during the boom ought to think of their house like a car — a money eater that they aren’t going to get money back from, because it’s depreciating.
Houses aren’t natively appreciating assets anyhow. They cost too much, so they tend to drift with people’s wages (which drift with inflation)
Houses aren’t natively appreciating assets anyhow. They cost too much, so they tend to drift with people’s wages (which drift with inflation)
The actual brick/mortar/wood thingy is definitely a depreciating asset. It drops about 0.33%/yr.
What actually appreciates in value is the land under the house. And a recent report by Case/Schiller came out that estimated over the long haul, on average over all markets, residential real estate appreciated at just about exactly the rate of inflation. Of course some markets perform a lot better than others and some suck long term as well.
+1.
BTW, in case it wasn’t clear, I was basically agreeing with you in a long-winded way.
I hear what you’re saying, Kaz, but I can see the other side as well.
For one thing, being underwater tends to close off your options or at least make them more difficult. Maybe this was a “starter” house and you’re anticipating expanding your family and would like to move into bigger digs. Or you can anticipate that you’ll likely need to move for career reasons, even though you have nothing specific in mind right now. It’s just a matter of feeling trapped for some I would imagine. Remember that most mortgages aren’t paid off in the sense of having made 30 years of payments; frequently the house is sold long before then.
Second, even for people that plan on staying put indefinitely, for a lot of folks their home is their primary financial/retirement investment. Perhaps not the wisest course, but in normal circumstances, and in a reasonably robust/growing community, it generally works out. You need somewhere to live, regardless, so you’re going to either rent or buy. So you buy a home, raise a family, and pay down the mortgage. The kids move out and then you sell the house for a reasonable profit, move into smaller digs and enjoy the retirement “savings.” The housing crash undoubtedly put a major kink in a lot of folks’ plans.
Finally, there’s just the element of feeling ripped off. You say it was worth “X” when they bought it, but that was likely a judgement made on the basis of a sales job by a broker eyeing a fat commission telling them it would “certainly” be worth X+Z down the road. Now it’s worth X-W and they’re stuck. A foolish decision perhaps, but a lot of people made a lot of money riding the bubble on the way up and the experts were telling them a hopeful fairy tale. Hell, even the pros didn’t anticipate the timing of the crash.
It’s hard to time the greatest fool. That a crash was coming wasn’t rocket science.
Georgist economists (and there are maybe a half-dozen of them at best) called it on the dime based on a historical 18-year cycle. The last housing bust was 1990, but we forget because it wasn’t nearly as bad.
FWIW, they’re not claiming super-powers here. They acknowledge a bit of luck as well because the cycle isn’t that exact; more like 15 to 20 with an average of 18. And I have yet to find one with a convincing theory to explain why it’s specifically 18 years.
What else happens in 18 year cycles?
I expect that’s your answer, albeit one with a lot of contributory factors.
The most frustrating answer I got was that the cycle was “endogenous,” which means of course, “Hell, if I know.”
There’s a (controversial) soc-sci theory out there by a couple of historians that wrote a book called, IIRC, The Fourth Turning. It postulates a poli/soc/econ cycle of 80 years in four phases that they claim to have traced back quite a ways.
The fourth phase or “turning” is the one we would be in now, characterized by a financial collapse and war. Then a rebuilding. Then a spiritual awakening. Then a rejection of the spiritual for the material which leads to collapse, war, etc., roundy roundy.
In this model, the Great Depression followed by WWII, was about 80 years ago. Eighty years earlier there was a big depression prior to the Civil War. Eighty years before that the American Revolution. They also claim to trace the same pattern though European history.
I’m not enough of a historian to judge the merits of their narrative and arguments. But, if it holds water, then it’s not inconceivable that the land price cycle would be part of this as a generational thing. Basically, a new crop of potential home buyers enters the market every generation unaware or having forgotten how these bubbles work.
I mean… if some real estate guy tried to give you some story now about how home prices can only go up indefinitely you’d laugh at him if you didn’t smack him for impertinence. But 15 years from now? Especially if you were just a kid the last go around?
What else happens in 18 year cycles?
