All These Foreclosures Don’t Affect Me
Posted on March 15, 2008
Filed Under mortgage |
I heard someone say this the other day and I couldn’t believe my ears. There point was that they weren’t planning on selling or refinancing their house for a couple years and so the current real estate/mortgage situation would be a thing of the past. They live in an nice neighborhood and really didn’t think that their value would be affected by the declining markets.
With friends in the mortgage and real estate industry, I hear a new horror story every day. People in nice, upscale neighborhoods are going to sell or refinance their house and having it appraise at 25% to 30% less than they expected. In many cases, the appraised value is less than what they paid for it three or four years ago and less than what the tax assessment is.
On the surface, the gentleman above is correct. He doesn’t have to sell or refinance his house right now but if you look a little deeper, you can see that the declining real estate market affects everyone. For many Americans, our homes are our major investment. We have always been told that it’s a safe. We have watched our homes appreciate every year and so we have a good deal of our wealth tied up in them.
Let’s take a look at his situation. He bought his house in a good neighborhood three years ago. He got a pretty good deal on it at about $425,000. He put 20% down and got a fixed rate loan. His house appreciated pretty rapidly for the first year and he took out a second mortgage for $25,000 to redecorate and pay off some bills so he now owes around $365,000.
He knows that there are several houses for sale in his neighborhood and a couple of vacant homes. What he doesn’t know is that a couple of those houses have gone to foreclosure and been sold by the mortgage company at bargain basement prices. This has lowered property values in the neighborhood considerably causing other people to negotiate short sales with their lenders. All in all, home values have dropped in his neighborhood about 25% in the last year.
The home for which he paid $425,000 is now worth $318,000. He owes $365,000 on it. If the market continues to decline at even 10% per year for the next two years, his home will be worth $257, 580 in 2010 when he expects to either refinance it or sell it. That’s a loss of $167, 420 and right around $100,000 less than he owes on it.
Real estate analysts are predicting the decline to continue for two to three more years before it starts to turn around. Even when it turns around, they predict a much more gradual rate of appreciation over the next decade. I’m going to use 10% appreciation which may be on the optimistic side for a few years. At 10% appreciation, it will be 2013 before his house is worth what he owes on it and 2016 before it is worth what he paid for it.
Hopefully for all of us, the measure that Congress has recently enacted will stem the tide of foreclosures and short sales. My friends in the mortgage industry tell me that banks and mortgage companies will go out of their way to help people who can’t make their mortgage payments if they are contacted by the homeowners.
If you are in a declining market there isn’t much you can do but wait it out. I got caught the beginning of it and it is part of the reason I am in the position that I am financially but it could have been worse. If I had not sold my house when I did, I would be upside down in it and I would not have been able to sell or buy a new house. In the midst of all of this, I am counting my blessings, rebuilding my retirement fund, my emergency fund and my credit.
If you are having trouble making your mortgage payments, call your lender imeadiately. They do not want to foreclose on your home and almost all of them will work with you to keep that from happening. It is the best way to stop this madness.
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It is also affecting renters. My parents have a home in Spokane, Washington they basically can’t rent it and have to pay the heating bills because the economy has been so bad that people can’t find jobs and are leaving the city. They also can’t sell it for the same reason. It is sitting there losing value slowly.
This really hit home, so to speak. Yesterday our home finally closed after being on the market for a year!
Sidenote: It was a huge financial drain because it had sold last June. We closed and the buyers were going to close a week later. We packed up and moved states away to our new job. Well, the buyer did not show up at closing. So, back on the market it went and we have been paying 2 house payments plus the hassle of upkeep on a home we can’t do ourselves.
Anyway, needless to say, we took a huge hit. And, it is in an excellent neighborhood. It appraised $50,000 less than it did one year ago. And I feel lucky to have sold it.
If your friend doesn’t think it is going to effect him, he needs to think again. The housing market is impacting our entire economy. Thanks to the housing market, we are in a recession. Possibly heading towards a depression. This is effecting everyone.
I stumbled this saying its worth everyones consideration.
I have done similar calculations based on peak median home prices dropping from $232000 to 208,000 today and eventually to 150,000-160000
John bougearel
Successfultradingtips.com
[...] S. says the large numbers of foreclosures and short sales affect everyone, whether you know it or not, at My Aching [...]
The gist of this story is true, but some of the figures look too dodgy to be true. If he bought his house for 425K and the “house appreciated pretty rapidly for the first year”, then a 25% drop in house prices wouldn’t bring it back down to the $318 price you quoted. It looks like you’ve just knocked 25% off his original purchase price, which isn’t correct.
Enough Wealth,
You are correct, I didn’t add in the appreciation from the first year and it would have an effect on the value. The example was based on a compilation of several different people who had tried to get a loan and couldn’t because the appraised value of their homes was 25-35% less than their loan. If you add in the appreciation to the calculation, it would effect the value at different stages and also the amount of time to recoup. Math is definitely my challenge. And I thought I was doing so well by actually calculating out the actual loss in value each year instead of just lumping it all together.
I actually found some useful information from the government of all places about how to stop foreclosure here http://hubpages.com/hub/Avoiding-Forclosures
In NC an attorney offers help to residents that might be at risk in losing their homes to foreclosures.
NC Attorney General Offers Help For Foreclosures
-Jan