Thursday, April 21, 2005

Another Second Home Tale

This Palm Springs story includes a couple who may have made the ultimate mistake in the housing bubble. "Retiree Fred Crutcher, 68, and wife, Patricia, have had frustrating experiences as both buyers and sellers."

"While they're very happy with their new home in northern Palm Springs, they're still trying to sell their former home, a large two-level condo in southern Palm Springs."

"The couple listed the at $589,000, but have since reduced the price twice, it is now listed at $580,000. 'It's really hard to tell why it hasn't sold so far,' said Crutcher. In the meantime, the couple is now having to pay two mortgages, not to mention homeowners' association fees in two places."

The future of housing may depend on how many families are in a similar situation.


At 9:05 AM, Anonymous Anonymous said...

The thing that absolutely kills me about all of this is the baby boomer factor.

The baby boomers are one of the most prominent buyers in the bubble. Generally, I get the feeling they are buying as a retirement investment.

Furthermore, in 8 or so years, the BBs start retiring en masse and that will surely be accompanied by them downsizing their accomodation. So, just when BBs will need to start living from their savings (ie RE investments), the market is going to be flooded by the same downsizing their primary residence AND selling their investment properties.

This is in addition to not having a decent Social Security system.

No problems here...

At 9:11 AM, Anonymous Anonymous said...

My neighbors here in San Diego had the same problem. They bought a big house in North County, and put their North Park "bungalow" on the market in December. They finally sold it this week, almost 12% lower than their original asking price.

But it's still not all bad news.........they still got almost half a million for less than 800 sq ft! They just wanted closer to 6ooK

At 9:15 AM, Anonymous Anonymous said...

I live in Maryland suburbs of DC and the house prices in my neighborhood have gone up by 150% since Jan. 2000. I believe that a major cause of this is the Greenspan generated liquidity/credit boom. It seems like anyone, without any attention given to their ability to pay, can obtain a loan.

I know this couple (only husband makes 79K per year) who bought 850K home with interest only loan speculating on future appreciation. Now they cannot afford to make payments and cannot sell the house for what they paid for it (bidding wars!!!), so they have moved into a rental apt. and have rented their house for 3000 per month (a 500 negative cash flow). Imagine what will happen to them when the interest rates climb higher and when the pricipal payments become due.

I am very nervous watching this gut wrenching drama unfold in Montgomery County MD. We have a fully paid townhouse (that we luckily bought 5 years ago) and now need a single family house (growing family/kids etc.) but are very afraid to make the move.

At 9:23 AM, Anonymous Anonymous said...

Anon in MD,

You could sell you fully paid off townhome while the price is high and rent a nice single family for a year or two.
It's what I plan/am hoping to do before the market catches on here, Phx, AZ.

At 9:36 AM, Anonymous Anonymous said...

Here's the recipe: Sell immediately, rent for a bit, then buy back in when the dust settles enough for your comfort level.

I have a June closing on my townhome that appreciated 37% since I bought in 2000. I might have gotten slightly more, but I chose to price my home properly and get out while the getting was still good. As it stands, my sales price is actually higher than the average REALTOR listing price for comparables in my neigborhood.

Realtors in my area are driving down list prices to make the sales. FSBO's are priced ridiculously with delu$ional sellers that have no concept of the current market conditions. It's secretly been a buyers market for almost a year. One single family here has been on the market for nearly 12 400+K, then 390, then 370, now I think it's in the 360s!...still not moving.

The market is cooled and will cool further. Heaven help anyone who can't remember the last few downturns. I recall in the early 80s having sold a home at 179k only to have the bank foreclose on the buyers later on when the market tanked and resell it for 108k!!!

Where has all our memory gone?

Sell now and fast!

At 9:36 AM, Blogger dryfly said...

Anon in DC... you don't need a 'house' to raise kids, you need a 'home' and a townhouse works fine for that... if the market is that risky where you live - hold off a while.

