Charts and graphs are all well and good, but once in a while it’s good to look at some of the more personal effects of the housing bubble. Today let’s take a look at a possible scenario that some hopeful home sellers today might be facing. Next Friday, we’ll turn our attention to home buyers. (Update: Make that Monday)
Let’s consider a hypothetical couple—we’ll call them Joe and Linda. The year is 2005, and the mid-20s pair buy a quaint little 2-bedroom, 1-bathroom, 1,100 square foot Victorian charmer in Snohomish for $245,000. A perfect home for the young family of two.
Not wanting to blow their entire savings on a down payment, they finance the home in the same way many others did during the bubble, with an 80/20 pair of loans. They sign up for a $196,000 30-year adjustable rate mortgage (fixed through 2010) and a $49,000 15-year second with a balloon payment in 2020. All together, their monthly principal plus interest payment comes in at around $1,400—an obligation they can afford on Joe’s professional salary.
For the past four years, they have been dutifully paying their mortgage on time every month, fixing up the house, and generally enjoying life. Of course, they knew that the days of a fixed $1,400 payment were numbered, but this is just a “starter home” anyway, and if for some reason they don’t move within five years, their loan officer assured them that it would be no problem to refinance.
Now it’s 2009, Joe and Linda are nearly 30, and with a young son, another on the way, and their fixed rate set to expire in just over a year, they a have naturally begun to think about moving up the “property ladder.” Unfortunately, that’s where the problems begin.
Joe and Linda start to look around at recent comparable sales in their neighborhood, and they realize that best case, they might be able to find a buyer that would pay $250,000 for their home. After agent fees and excise taxes, such a sale would leave them with about $228,000.
Since Joe and Linda still owe over $230,000 on their mortgages, they realize that selling their home will actually cost them a few thousand dollars—or more, if they can’t find a buyer at $250,000.
At this point, Joe and Linda could refinance into a new 30-year fixed-rate mortgage and wait for better times to try to sell, or they could bite the bullet, sell the home at a loss, and take their pick of a growing supply of two and three bedroom homes for rent in the general area for as little as $900 a month.
So what should they do? If I knew a couple like Joe and Linda, I would recommend they sit down together and decide whether they can be happy living in their home for another ten years.
If the answer is no, and if they can afford to, they should probably do whatever it takes to sell ASAP. Sure, they may have to come to the table with a few thousand dollars, but when they find a decent place to rent for a few years while the market continues to cool, they will easily make the money back in monthly savings, and they will avoid taking an even larger loss down the road.
If the answer is yes, then by all means, refinance into a nice safe fixed-rate loan and get comfortable. Thankfully, Joe’s job has not been in serious jeopardy, so getting a new loan should be relatively straightforward.
The reality of today’s housing market is that we are not going to see a quick rebound. Things are going to continue to get worse before they get better, and when we do finally hit the bottom, the market will likely languish there for some time. If you think “waiting the market out” means trying again in 2010, you are going to be in for an unpleasant surprise, especially for the more rural markets further away from the “job centers.”
So what advice would you give to Joe and Linda? What’s the most realistic and prudent way for a homeowner to make the best of a situation like this?
