What to do about a house?

[Tulpen]

Re: What to do about a house?

Most of the comments here suggest we are far from panic or a bottom.
Only when it is no longer a question to sell now, are we near a bottom.

[Verrocchio]

Re: What to do about a house?

It is what I had thought - PA does do regular assessments to determine tax 'worth'.

Commish, the property tax is likely to become increasingly important to states and other agencies with the power to levy taxes (school districts and municipalities in some states) as they become increasingly cash-strapped. The need for (and total cost of) local governmental services tends to increase as the economy worsens (think law enforcement, welfare, public health, and so on).

The same home in CA would have cost around $200K in 1993, but the taxes today would be around $3K/year. A comparable home bought even now would be around $500K, with $6K/year taxes.

Your example is highly relevant to the What to do about a house question. The comparison between renting and owning begins with the $500/month for property taxes paid by the happy homeowner. To this will be added the cost of heating and cooling the additional space that is part of the unnecessarily large house that is typically bought. I know single couples, both young and empty nesters, who live in four- and five-bedroom houses with three or four bathrooms, and the once rare three-car garage has become common. The additional space has been rationalized as a good "investment." Both taxes and utilities are likely to rise, due to demand for local governmental services and rising energy costs. Add mortgage payments to this rising floor and by comparison renting a right-sized home and having property tax hikes buffered (delayed) by a landlord becomes more attractive.

[c1ue]

Re: What to do about a house?

Commish, the property tax is likely to become increasingly important to states and other agencies with the power to levy taxes (school districts and municipalities in some states) as they become increasingly cash-strapped. The need for (and total cost of) local governmental services tends to increase as the economy worsens (think law enforcement, welfare, public health, and so on).

V,

Very true. It has been my thesis - reinforced by Dr. Michael Hudson's property tax theories - that the $ amount of property tax vs. the % levy tax amount has a direct relationship to escalating property prices - something which is holding up very strongly all across the US thus far.

This is exactly why it is my (somewhat long shot) conviction that CA will have to abandon or heavily modify Prop. 13. Either that, or reduce all school systems outside of really rich neighborhoods into smoking puddles of slag.

If nothing else the teacher's union will push that through, followed closely by the police, fire departments, and what not.

My guess is the replacement will be something like this:

1) a la wealth tax: a minimum house price over which property tax will be levied at 'market' rates
2) a 10 year retroactive implementation of the law - thus the elderly are exempted
3) those over 65 will be able to apply for a $ value exempton out of their property tax value

Some combination of the above.

[zoog]

Re: What to do about a house?

Apologies for my late reply to this thread, but I've been busy with activities related to this thread.

To wit: I finally sold my house, which I "bought" in 2005. Seven months on the market, over 70 showings, and a cumulative ~15% drop in price. Despite all that, I actually managed to make some profit.:cool: I closed about a week ago.

In 2005 I'd never heard of EJ or iTulip, or Robert Shiller, or anyone who might have been warning that housing was in a bubble. However, even as I was hurrying to buy before I was "priced out forever", I kept wondering in the back of my mind "how much longer than this really go on? at some point, no one will be able to afford a house anymore".

It was interesting to read everyone's responses to this thread. Deciding to sell (or buy) a home is certainly more than just a financial decision, and everyone's situation is different.

For me, the primary reason I decided to sell was a bad location. Buying well under the median home price at the time gave me few options. I chose what was the best house by far out of what was available (the others were in sorry shape), but at cost of a rather undesirable street. I grew to regret it as the months went by. And then I started reading housing bubble blogs and that led me to Shiller's housing analysis and somehow I stumbled onto iTulip and read EJ's housing peak warning and... oh no!:eek:

As I have said before, if I was foolish enough to buy near the end of the bubble, and with very little down, at least I was smart enough to buy a home with payments I could really afford, even if the interest rates went up. So although I very much wanted to sell the house and get out, the worst-case scenario would have been staying in it and just paying it off as quickly as I could. I think back about how stressful the experience has been for me, and can only wonder how horrific it must be for people who are facing foreclosure.

One thing that worked in my favor is that the Portland real estate market seems to trail behind California about a year or so, sometimes longer. Prices in Portland peaked around August 2007, just as I put my house on the market. Most people here still have no idea. At first I was not too worried, but then subprime lending suddenly screeched to a halt, wiping out most of my potential buyers. Thus began the waiting game.