Besides with the place paid off - you can afford to take your kids places on weekends that overly strapped home 'owners' can't even dream of... if you want them to get out more... take them to Shenandoah or Chicoteague... you'll be the only people left with cash in hand to enjoy the weekend... everyone else will be sending their pay and everything else they can pull up to their mortgage lender.

Which brings up a point... that Palm Springs couple who owned two properties was paying mortgages on both... think about it. They are retired, have owned one place since 1987 (over 17 years) are 68 years old and haven't paid off ONE mortgage yet, let alone two...

With the appreciation since '87 they can't have much left to pay off unless they have been dipping back into the well again and again. I mean the price they paid in '87 was probably something like $200K if they are now asking $580K... Even with a 30 year mortgage and minimal down payment (by '87 standards)... they should owe only a $100K or so on it...

This all tells me they don't have very deep pockets - or they'd take a mortgage or two off the books and quit worrying about it... It is clear they don't have deep enough pockets to be playing this game.

And I agree with the original entry by Ben that a lot of people could be in that boat. We'llsee.

At 9:39 AM, Anonymous Anonymous said...

that was a pretty funny article... i love how the realtor said there's no bubble there... and that it's good for area to go thru a "correction"... dude, your inventory has more than doubled! what do you think is happening...

At 9:44 AM, Blogger John Law said...

it must be hell to have two mortgages and a property that just sits there, maybe not even getting looked at.

At 10:41 AM, Anonymous Anonymous said...

these are typical boomers... no cash, high debt... and either living off of social security or looking forward to it... probably their most stable paycheck of their lives... just living off the fat of the government

At 11:05 AM, Anonymous Anonymous said...

That was an interesting suggestion about keeping the townhouse and not moving to a house. It goes to the point that Americans seem to think they need much more space than any other people on the planet.

House size has grown tremendously over the years even as family size has shrunk. 30 years ago a normal house size for a family was 1,200 square feet, but today that would be considered WAY too small. Every kid has to have his/her own bedroom, there has to be a big backyard with a pool, etc. This has certainly helped inflate housing costs (and profits of home builders). It has created a bigger burden on families, too.

So many people kill themselves working long hours and commuting for hours just so they can have a sprawling home in the suburbs. For me, it's just not worth it. My 1,350 square foot house is paid off and the freedom of not having a mortgage is wonderful. I wouldn't consider taking on a burdensome mortgage now just so I can have a McMansion.

So, if your townhouse works for you, I say keep it and avoid this crazy market.

At 11:55 AM, Anonymous Anonymous said...

The budget deficit is a problem because it is projected to rise significantly as the first of 78-million baby boomers start to retire in 2008.

"Persistently large budget deficits threaten the economy because they can push up interest rates for consumers and businesses. Higher borrowing costs would weigh on consumers' and businesses' willingness to spend and invest — two important forces that keep the economy going. Rising interest rates also would slow growth in the housing market, Mr. Greenspan said."

"And, growing budget shortfalls would force the government to borrow more to finance those deficits.

“The federal budget is on an unsustainable path, in which large deficits result in rising interest rates and ever-growing interest payments that augment deficits in future years,” Mr. Greenspan said.

At 12:14 PM, Anonymous Anonymous said...

In 2008, the first of the boomers begins to unload their real estate.

Get ready for some fire sales!

At 12:33 PM, Anonymous Anonymous said...

Surely we will then have enough RE ! There can't be a shortage of RE if 80 million BBs retire and move into old folks homes. I'll bet I know where the next shortage will be !

At 12:52 PM, Anonymous Anonymous said...