I expect that’s your answer, albeit one with a lot of contributory factors.
Cicadas. Gotta be.
Am I the only one who thought “PEOPLE HUMPING PRODUCTIVELY!!!”?
Who waits 18 years between kids?
Great-grandparents.
Who waits 18 years between kids?
We came close — 14 years.
“Georgist economists (and there are maybe a half-dozen of them at best) called it on the dime based on a historical 18-year cycle. The last housing bust was 1990, but we forget because it wasn’t nearly as bad.”
Though the housing bust started in 2007 (and was starting to go sideways in ’06). It just wasn’t until 2008 where the other shoe dropped in the financial markets.
An overall 15-20 cycle does make some sense though, I have heard a similar 15 year cycle with the stock market, secular bullish then secular bearish. (though the evidence for that one gets weaker ever year).
Like others said, it’s probably generational – if you weren’t personally burned on something, your instincts and preferences are different than those who were. And eventually everyone gets burned on something.
Kolohe,
I call bullshit on all this stuff. The players have changed on a fundamental basis from the 1970’s. The fine folks running the economy are experimenting with different business models (including FIRE and hedgefunds).
These are not recurring problems, folks. They’re new ones.
Reagan and 401ks also radically changed our political landscape.
Rod,
If being underwater prevents a move, I TOTALLY understand that. But if you would be otherwise entirely happy with your purchase and staying in your home had you never found out what it would be worth on the open market today, that’s a different story, which is primarily what I was speaking to.
I understand where you’re coming from. But it’s not like paying too much for a laptop or something. We’re talking REAL money here. Like a mortgage payment that’s two or three times what it would be based on today’s prices. And you’re paying that for like freakin’ forever.
Could you really avoid thinking of all the other ways you could be using that money?
Personally, I really can’t fault someone for walking away from a situation like that. Corporations default on deals like that all the time and call it good business.
Well, that corporations do it doesn’t make it acceptable. In fact, if corporations are doing it, it’s probably unacceptable (ba-dum-CHA!).
People also ignore that their mortgage payments, at least the P+I are fixed for the lifetime of the loan, presuming they don’t refi or anything. That means they do no raise with inflation and, theoretically, should consume an increasingly smaller percentage of their income assuming that simply rises with inflation (taxes will increase, but likely not enough to bring the total expenditures in line with inflation). So, yea, people looking with a one or two or even five year horizon might get really frustrated. But, generally speaking, you shouldn’t be buying a house with a one or two or five year horizon. If that is your mindset, buying isn’t right for you.
Also, to me, the idea of walking out on a contract except in the most dire of circumstances is just unthinkable to me. Just how I was raised, I guess. If you can make the payments, you make the payments, no matter how grumpy it might make you.
Also, to me, the idea of walking out on a contract except in the most dire of circumstances is just unthinkable to me. Just how I was raised, I guess. If you can make the payments, you make the payments, no matter how grumpy it might make you.
Well, sure. The banks hope that you will feel a moral commitment to fulfilling the contract, and there’s something of a right-winger meme out there to that effect. But this isn’t really a moral issue. IF you had borrowed the money from a (well-heeled!) friend or relative, that attitude would make sense since they had done you a huge favor.
But the bank wasn’t doing you a favor making the loan. It was a business proposition that they hoped/expected to profit from. Sometimes business propositions turn sour. They know that and part of the interest rate you pay is calibrated to make up for a certain percentage of defaults. The important point here is that they didn’t loan you the money to be nice or helpful; they could give a crap about you personally. They made the loan for purely
selfishself-interested reasons. There’s no reason for you not to evaluate your options similarly.No one else is going to look out for your interests and those of your family but you. The bank certainly isn’t; that’s not in their business plan. And neither is being “fair” or “moral” in their plans; just making a profit and staying within the law (sometimes). Default, and what happens as a consequence, is spelled out in the contract, and it’s a legal option, just like bankruptcy. If it were some horrible, unthinkable option then it wouldn’t be in there.
