'Upside Down' Home Sellers Owe More Than They Get

Washington Post ^ | April 20, 2007 | Nancy Trejos

[RexTheRunt]

Excerpted from the article:

The results? Housing delivered a solid but unimpressive annualized return of 8.6%. Commercial property did better at 9.5%. The S&P, however, delivered a crushing 13.4%.

Other studies argue that real estate's returns are much worse. Yale finance and economics professor Robert Shiller, author of Irrational Exuberance, who looked back to 1890, contends that only twice has real estate produced truly outstanding returns: after World War II, when returning troops were starting their families, and from 1998 to 2005, a period he thinks is a bubble.

Housing's rate of return, he argues, has to trend back to the mean of about 3% a year - barely above the inflation rate. If that's starting to happen now, he says, we could be facing many years of losses.

I could not agree more.

[Leftism is Mentally Deranged]

That’s the market. What’s the implication of the article?
Bush caused it?
The govmmt should pay the difference?

[longtermmemmory]

actually the REALLY interesting part is the creditors rewrote the backruptcy laws to prevent lien stripping over the unsecured portion of the loan.

Thus this ANNECDOTE would have the couple filing for divorce and bifucating the debt into secured and unsecured.

[Dr.Deth]

"(Upside-down mortgages were) unheard of three years ago," said Kevin Connelly, a mortgage banker for Pinnacle Financial in Vienna.

And they were all over the WaPo pages 10 years ago. The ones that didn't sell saw their properties eventually recover... then double, triple, and even quadruple. It's called a business cycle.

[PAR35]

Right now in California people are stuck in “interest only, negative equity” situations.

But in Calfornia, they have the option of walking away from the debt. The lender can either go after the house, or after the borrower, but not both.

[longtermmemmory]

This is not unusual for two income homes.

TOGETHER they can afford the house, seperatly they can not.

This author knows nothing about finances and divorce.

It is also suspicious because of the used of the anecdote to creat a line via one point.

[ex-Texan]

The last time large numbers of sellers found themselves "upside down" on their mortgages, or owing more than their houses were worth, was in the early 1990s, when the recession dragged property values down in many parts of the country. But several real estate agents and settlement attorneys say they are bracing for worse this time around because prices rose at an unprecedented rate and people eager to get into the market took out nontraditional loans to pay the inflated prices.

Thus, there are many homeowners with mortgages that allowed them to put little or no money down or to pay only interest in order to keep their monthly payments low. Others have adjustable-rate mortgages with low introductory teaser rates that have increased. Because they have little or no equity, such homeowners can't refinance. If they can't refinance, they have to ask the banks to modify their loans.

At least this seller purchased a full sized house. Not like Californians who were forced to consider tiny condos for $ 540,000.

This is just the start. It will get a lot worse before it gets better. In the primary example the seller only lost about 22%. By the end of next year, in my estimation, losses typically will exceed 40% or more in some states. But the National Association of Realtors still will not admit housing prices are falling. I read a report on another site about realtors refusing to submit offers lower than the asking price to sellers. Clearly an illegal tactic. But soon they will not have any choice. People are offering 15% to 20% less than the asking price in many states.

Today builders throw in all sorts of extras (like SUVs for $ 40k) so they can keep prices artificially inflated. Learn more here? Where are all the naysayers now? Just wait until next year. It's going to get very interesting, indeed.

[-YYZ-]

“Poorly built homes tucked into any odd sized plot of land available. Seems the developers absolutely have every politician in their pockets. If a tree is standing it must be bulldozed. No investment in new infrastructure, since that would dilute the home density.”

Sounds just like here. Makes me sad to see a previously beatiful, treed piece of land cleared for developemnt. And it’s not that I have anything against developemnt, it’s just that it’s done in the cheapest way possible. Cut down every tree in sight and then bulldoze everything perfectly flat. Scrape off all the top soil and haul it away, so you can sell it back to people later when their sod doesn’t grow worth crap on the rocky-subsoil that the yard were “landscaped” with after the houses were built. Put up the biggest (but cheaply built) houses as possible, as close together as possible. Just like standard suburban tract housing, but with upscale-looking homes.

I guess I’m spoiled, in that the homes I grew up in were in developments that didn’t follow that model - they were in neighbourhoods where every house was essentially unique, built to the owners’ specs. I’d go back to that in a second, if you could actually find any developments like that around here that aren’t “upscale” (ie insanely expensive and filled with McMansions, albeit unique ones).

[ExSES]

Housing's rate of return, he argues, has to trend back to the mean of about 3% a year - barely above the inflation rate. If that's starting to happen now, he says, we could be facing many years of losses.