I have become totally addicted to this blog! My husband cracks up every time he walks by the computer and sees me reading about the bubble AGAIN.
After skulking around for several weeks, I finally felt compelled to post today after reading the discussion about whether to "trade up" or stick with a smaller townhome for good.
We have also been agonizing over what to do in light of the current market conditions where we live, and our family situation. We live in North San Diego county, in a 1376 sq. ft. "single family attached" home (3BR,2.5BA).
We bought the home in 1999, before our son was born, with the intent of eventually trading up to a 4 BR detached with a (slightly) bigger yard ... our backyard is not super tiny, but it's definitely on the small side (no room for a treehouse or a playset).
We now have two small children (a boy and a girl) who currently share a room and can continue doing so for about another two years, and then we have a guest bedroom, which we feel the need for since most of our immediate family lives in France and Spain. SOOO, eventually we'd like a 4 BR.
However, as you all know, the market has gone haywire since we purchased. We currently owe ~$185K on our house, and could easily sell it right now for around $460K. The problem is, of course, that when the other shoe drops in this insane market, our equity will also decrease, putting us in the exact same position with regard to our ability to buy something reasonable. We are big believers in living within our means and don't want to end up house poor -- we are a one-income household with no debt aside from our mortgage.
We have considered the possiblity of selling now and renting until we see an opportunity to purchase a larger home for about what we're paying now (reduced prices minus our current equity), but, although I'm firmly convinced of the bubble and am beginning to see clear signs of the slowdown in my own community, I confess that we are both very hesitant to sell our house -- it's scary!
The other factors are that (1) We could build out a smallish but workable fourth bedroom in a high-ceiling area of our home, but that would entail adding about $34K to our mortgage debt (HELOC or HEL); and (2) We currently have a 5/1 ARM that will adjust in December 2007 and have been considering refinancing to a fixed rate now, since rates are unlikely to be this low again. I only want to do this if we commit to staying in this home till retirement. Our goal is to own a home free and clear in 20-22 years.
Sorry to be so long winded, but this is something we're really struggling with, and I would love to hear your perspectives and advice ...

At 1:13 PM, Anonymous Anonymous said...

Honestly, if I were in your position I would sell and rent ASAP.

Really, is there any chance that house prices in the next few years will be higher than they are right now ?

I assume that $300K is a significant amount of money for you and I'll bet that in 2 years you could buy your 4BR outright for less than $300K. You could attain your goal of owning outright in less than 20 years, probably less than 3 years.

If I were you, I'd be listing and looking for a rent deal.

At 1:15 PM, Anonymous Anonymous said...

BTW: One of the reasons I recommend that so strongly is that I know TONS of people who got burnt in the dot com craze.

If they had just taken profits and gotten out of the market they would have been fine. Actually they would have been semi retired. Instead they were left with grief.

At 1:15 PM, Anonymous Anonymous said...

If you are looking to "move up" a soft market is better. First, 10% off a 1mill home is 100k, but 10% off a 500k home is only 50k. Secondly, the entry level market usually goes down less during a down phase so it is likely that while your townhouse goes down 10%, the house you want to move to goes down 20%.

Lastly, if you read this blog every day as I do it might seem that the bubble is about to pop. No one knows that for sure, and it could go on for several more years.

At 1:31 PM, Anonymous Anonymous said...

San Diego

If I were in your shoes I would stay where you are and see what happens with the real estate market. As you can see this market is teetering and we should have a clearer picture by the end of summer.

Ask yourself the following questions:
1) How many days out of the year does that guest bedroom sit empty.
2) If your relatives from France and Spain can afford to visit you, don't you think they can afford a hotel package deal.
3) While you love your relatives dearly, shouldn't your immediate family be a priority.
4) Do you think your relatives would understand the need to convert the guest bedroom to a needed bedroom for your child.
5) Do you really think that you should have to take on the added debt for adding a 4th bedroom just so your relatives will be able to save a few vacation dollars.

I could go on but I think the answer is pretty clear.

If you really feel compeled to have a 4th bedroom for your relatives convience then go ahead and add one to your current home. Even at the cost of $34,000 it is cheaper than the cost associated with selling your current home (sale costs about $39,000) and buying a new home with a bigger mortgage.

Good luck.

At 1:43 PM, Anonymous Anonymous said...

Why would you recommend they stay where they are ? Don't we agree that SD is a big bubble and that the value of their home will decrease when the bubble bursts ?

What is the stigma associated with them renting ?

At 6:02 PM, Blogger dryfly said...

I would NOT rent and I would NOT move up... I raised three kids in a small 3 BR home that was less than 1300 sqft... plus we always had a couple big dogs, a couple cats, etc.