That’s fair, Rod. Personally, I tend not to think of contracts as such, but maybe that just makes me a sucker. :-/
Then again, defaulting has very real consequences. The sort that tend not to be worth undertaking just because one is grumpy at the market.
there’s something of a right-winger meme out there to that effect
Indeed. Corporate people have rights while biological people have obligations.
Kazzy,
It’s perfectly legal in a lot of states. And if we have to choose a bagholder, and we pretty much do, can we please not let it be the American Consumer? I feel like these folks ought to get some kind of pain (live out of a car for a year, maybe), and then get on with their lives, and let the financials take the brunt of the pain.
The american consumer drives our economy. Don’t let him get in too deep.
Kazzy,
it shoots your credit rating. Nothing more than that. Not too bad, actually.
And yes, a contract is a contract, but if the person you got into it with was knowingly providing fraudulent data to you (saying you didn’t qualify for a fixed rate, for example, or giving you a different (higher) rate because of skin color), I’d ditch it on general principle.
Some legal scholars argue we should allow for efficient breach on contract including very influential ones:
http://en.wikipedia.org/wiki/Efficient_breach
Sometimes you might also not expect to move but get forced to by a job. My parents bought their second home when I was ten. They bought it from a family that really did not want to move but that dad’s job transferred him to Florida and they decided to stick with the career instead of the house for whatever reason.
Also I think it is fairly recent for couples to see their houses as investments more than residencies. It used to be more common for people to pay off their 30-year mortgages, at least among my grandparent’s generation.
no, it’s still a “death note” if you know what I mean. Your grandparents just understood that this was going to be their main place to live (an investment!) until they died.
What Kazzy said. My house may be underwater now, but I don’t really know. We got a very good deal thanks to not seeking a mansion and finding some very motivated sellers. And we put down a sizable fown payment. But still, our town is in such dire economic condition that it’s quite possible we couldn’t sell it for what we owe (I know that’s true on our other property, which is why we’re renting it at a small loss.).
But I have no interest in trying to figure out if I’m under water because I can affird my oayments expect to be here for the next twenty years. It just doesn’t matter if I’m actually under water or not.
I’m fortunate. I realize that.
It is sorta like how you haven’t actually lost money on an investment until you sell it. So few people realize that.
While that’s true, it’s also false.
If you’re holding oil, and it spikes and falls a lot, you shouldn’t really count either up or down as win or loss. You can always ride it out.
NOBODY is going to be able to ride this out. MANY stupid people are pricing their houses on “My neighbor made 10% selling back in 2006…” So I Should Too!
I couldn’t buy a house from anyone who had been dumb enough to buy during the housing bubble (especially if they bought from flippers). They just weren’t being realistic about the loss they were GOING to take.
Ah the joys of tenure! 😉
What are you doing to get your town in less dire economic conditions? ;-P
Kazzy,
On one level, I share your bewilderment about people who don’t plan to mov, and have anticipated correctly their ability to make their monthly payments, but nevertheless feel imposed upon because they are underwater.
However, I “get it” at another level. It’s probably similar to my decision to grumble silently to myself about paying 20 cents extra per pound for organic bananas when my future in-laws (who prefer organic when they visit*), even though I gladly pay much more money for junk food or beer for myself. (As an example: our local grocery store has started offering “Limited Edition” sour cream and onion Doritos, and I’ve bought 6 or 7 bags of them to stock up.)
*To be clear, I do it as a courtesy, in a similar way that you might buy a house guest his or her favorite wine because you know they like it. They don’t “insist” on me providing organic at all, and in cases where eating organic really means that much to them, they would cheerfully pay for their own organic food.
That makes sense. But grumbling is a far cry from defaulting. Being a bit frustrated with the banana situation is one thing. Refusing to buy any food for them or denying them access to your home is quite another.
Kazzy,
I wonder, however, how many of the people in the circumstances you describe–i.e., they can pay the mortgage, they don’t need to move, etc.–actually do default. I suspect it’s low, but I really don’t know the answer.
Bob and Jane want to buy a house and are willing to pay 500,000 dollars for one.
They find a nice little colonial worth that much. It is the Fair Market Value.
They pay 10 percent down and the rest is mortgaged.