Lowering the price seemed to draw more interest, but I think it really came down to waiting for someone to come along who either was not bothered by the surroundings or was as clueless as I was when I bought the place. I had to lower the current asking price some by way of helping with their closing costs, I had to do a few repairs, but basically everything went through without a hitch.

I am now renting a house in a much better location for roughly the same monthly payment as my mortgages. Of course I won't be getting that big tax refund check any more, but I was paying quite a bit more than the minimum, so I think it nets out about the same. I expect rent to go up next year though.

I am content to rent and wait. Either I will wait until I think prices have hit bottom, or I will wait until I get tired of renting, whichever comes first.

I finished paying off my car last year (on time), my school loans early this year (a couple years early), and now the mortgages are gone, so I am debt free, which is a wonderful place to be.

Thanks to EJ and the usual iTulip characters for opening my eyes to this macro-economics circus. There is still much I do not understand, but I feel like I am in a much better position to face whatever happens in the future.

I maintain a number of charts on housing data, mostly Portland but also some national, you've seen me post one or another occasionally. I won't load this up with charts, but I will post the inventory chart for Portland, because I think it pretty much tells the story.

[Guest]

Re: What to do about a house?

Zooger -

I promised you a case of your choice of premium beer - shipped to you at my expense if you sold your house in the next year. Remember? OK dude, now you gotta follow through. Mailing address, choice of hops, phone number to put on the airbill the works. (or maybe you give me the name and phone number of your local microbrew liquor store and I call them to arrange the credit by phone? ( :p )

And THEN - you have to SIT in your living room and drink the lion's share of it, (you are allowed a teensy bit of help) while your wife and kids watch in frank disgust as you get utterly, abjectly sodden.

A man's got to keep his word.

[c1ue]

Re: What to do about a house?

Zoog,

Congratulations on pulling the trigger on your escape.

Out of curiosity, if you compare renting since 2005 vs. your out of pocket interest expenses + loan repayment, plus foregone interest on down payment (if you made a sizeable DP), plus repair expenses, how does it all add up?

Shameless data digging...

[zoog]

Re: What to do about a house?

Zooger -

I promised you a case of your choice of premium beer - shipped to you at my expense if you sold your house in the next year. Remember? OK dude, now you gotta follow through. Mailing address, choice of hops, phone number to put on the airbill the works. (or maybe you give me the name and phone number of your local microbrew liquor store and I call them to arrange the credit by phone? ( :p )

And THEN - you have to SIT in your living room and drink the lion's share of it, (you are allowed a teensy bit of help) while your wife and kids watch in frank disgust as you get utterly, abjectly sodden.

A man's got to keep his word.

Heh, I seem to recall saying that would be the end of me. Can't drink the stuff, but I appreciate the gesture.

[zoog]

Re: What to do about a house?

Zoog,

Congratulations on pulling the trigger on your escape.

Out of curiosity, if you compare renting since 2005 vs. your out of pocket interest expenses + loan repayment, plus foregone interest on down payment (if you made a sizeable DP), plus repair expenses, how does it all add up?

Shameless data digging...

Ah geez, c1ue.:rolleyes::confused: Well now that's a rubbery set of numbers to run. Just for starters, the rent on my apartment was less than the required mortgage payments, and I always paid at least twice the minimum on the secondary mortgage. I only put about 5% down so the downpayment was small. Put in more than twice my downpayment in repairs and improvements... at least half of that amount was personal preferences, not entirely necessary. I could go on, but pretty much every number in the equation is subjective.

Nonetheless, I made a stab at it. This is basically how I ran the calculations:

Profit - (Entire mortage payments [includes prop taxes, insurance] - tax refund + repairs/improvements + downpayment)

vs.

Downpayment invested in CD's, rolling over as needed - Entire rent [on old apartment if I'd stayed, annually adjusted]

I end up with a negative number either way, with the renting scenario losing about 25% less than house scenario. If I assume I would spend the same amount on rent as I did on (mortgage payments - tax breaks) then the house scenario loses about 20% less than renting. If I also figure putting into CD's the money I spent on repairs and such, the renting scenario loses half as much as the house scenario.