We bunked the two boys and gave the girl the 'guest room'... when family came (which was often) we tossed some kids out of their rooms and told them to sleep on the couch... they loved it, like camping.

And understand - I live in Minnesota where it is freezing cold much of the year... you have an additional room we only dream of - California weather.

If you want the bigger house, you will be house poor... no if-and-or-buts. I wouldn't do it. California is too much fun to be that strapped down in 'paradise'.

The reason i would not rent is that the rental market can change quickly too - especially if a lot of people start losing homes... they will all have to go somewhere. And in that world rents are likely to converge on the true cost of ownership.

Stay where you are and enjoy the time with your kids - they will be gone very soon.

At 6:19 PM, Anonymous Anonymous said...

My family and I live in Orange County, CA. We have sold our house last summer. After paying off the mortgage, closing and broker fees we have about $300K left. Right now we are renting similar size house in the same area (even with a better location - closer to my kids school) for less than we used to pay for previous house, even that our mortgage was a lot lower than the price we sold it for. It was relatively easy to find rental house, as there were a lot of properties coming to market at the end of last summer. I expect this to continue throughout this year as well. Nobody can tell for sure when correction will happen and to what degree. But let me ask you this: In current economic and geopolitical situation, when would you feel more comfortable - living in "your own" property with $300K mortgage or living in a rental one with NO liabilities and $300K in cash?

At 6:29 PM, Blogger John Law said...

san diego-

you know that there is a bubble, but you're scared to sell? that doesn't make sense, but it sort of does. I think you may be scared of being left out of appreciation in RE. I think the main reason is you love your home and don't wanna move. that's perfectly understandable, a house is not a stock or a bond.

I think you have to do what will suit you best mentally. it sounds like you want to keep your house. just remember, your strong convictions of a housing bubble may irk you when 3 years from now if your house is worth $345,000. you'd probably say you could have had that money in the bank(hopefully the bank doesn't go under from RE loans or a crisis). you could then buy the house you want eventually. from reading this blog, there is a good chance you could pay rent on a larger house that's worth twice as much with not a big monthly rent! it's your choice. you know it's a housing bubble, so be prepared down the road to face whatever. it may just be worth it more not to uproot your family and move to a new house.

do what makes you happy!

At 6:34 PM, Anonymous Anonymous said...

What is the stigma associated with them renting?

No stigma, but there are a lot of very good reasons to prefer living in a house you own versus renting.

If you're renting a house, the owners might decide to kick you out because they want to sell it. Moving isn't much fun.

If you own your own home, you can do what you please to make it suit you. If you rent, you have to get permission to do almost anything, from painting it to installing shelving.

The same goes for owning a pet - many landlords don't allow it.

And let's face it, many landlords are just plain assholes! They don't fix things they're supposed to, and give you grief over almost anything you do. They feel free to enter your home whenever it suits them.

As someone above said, there's no way to know exactly when the real estate bubble will pop. It might happen next month, next year, or a few years from now. If you sell your home right now, you could still lose out on some significant appreciation.

Another factor in California - property taxes are much higher when you buy a home rather than staying in your current home, because of Proposition 13. It could easily amount to thousands of dollars a year.

I don't know all of the details of your personal situation, but there are many solid reasons to stay where you are.

At 7:16 PM, Blogger deb said...

Great article on renting vs. buying in Sacramento.

We sold our LA suburb home in July, stashed the money away, and are renting. We pay $2800/mo to rent a house that would sell for over a million. It's a good deal for us, but boy was it hard. The emotion of being out of the market has been almost more than I can take. This blog helps me keep the faith that I am intellectually correct to not dump our money back into this insanity.

I must be one of those "sheeple" at heart, because I feel the herd calling to me every day, telling me I am going the wrong way. I try to remember that, in fact, we are following the smarter path. Harder than I ever imagined!

At 7:18 PM, Anonymous Anonymous said...