A housing crisis hits and the house loses half of its fair market value. Now it is worth 250K.
Let’s say for the sake of the hypothetical. The value will not increase back to 500K during the course of the mortgage or after.
Wouldn’t you be pissed if you still owed the bank 400K on a house that is only worth 250K. It also locks them in and prevents them from moving if they want or need to because selling the house will not cover the mortgage. This is giving the bank a windfall. In pure economics, it is entirely rational to default on your loan. The damage done to your credit rating might be less than giving the bank a windfall of 150K.
How is the bank getting a windfall of $150K? You didn’t buy the house from the bank (unless it was a foreclosure sale or something). They loaned you $500 that you then turned around and paid to the former owners. If anyone got a windfall it was the former owners.
[But see my reply to Kazzy, above.]
Presuming the couple d0es not default, the couple is going to be paying back the bank the full mortgage plus interest. So true they don’t get a windfall but they get more than the FMV of the house.
Okay. I read you wrong (and in retrospect my reading doesn’t make any kind of sense at all).
Yes, if you fulfill the contract the bank makes a profit. I don’t know how would call it a windfall, though. The revised value of the home doesn’t affect their ROI. It just screws your (the borrower’s) situation.
Besides (as already mentioned) the fact that it becomes harder to move for better/different employment/lifestyle prospects with an underwater house, the other core problem is that underwater people can’t take advantage (as easily) of the historically low interest rate environment we’ve been in for the last 2 years. A thirty year fixed rate hasn’t been this low in most people’s lifetimes, and is a good 2-3 percentage points over the prevailing rates duing the housing bubble ramp-up and peak.
I’m a renter but an article about a new plan came up in the most recent issue of the New Yorker. It scares Wall Street so I have promise for it:
Sorry but is abstract only. The gist is for the government to use emenient domain to wrestle the mortgages from whoever holds them and then give everyone a lower principal interest in masse to keep them in their homes:
http://www.newyorker.com/reporting/2013/02/04/130204fa_fact_friend
Sounds expensive.
It keeps communities together and the banks get more money when people pay a lower monthly rate than selling a house via foreclosure.
Since when do we have communities to keep together? Small towns are dead and dying, man. And people don’t have real communities in the suburbs (a community is where you know the richest man in town, and the guy who steals vegetables from the store for his kids too).
These aren’t small towns. These are semi-large cities around LA. Find a copy of the New Yorker at the library and read the damn article.
And I am a bleeding heart liberal who dislikes moral hazard arguments. If anyone needs to be punished, it is the banks for making loans that knew they should have not made.
I am a bleeding heart liberal who dislikes moral hazard arguments.
The first part of that isn’t worrying, but that second part…oh, man, to me it’s like saying you don’t care about the actual effects of your preferred policies, so long as the symbolism is happy-making.
to be fair, “moral hazard” in laypeoples’ hands often just means “vengeance”, which is why the term got a bad rap amongst the aforementioned bleeding heart types. not that they’re immune to the beautiful charms of vengeance, of course, but a common invocation was by conservatives against poor people rather than banks.
ya just gotta position it right for your audience. ressentimentalists!
James,
Perhaps I was being too strident.
DHX brings up better points about why I dislike the term “moral hazard”. It is often used by right-wing and Wall Street types to tut tut morality against the poor. It was not the poor who came up with NINJA (no income, no job, no asset) loans. It was Wall Street and the mortgage companies. They were also the ones who came up with the ideas of all these complicated cut-ups that make it impossible to determine who owns what. Now that someone came up with a possible solution to keep people in their homes (and these are just underwater mortgage holders, not necessarily people with NINJA loans), Wall Street gets scared and comes in and says it would be a “moral hazard” to help people.
If anything Wall Street engaged in moral hazard by NINJA loans and other issues and we needed to bail them out or everyone else would really suffer. So perhaps they have a point because they clearly have not learned. They are still as arrogant as ever with their “masters of the universe” shit.