The final sale price was only about 15% more than what I bought it for in 2005. Had it been higher, the house scenario might have broken even or possibly actually been profitable. But as we all know, only during certain periods does housing make those kinds of profits. If you miss the timing... too bad.

Boy am I gonna be tired in the morning. Thanks a lot, pal.;)

[Hypatia1]

Re: What to do about a house?

vmkfstools My cube mate bought a house in 2005 in northern Virginia for 700+ grand. He's now under water and his loan will readjust in 2 years. He can't sell the thing without owing the bank more cash than he has. He's seriously considering this plan:

Rent out his current house for what ever he can get per month. Find a much smaller new house in the 350 grand range that the builder is desperate to unload. Buy the smaller with a builder arranged 30 year fixed mortgage. Then a couple months later walk away from the first house. Give the keys back to the bank (If there was no renter, he'd break the keys off in the lock).

What you think of that scam???

[WDCRob]

Re: What to do about a house?

IIRC, that's probably illegal Hyp (since to get the 2nd loan he'll likely have to hide the existence of the first one). Tanta at Calculated Risk has posted about this in the past (or maybe commented on it - in which case, good luck finding it).

According to the C-S Index prices here in DC have dropped almost 6% in the last three months. I'm worried that interest rates will spike at some point, but as long as prices are declining at a 20-25% annual rate I think I'll hold out.

So I'm in the position of pulling for the Fed to keep long rates low until next winter. Jan/Feb 2009 won't be the rock bottom, but it'll be good enough for a long-term buy.

[swgprop]

Re: What to do about a house?

What you think of that scam???

Hypatia1: Personally I can't begrudge someone for making a financial decision such as your friend is considering. He does need to be aware of Virginia foreclosure law though - I believe deficiency judgments are allowed there. Whether or not his lender would pursue one can't be predicted - but I'd think it more likely if he abandoned the current residence and bought another.

[c1ue]

Re: What to do about a house?

Boy am I gonna be tired in the morning. Thanks a lot, pal.;)

Thank you!

Always interesting to see hard data.

The interesting part is this: you sold and made money on the house, yet the clear profitability vs. renting is not clear even in the short term where you had maximum tax writeoff.

Had you lost money on the house - it seems pretty clear then that renting would definitely have been better.

[zoog]

Re: What to do about a house?

Thank you!

Always interesting to see hard data.

The interesting part is this: you sold and made money on the house, yet the clear profitability vs. renting is not clear even in the short term where you had maximum tax writeoff.

Had you lost money on the house - it seems pretty clear then that renting would definitely have been better.

Yeah it was enlightening to see the comparisons, worth the effort. A while back I ran some future projections of staying in the house vs selling and renting, and it seemed like the differences in my annual bottom line were minimal for the first few years. Over a much longer term, owning appeared to work out better. I ran those numbers to defend my decision when friends inevitably chastised me for "throwing money away on rent".

I do plan to buy another house again at some point, as there are other, non-financial reasons that make it appealing to me. Should be a better deal next time, and I will have a larger downpayment to start with.

I wonder if sometime in the next 10 years, lenders will go to requiring 20% down no matter what. It would be better for everyone involved, I think. The related question is, will prices come down enough relative to wages and savings rates going up enough to make a 20% downpayment within the reasonable reach of most people?

Found this on census.gov:

HOMEOWNERSHIP RATES

	2000	1990	1980	1970	1960	1950	1940	1930	1920	1910	1900
United States	66.2%	64.2%	64.4%	62.9%	61.9%	55.0%	43.6%	47.8%	45.6%	45.9%	46.5%

[Rajiv]

Re: What to do about a house?

. Over a much longer term, owning appeared to work out better.

In areas with no rent control - definitely -- however if you are living in areas with rent control, the equation changes quite dramatically -- rent control cities would be like San Francisco, New York.

[Slimprofits]

Re: What to do about a house?

Good credit may not be good enough

In recent weeks, mortgage insurers, whose backing is required for borrowers who can't afford the traditional 20 percent down payment on a home, have already flagged nearly a quarter of the nation's ZIP codes where they refuse to insure some home loans.

That's more than 9,600 ZIP codes in at least 34 states where they won't insure certain types of home loans - those for investment properties or second homes, those with riskier adjustable-rate or interest-only mortgages, or for buyers making small down payments such as 3 percent.