But..., but..., but, the vast majority of "Talking Heads" on TV have been assuring us for years that... "IT'S DIFFERENT THIS TIME"!The Fed has found the secret to endless prosperity!

The Fed prints money..., the emerging market governments take those pieces of paper and send us real goods (to provide employment) and the U.S. population endlessly borrows to buy those goods! Obviously, the economic equivalent of the "Perpetual Motion Machine" has been found (until the global economic balance reverts to its mean)!

[longtermmemmory]

stocks do have a carry cost if you live in FL with their intagibles tax.

[Maceman]

Given that the couple in the article only discovered the prepayment clause two days before the closing, it’s pretty clear that they didn’t weigh their options and make a rational decision as you obviously did.

[Maceman]

Do you have a fixed-rate mortgage? I think they’re only found on adjustable-rate mortgages these days... otherwise you could borrow at the low teaser rate and then skip to a new loan before they get the chance to make a real profit off of you.

I have a fixed rate now, but when we bought our house in 2000 we had an adjustable rate, which I also made sure did not have a prepayment penalty.

[shhrubbery!]

Used to live in NoVa.

Poorly built homes tucked into any odd sized plot of land available. Seems the developers absolutely have every politician in their pockets. If a tree is standing it must be bulldozed.

Well said. That's what we saw when we visited Purcellville a few years ago, on a trip to check out Patrick Henry College.

We have plenty of that in north Jersey too --depressing tracts of McMansionvilles-- but I think it's even worse in NoVa.

[wideminded]

All this real estate appreciation over the past few decades has been great for federal employees in the DC area, but what does this mean for the next generation of federal employees?

[longtermmemmory]

The article is incomplete, it is designed to inflame and scare.

The drive by media needs a “you are going to lose your house” crisis for 2008.

This is NOT about poorly made or taken loans, this is ONLY about 2008.

[RexTheRunt]

I suggest that you ask yourself and your neighbors this question:

Could I afford to buy my house, for its current book value, on my current income, using a low-risk mortgage (fixed rate 30-year amort)??

If more than a few of the people on your block say "no", then sooner or later something will have to give.

I sold my house in Florida for $500K when I could see that people like me could no longer afford to buy without taking on suicidal levels of debt.

[ExSES]

Makes me sad to see a previously beatiful, treed piece of land cleared for developemnt. And it’s not that I have anything against developemnt, it’s just that it’s done in the cheapest way possible. Cut down every tree in sight and then bulldoze everything perfectly flat.

My "subdivision" of approximately 300 acres was "developed" in the early 1950s as a "golf course community". The "developer" had rough trails cleared and marked where the roads would be put in. I am told that he personally walked the trails directing the bulldozers to avoid nearly all the large oaks (one huge oak actually has the road split to go around it). Where the vegetation was sparse (only about 10-15% of the land), the roads are straight. Everywhere else, the roads curve incessantly.

The area was a nightmare for surveyors before the advent of GPS and a number of lot owners encountered land disputes. Fortunately, the vast majority of the disputes were solved through agreement of the affected property owners.

The lots (1 to 2 acres) were selling for $3K to $9K ($9K for the lakefronts) when I bought in 1970. The area was total "boondocks" then but is 50% surrounded by "cookie cutter developments" now with major shopping within 5 miles.

I held on to the lot for 22 years (moving from one end of the country to the other several times) before retiring and personally building on it. While there were times when selling the lot was very tempting, I always resisted the offers. The remaining handful of lots are selling for 15 times their prices back in the 1970s and I certainly could not afford the place now (or any comparable place if I moved). I may have been able to "make more" from treating the property as an "investment" but it has been far more satisfying to view it as home...

[-YYZ-]

Congrats, it sounds like you have a beautiful piece of property to retire on.

I’ve also wanted to get into home ownership, but until recently didn’t really have the resources, and then with the way prices have been spiraling up... Anyway, I didn’t really want it as an investment either, I just figured I could have a place to live and build some long term value - some real assets. Hopefully I’ll still get my chance without having to break the bank.

[Poundstone]

“All this real estate appreciation over the past few decades has been great for federal employees in the DC area, but what does this mean for the next generation of federal employees?”

Good question. A lot of younger ones either have to live WAY OUTSIDE of D.C. (in places like Herndon and Purcellville and Woodbridge) or else rent (and rents are pretty darn expensive too). We do get a 12 percent pay increase (called “locality pay”) for serving in the Washington area, but there’s no way that’s enough to afford a house in our leafy, safe, attractive neighborhood in close-in Arlington, VA. I’m just glad we bought our house when we did — and we would have had a hard time affording it if I hadn’t sold a condo I already owned elsewhere in Arlington via a Starker Exchange.

[jaydubya2]

Guess he doesn't teach economics.