The same was true doing the Healthcare debates. The reactionary-right always claimed it would be a “moral hazard” to provide people healthcare because they would get unnecessary surgery and what not. This is bullshit and said as a way to just justify keeping the status quo of 45 million plus without insurance.
Oh, you’re opposed to folks who are self-interestedly hypocritical. Why dinja just say so? 😉
James,
Not sure if your wink was sarcastic or not but.
The article mentions (and I wish it wasn’t just an abstract) that a lot of these people can pay the full mortgage but they are going to pay more than their house is worth. Eventually many might do the rational thing and default. This is good for no one. It is not good for banks who get less on a foreclosure sale and it is not good for home-owners and communities.
So helping these people helps everyone or almost everyone except the wall street guys who developed these bundles of loans.
ND, all the wink meant was that I don’t like self-interestedly hypocritical folks, either. I’m no defender of businessmen who got their bailouts–in response to which I was one of the folks back in ’08/’09 screaming “moral hazard, for god’s sake, you congressional ninnies–and only now seem to have become aware of the concept. They’re to be reviled.
Still, just because it’s a Catholoc priest who’s warning you to beware of creepy Uncle Joe doesn’t mean you should ignore the warning.
I should add, though, that back in ’08/’09 I was saying that if gov’t’s going to bail out anyone, it should be bailing out homeowners rather than banks. I’m not for bailing out anyone, but since we were going to bail out someone, make it the homeowners; at least they won’t demand end-of-year bonuses on top of their bailouts.
Yeah, you can’t really not like the argument that generally the way to constrain action is to make actors responsible for the consequences of their actions. However, it doesn’t follow that in some situation the consequences of letting all the consequences that some actors or group of actors’ actions have brought about (or are on the verge of having done so) won’t be so great for general a group of people who did not participate in thse actions, that if you have the ability to forestall some of those consequences, that it’s not the right thing to do so. You can *like* moral hazard arguments as still think that a particular situation just can’t be allowed to obtain pursuant to it. That was the argument of the pro-bailouters in ’08. It
s not that moral hazard was rejected on its own merits; it’s that the broader consequences of failing to bail out the actors who had brought it all on for those who had no part in it were deemed too great. Now, granted, a larger degree of consequence for those actors could have been imposed in the midst of saving the system. The system was deemed still too fragile for that. And that attitude prevailed for far too long – that’s pretty much a consensus now. But that was the problem – not the reality of any bailout at all, i.e. having the mechanism to forestall moral hazard simply be unaltered natural consequences.
“So helping these people helps everyone or almost everyone except the wall street guys who developed these bundles of loans.”
which is where the whole “moral hazard as vengeance” thing comes from. everyone has hate that needs to be discharged, like static electricity, at some target – real or imagined or most often some combination of both. nearly everyone wants someone else to throw money at this and make it go away.
if in the process the object of hate becomes injured, all the better. and the further into the sports bar you get the more prominent the punishment angle becomes.
DHex,
I am not sure whether the process in the article hurts Wall Street guys or not but that is their complaint. The guy who created this idea was one of Warren Buffet’s Lieutenants and is getting investors to help in the hope of a return. In the article the Wall Street guys complain that the process merely gives the return Wall Street would normally get to the new investors. Maybe this is accurate, maybe it is not.
I wish the article was not abstracted because I am sure that I am not describing it with justice but it did intrigue me.
The government needs to pay fair market value when it exercises its powers of eminent domain. The argument you’re offering here is the public purpose of a cram-down, but it doesn’t address the magnitude of fair market value.
What’s the fair market value of one billion dollars of fractional securitized mortgage interest principal? The answer is about, if not exactly, one billion dollars — taking into account both the over-time cash flow of principal and interest, and reducing this to present market value. That number can be calculated with enough precision by actuaries and accountants that it would not be subject to reasonable debate.
And we’d have to be talking about MASSIVE amounts of money, not just a few billion dollars, for something like this to make any difference to any significant number of people or on the economy. Let’s say that we cram down an average of $100,000 in principal on every distressed home in America under this program. You’re looking at somewhere between 375 billion to half a trillion dollars of new deficit spending, depending on how you want to define ‘distressed.’ After all, if I got $100,000 in principal pay-down on my home mortgage today, I’d still be underwater by tens of thousands of dollars. I’d be willing to bet that it would cost more than a trillion dollars to correct the market to current market rates. And that correction, itself, would substantially distort the market in ways we can’t even begin to predict.
