In our discussion this weekend about why people would walk away from a mortgage, even though they can afford to continue paying, Tim Kane (S-Crow) pointed out:
It doesn’t take much emotional pull to consider walking away when you see property being purchased across the street for $150,000+ less than what you may have purchased your place for in 2006 and it costing substantially less to cover the monthly payment at today’s market prices. This is more prevalent in newer developments and I would guess can make for interesting neighbor to neighbor discussions.
Well, I spent a little time on Redfin looking at some new construction homes for sale, and it didn’t take long for me to find some examples similar to Tim’s hypothetical scenario:
Development: Camwest “Tambark Springs”Floorplan: ~1,700 sqft, 3-bed, 2.5-bath “Aspen” (pictured at right)
Past sales:
New units’ current asking price: $319,950 (~20% off)
Development: Camwest “Shamrock Heights”Floorplan: ~2,500 sqft, 3-bed, 2.5-bath (pictured at right)
Past sales:
New units’ current asking price: $459,950 (~19% off)
In the first example above, if we (very generously) assume that the folks that bought in ‘06 and ‘07 had 20% down payments and got 30-year fixed-rate mortgages at the going rates at the time, their payments would presently be around $2,400. Today’s buyer with the same sized down payment would have a monthly payment around $1,700.
That’s a ~30% difference in payments. The ‘06-’07 buyers are spending $8,400 a year more for the same house as their neighbors. I imagine most people can think of lots of things they’d rather do with $8,400 a year than to continuously pay for a poor decision they made years ago.
There are tens of thousands of buyers around Seattle who bought at or near the peak with little to no money down. Many of them even got a mortgage that they can technically afford (got ramen?). At the time they bought, it made sense to them to squeeze their budget, because they bought into the notion that if they didn’t get something right away, they would be priced out forever.
Every month that these peak buyers spend in their peak-purchased house they’re basically “throwing away” hundreds (sometimes thousands) of dollars. Selling isn’t an option, because they owe so much more than the home would sell for. Walking away starts to make sense.
I’m not saying I necessarily recommend walking away as a course of action (or that I don’t), but I can absolutely understand the rationale, especially when you’re in a situation like the above examples, where people buying the exact same house today are paying thousands less per year.
In a bit of a twist, let’s ignore this year’s dog and pony show, and take a few moments to go back to 2006’s Street of (Materialistic Pink Pony) Dreams, which I actually had the misfortune of personally attending. The first thing that comes to mind when I recall walking through these homes was the surprisingly cheap feel of the finish work. We visited near the end of the run, so by this time, thousands of people had traipsed through the halls of these houses, opening and closing every door and cupboard more times in four weeks than would usually be experienced in a year. In a way it was like an accelerated wear process. Closet doors were jamming, knobs were loose, hallway doors didn’t sit quite straight… in general it was quite unsightly. Plus there were a number of things that didn’t even have to do with wear, such as poorly-painted trim lines and wood trim that didn’t quite match up correctly. I’m sure that they went back through the homes after the tour dates were over and fixed most of these things, but seeing them near the end of the tour was like getting a preview of what things would look like after five years of normal use. For multi-million-dollar mansions, you think they would have sprung for better hinges and rails.
Another thing that struck me as odd was the wine cellars. Not that the houses had wine cellars at all, but just how ridiculously huge some of them were. In the house with the largest wine cellar (Hillcrest Farm), I estimated that there was space for 1,646 bottles of wine. Is it just me, or does that seem a bit unnecessary, even for the Street of (Materialistic Uber-Excess) Dreams?
Kensington Manor
Casa Montecito
Twin Cedars Lodge