RE: the what to do post at 12:52

I'm addicted to this site too, Ben has done a great job finding some pretty intelligent posters. My advice, if you can keep the adjustable and pay it off before the interest rates could adjust do it. Maybe get a part time job and throw all the extra cash at extra principal payments. With the excessive amount of debt from both the consumer and the US guv something has to give in terms of interest rates. The less amount of debt you have the better.

At 7:38 PM, Anonymous Anonymous said...

Thanks to all of you for your feedback. I have had all of these thoughts myself at one point or another. Just to clarify, the usage of the room addition I spoke of would be about 2% guest room and 98% playroom/den, if we were to decide to have it built.
Also, our current housing payment is very comfortable ($1014/mo.), making it easy for us to save a good chunk every month for emergencies/unplanned expenses, as well as vacations. This is what allows us to pay extra principle, too. So if we ever move -- now or later -- I really wouldn't want to pay a whole lot more per month!
I guess I just love my house, smallish though it may be. I would hate to give it up, even in order to "freeze" my current equity to turn toward a future downpayment.
Hee Hate Me made an interesting point about entry-level properties taking a less severe hit in a down market than more expensive homes. That's something I've often wondered about myself, b/c it does seem to make sense.
Bottom line is that I guess I don't have enough history in California to take the gamble of selling in our situation! We've only been here for seven years, and haven't lived through any of the prior busts. The tangible reality is that we owe a miniscule amount (for this market), and that even in the face of a total market tank, we'll be "safe" staying in our home. I don't think we feel up to being risk takers in this situation, so I think we will sit tight for now, and just keep a sharp eye on what's happening around us.
Thank you again for your input -- I wish all of you luck in your own RE efforts!

At 7:43 PM, Anonymous Anonymous said...

P.S.: The type of houses that we'd be interested in, at current prices, are in the $575-600K range (keep in mind that ours would easily go for 465K, by owner, at present). The differential is what has me worried, in a high or low market -- we're just unwilling to squeeze that extra $$$ out every month!
Who knows, maybe the higher-priced homes will take more of a hit than the entry levels ...

At 9:07 PM, Anonymous Anonymous said...

I am the writer of post "Anon" 1:31 pm responding to the following questions. I wrote a response about 4:10 pm, but it was lost due to this blog's "Server Maintenance", so I've tried to recreate it the best I could.


"Why would you recommend they stay where they are ? Don't we agree that SD is a big bubble and that the value of their home will decrease when the bubble bursts ?

What is the stigma associated with them renting ? "


Yes I agree that the SD market is in a bubble and No I don’t have anything against renting.

The reason I recommend that they keep their current home is because of their family situation. Their current home offers them adequate, enjoyable and affordable housing.

If they were to rent a comparable home in the area it would likely cost them between $1,500 to $2,000 per month. I would guess that their current $185,000 adjustable rate mortgage is around 4.5%, and is fixed for the next 2 years. Payments of PITI and HOA are probably in the neighborhood of $1,400 to $1,500 per month. Then they get to deduct the interest and property taxes on their tax return. Considering the tax deductions their effective housing cost is probably under $1,000 per month. Cheaper than renting!

Ok say the market tanks and the value decreases 50%. She said her home is worth $460,000, 50% of $460,000 is $230,000. Assuming that her loan of $185,000 represents an 80% LTV, that would mean she paid close to $230,000. So even if values decrease 50% she won’t lose any of her original investment. And even though she may lose some of the appreciation that accumulated over the last few years, values will eventually go back up.

I have heard of many people over the last few years that thought the bubble was about to burst, so they sold their home and moved into a rental, to wait until the bottom dropped out and then buy back in at a discounted price. But as we all know that has not happened yet. Now all those people who sold prematurely are crying about how much more money they could have made if they had held onto their home.

So it’s not always as simple as “Buy Low and Sell High”. There are family, comfort, schools, etc to consider. And since no one knows for sure when this bubble will burst, it would be a shame for them to sell and rent and wait and cry like so many others as I mentioned above.

Tip: If you are ever writting a long response on the internet, first draft it in your word processing program then copy and paste it where needed. It will save you a lot of grief.

At 10:22 PM, Anonymous Anonymous said...