One thing we could readily predict, though, is that the securitized investment products which were written down would produce substantially less cash flow after the initial cram-down. This will contract the GDP significantly, notwithstanding the massive amount of money spent. And I suspect that would leave us looking with envy at Greece and Iceland for the fiscal prudence and careful foresight of their immediate past political leaders.
Agree with burt. is stupid plan.
Jingle mail is WAY more fun! (legal only in certain states, mind)
Also, wouldn’t you want to switch houses with your neighbor?
The gist is for the government to use emenient domain to wrestle the mortgages from whoever holds them and then give everyone a lower principal interest in masse to keep them in their homes:
What could possibly go wrong?
I’m hanging on to my 30 year fixed rate home for a while, which I bought in late 2009. I got stuck with it in the divorce and would rather live in location Y, but, for now, I’m sitting still. I like the idea of renting the house out in location X so I can move to locations Y, but I don’t want to make any decisions right now.
I love the post, Burt. I’m sure I’ll reread it because there is lots of good stuff here. Thanks.
Trust someone in Southern California to give advice that’s only applicable to high rollers. Most people get jack-all out of the “home mortgage deduction”.
If your home mortgage interest deduction is small to the point of being negligible then you’re probably not in an unaffordable negative equity situation in the first place.
Agreed. I will this year but only because of a huge deduction for job expenses to add to it. Given that you have to exceed the standard deduction to even start to benefit the MI deduction is really a housing subsidy for upper-middle income earners and above. Therefore, a sacred cow. Sorta like farm subsidies.
Just for the sake of fact the average house in Indianapolis is about 160k. Now if you figure at todays mortgage rates at 130k a 4% mortgage is about 5200 a year for interest the first year. With the standard deduction for married couples at 11,900 it would take a good chuck of state income tax to get to the point where deductions would justify bothering to file schedule A. In any case at the 25% rate you would likley save maybe a few hundred to a thousand dollars using the mortage interest deduction assuming other deductions get you near the 11,900 number. Prices would be even less in smaller towns in the midwest. For Fort Wayne In, a town of maybe 200k in the vicinity the median sale price according to Trulia is about 65k so a mortgage would in all probablity not mean any savings on income tax.
Fair enough and good for you that your housing payments are so reasonable. I’m not aiming my thoughts at such a person — a 30-year fixed at 4% on $130,000 produces a monthly payment of $620, before things like mortgage insurance come in to play. This ought to be well within the ability of most employed people to pay — with two incomes working full-time jobs of even a dollar an hour more than the minimum wage, that kind of money gets you a 3+2 with about 2,000 square feet in a reasonable neighborhood near the periphery of the city limits.
Good for you — in almost every situation I can imagine other than being required to move to keep employment, the right thing to do would be carry the loan, and don’t worry all that much about the market, and the rest of what I’ve written won’t apply to you at all. Not because you’re a low roller, but because the principal you’re carrying is low. You don’t need my help or my thoughts here, because you’re likely neither underwater nor on the verge of losing your house.
Now, take that $160,000 house in Indianapolis, and move it three hours north to an equivalent neighborhood in Chicago. $160,000 turns in to $350,000 — in today’s market. Let’s assume the same 20% down payment you built in to the Indianapolis house — that’s a mortgage of $280,000 at 4% interest, giving you a monthly payment of over $1,300. Bear in mind the cost of living in Chicago is overall 15% higher than the cost of living in Indianapolis. Now that same household is looking at needing a combined pre-tax income of something in the neighborhood of $100,000 a year, instead of two people working $8.75 an hour jobs. Now you’re getting in the world of people that I’m aiming my comments in the OP at, because now it becomes much easier to sink underwater if something happens to that income.
Or, let’s set the wayback machine to 2007, after the market hit its first plateau in the crash. In Chicago, unlike Indianapolis, the bubble was a very real thing. That house that sells for $350,000 today in Chicago sold in 2007 for $525,000. Credit was contracting quickly in 2007, so let’s say you got a thirty-year fixed at 4%, which at the time was significantly below market, but maybe you had exceptionally good credit. Twenty percent down on that is purchase price would have been $105,000. Not a lot of down payments that big happening. So we’re looking at a second mortgage for, let’s say, $75,000 at 6.5%, again using your exceptionally good credit. Your total monthly housing payment, before mortgage income, would have been something in the neighborhood of $2,500 a month. If something happened that your household fell below an annual income of $160,000 a year, then you’re falling behind and you need to start thinking about some of the less attractive options I discuss above.
Now, needing to make $160,000 a year in Chicago is a whole different ball game than needing to make $46,000 a year in Indianapolis. But you’re living in basically the same house in basically the same neighborhood. And in the Chicago situation, it’s really easy to see something happening over the past five years — these past five years in particular — in which something could have happened to reduce that $160,000 a year to a lower number and treading water turns in to sinking down. Those are the people I’m particularly interested in reaching here, those are the people who I’m urging to look dispassionately at their situations.
Because the numbers are even worse than Chicago out here in SoCal, and I’ve had my heart broken too many times in court seeing these people not coming to grips with reality.
Or for an alternative take the house and move it 2.5 hours north east to Fort Wayne where the median price is like 75k or any number of smaller towns in most of IN. In many of course Zillow only shows county level data. (Fort Wayne was among the richest towns in the US 110 years ago, but now is different, at the time it was a leading light in the electric revolution). Anyway at 75k your mortgage interest is maybe 3k a year and a monthly payment of 300 or so. Now of course wages are lower there also. All this makes me wonder why back office jobs are not outsourced to smaller communities, where the cost of living and thus the wages are less.
Often they are. Anon made a big stink about an op out in Cranberry PA.
But seriously, you’re looking for some quantity of intelligence in a lot of jobs. that’s why they don’t get outsourced to smaller places (plus, enough people.)
Nice bigotry there, Kimsie, old friend.
James,
What, I have to cite educational attainment for various places?
It’s a fact of life that some places have more intelligent folk than others.
Corporations seek out smarter places if they need smarter people.
[[now, yes, I can be polite and call it the “creative class” — but I ain’t aimin to be polite.]]
(If you must quantify it as “people who will show up the Next Monday after being paid — and not still be drunk or forget that they’re supposed to work” I’m certain I can find enough corporate research on that front. It cost a pretty penny to import talent into some places…).
“Also, that boring old advice about no more than one dollar in four of your monthly income going to pay for housing, in one form or another? Yeah, that’s still true too. And I wish I’d heeded it when I bought my house, too.”
If you’re at all decent with finances, you can get up to about half and half. But that’s avoiding depreciating assets (like cars) like the plague. See, if you don’t need the $6000 (or $12000) hole in your wallet… you suddenly have a lot more money to spend.
Here in Texas we were spared the worst of the bubble.
Why? Because of nasty, nasty, strict regulations passed in the wake of the last housing bubble and never repealed. (From the early 80s, I believe). Texas just wasn’t a good market for speculation on housing (we overbuilt some, sure, but we weren’t seeing the massive increases in prices everyone else was seeing), you can’t take out home equity loans easily (or really at all)…
My house lost, at most 5% off it’s peak value. We had a 30 year, fixed interest loan provided through FM with I think 15% down.
It’s ironic, given the deregulation fever that has swept Texas for two decades now, that homes got passed over when it came to removing useless, business-inhibiting regulations. Worked out pretty well for us, since Texas recovered faster as a result of less money ‘lost’ in underwater homes.
Pittsburgh was flat through this one, because we basically sat out the last housing bubble. We STILL had excess inventory, so the feeding frenzy couldn’t really start.
One of the big reasons was that in Tx you can’t take equity out to take the equity below 20% (I.e. cashout).
The market will eventually bounce back, no matter even if you bought the house at the very peak of the market.