To the most recent anonymous poster:
Very close to our own reasoning ... you're close on the monthly cost breakdown, too (it's actually $1280 for PITI+HOA). You just can't beat it in this part of the country! So, as I said, we feel safe enough staying for now. One thing we're thinking might work for us when "the bottom drops out" is the foreclosure market. That might even out the price differential b/w our homes and the 4BRs, even with the downturn in prices.

At 11:01 PM, Anonymous Anonymous said...

I have posed this question before on this blog but this seemed like a place to get some advice from those who understand the San Diego situation so here goes:

We bought a year ago in North County with money from our condo sale. We put a huge chunk down and have a 30 year fixed. We paid almost 500k for our fairly modest home a year ago. Even though it was expensive it seemed like a good idea at the time. Our mortgage is not far from twice the price of renting something comparable rental. Now I'm hearing about all of these speculators and people with bad ARM loans buying homes and driving up the home prices and the precarious situation the market is in - higher interest rates forcing foreclosures and prices sinking downward.

My question is this: We can sell now for something like 600k but we will pay hefty (25 percent plus) capital gains. Do the blog readers out there think that prices are going to drop seriously in the next year?

I know that's a tough question but I've been reading some pretty bearish articles lately and they seem to make some sense. I don't mind renting for awhile.

Ben I love this blog but sometimes I wish I would have never heard about it so I could live in ignorant bliss ; ) And then there are pitches like this one that seem a little alarmist but could they be right:

(I'm sure they sell a ton of subscriptions by scaring the hell out of people.)

Thanks all!

At 11:53 PM, Anonymous Anonymous said...

I would stay where you are for another year until you meet the 2 year primary residence requirement to avoid the capital gain tax. Since you are married you can avoid paying capital gain tax on the first $500,000 of gain, provided you lived in the property for 2 of the last 5 years.

Prices will not drop overnight, and since the market has not really shown any real sign of slowing yet, you should have enough time to meet the 2 year requirement capital gain requirement before you really need to think about selling.

Since your home is already worth $100,000 more than you paid for it, you have a cushion to ride out a 15% drop in value.

Don't put too much thought in to the strategicinvestment article, it seems a little extreme.

At 6:49 AM, Anonymous Anonymous said...

"Anon" 9:07 PM,

You logic and math skills are quite questionable, to say the least... have you ever owned a home? Property taxes are deductible but not completely... it's about a 15% deductible... so what... it basically means... if you're paying $700 per month in property taxes, you're really paying about $575 per month... that's nothing... also... to say that Sand Diego in reality is paying about $1,000 per month in total (mortgage & taxes) is just wrong and bordering on idotic...

At 10:08 AM, Anonymous Anonymous said...

"Anon 6:49 am:

I don't have time to respond to your insulting response right now, but I will later today.

And yes I have owned 13 homes and currently own 6.

Oh and by the way you should learn to spell before you start throwing out such derogatory words, idotic is actually spelled idiotic.

At 9:34 PM, Anonymous Anonymous said...

Anon 6:49 am

In regards to my logic, take a look at these responses;

1)“I would NOT rent and I would NOT move up”
2)“I don’t know all of the details of your personal situation, but there are many solid reasons to stay where you are.”
3)“Very close to our own reasoning” (from San Diego)

So it doesn’t look like I’m being illogical afterall.

In so far as my math skills, take a look at this response from San Diego;

“you're close on the monthly cost breakdown, too”

Not only did San Diego say that my post was very close to their reasoning, but she also said that I was very close on the monthly breakdown.

While I will admit that my $1,000 “example” was alittle off, it was just an example. In regards to your figure of 15%, I would guess that they are in a higher tax bracket than that. Since I did not know I was being tested, I did not break out the calculator, but used a rough formula that used to be fairly accurate, when tax brackets were higher. Even if the numbers were off a bit, you have to admit there are tax advantages to owning.

That said, there is absoultely no reason for you to make such a rude statement. You disagree with my logic, fine, that’s your opinion and your right but you should learn to express your opinion in a more mature manner.


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