There are sound reasons why the median house price in an area should be about three times the median household income in that area (four times in California and a few other selected areas, where there are some peculiar circumstances). If you bought when the market was at the point where the median price was ten times the median income, it’s going to be long time bouncing back.
This may well be true. But no matter what else, there will always be inflation.
Yeah, but ten times? That’s…gonna take awhile. Especially given the current rate is like 2% and looking to stay that way for years.
Practical upshot is in the worst bubbled areas, the lucky ones are the ones who will still be selling their houses for a modeset to large loss in 20 years (in inflation adjusted dollars). Say 25 to 40%.
The unlucky ones? Their houses are in foreclosed ghost-towns built by eager developers that will probably rot into the ground before there’s enough population to want them, and whose problems aren’t just “Paid way too much” — but the fact that so many people did that your neighborhood price values aren’t just reverting to a rational price, but declining due to so many foreclosures and general abandonment.
Well, from four times median income to ten times is only a factor of two-and-a-half, but at 2% per year it still takes 47 years to get that two-and-a-half. Some of you may live that long — but it’s long odds against for me, barring some sort of medical miracle. Of course, I don’t pay much attention to the price fluctuations, as our mortgage was paid off some time back, and we have no plans to move.
Well, in your case, it’s a chimera of a problem. Your house is paid off so negative equity is a functional impossibility (unless you don’t pay taxes or unless you take out a large HELOC for some reason). You and your spouse don’t intend to sell it so its market value is zero until you both die. It’s yours, it’ll be an asset of your estate.
Let’s modify your situation just a bit. Let’s say that you were looking at the actuarial likelihood of dying before the combination of principal paydown, market fluctuations and inflation conspire to pull your house out of negative equity. At this point we’re really in the realm of estate planning rather than real estate transactions. Question 1: have you made arrangements for enough cash flow to your surviving spouse such that (s)he can continue to use the house until (s)he also passed? If not, securing that kind of resource is the priority, and life insurance seems like it ought to be Solution Alpha. Question 2: if your house is going to pass to heirs after you go and not a surviving spouse, with negative equity, then you need to counsel your heirs now that they should let the house go instead of trying to fight over it because it’s irrational to fight over something that isn’t worth anything and the estate will be more valuable without the underwater house than with it. If they wish to hold on to the house for irrational reasons, that’s their choice and you won’t care because you’ll be dead.
Try living in a house beside lynx. Or in a house without police protection, because everyone else ditched their mortgages. Or where the fire department has been cut severely. Or beside the pot house, or the one where mosquitos are growing because nobody has emptied (or cleaned) the pool.
All I’m trying to say is: you can be able to pay your debts, and it still be a fucking idiotic thing to do.
We are right there with you!!!
Yes it does suck!!!
We currently live in a house that has dropped property value by at least $120,000.00 purchased in 2005 for $350,000.00, now valued at $230,000.00 on a good day!
Our current mortgage, a Conforming Fixed Interest Only 10/20 Loan, interest rate is 5.875% will increase $615.00 dollars in 2015 (current principal balance 259,000.00)The LTV loan to value ratio is high due to neighborhood comps (foreclosure and short-sales)
HELOC (pool loan of $29,000.00)
We do not have a financial hardship
We are current on our mortgage, never been late
We do not have a Freddie or Fannie backed loan/ not VA/ not FHA
The investor is (BONY) Bank of New York as trustee for the CWALT, Inc. Country Wide Alternative Loan Trust
We just want to take advantage or the lower rate and not get stuck in the 5.87% rate come 2015.
Can’t do it!
To Ms. Kinder: Do you mind disclosing the general geographic area where you are located (e.g., southern California, western Tennessee, etc.)? It adds a bit of depth to the discussion, although the finances are what they are no matter where you might be. And I’m interested in seeing if this is something peculiar to California (although I’m rather strongly convinced it is not).
To the others: this is the sort of story I hear almost every day. I’m afraid that I don’t have any silver bullets for Ms. Kinder. Perhaps you do. “You should have been smarter seven years ago and chosen to have lived in a different community and talked your employer into allowing you to telecommute” is not particularly helpful advice, IMO.