Waiting on the World to Change — John Mayer
The next big psychological change to impact housing will be a change in homebuyers relationship with debt. Equity can be created in a home in two ways: you can pay down the debt, and the house price can appreciate. During the bubble rally, it was not fashionable to pay down debt. It is a slow way to build equity, and it requires sacrifice. During the bubble, appreciation happened much faster, and it required no additional funds to go toward a housing payment. Under those circumstances, only the most fiscally disciplined and conservative paid down their mortgage (and they are the only ones whose houses are not in jeopardy.) As the price decline drags on — which it will for several more years — people will come to realize that equity does not appear magically, but it is only obtained through retiring debt.
An acquaintance of mine bought a house in late 2007. I consider it my greatest failure of persuasion that I was unable to convince him to wait. The purchase was 70% emotional, but the 30% of him that rationalized the decision had convinced him that he could service the debt for 10 years with an interest-only fixed payment. He would then be able to refinance into another interest-only loan, and in 20-30 years when he went to sell it, he could take the profits to fund his retirement. It is thinking like this that will change. Instead of buying a house he could afford, he borrowed 5 times his income with an interest-only, and he has no funds left over to save for retirement (or anything else for that matter.) Since his purchase, an identical floorplan a few blocks away has been offered for sale for 20% less than he paid, and prices will decline another 20% befor they finish dropping. In ten years, he is likely to be still underwater, and he will either lose the home or struggle with a fully amortized payment on a 20-year schedule. If he had simply waited 2 to 4 years, he could have had the house, and he would have had the money left over to save for the future. There was probably no overcoming the emotional desire to have the house today (sadly,) but it is the intellectual rationalization that I found most interesting.
By 2010, people will realize the thought patterns of the bubble, the religion of real estate, are no longer operative. As this slow process of change grinds forward, people will start thinking in terms of taking on manageable debts with an eye toward paying it off to build equity the old fashioned way through retiring debt. This will be a big change for the market. People will be unwilling to put 50% or more of their gross income toward housing, and our economy will benefit because so much of our local wage income will not be going toward debt service. There is a silver lining in a price decline, and the rebalancing of household finances will be a great boost to our economy. Crushing debt service is like a tax that takes income out of our local economy and sends it to investors in far-away lands. When this money stays home, people have more money to spend on local consumer goods. None of this will happen quickly, as the lingering effects of kool aid intoxication will be with us for some time, but in the end, house prices will be affordable, and the local economy will recover — not through a Ponzi scheme of ever-increasing debt, but through working, earning and circulating that money in the local economy the way it is supposed to be. Until then, I guess we will keep waiting for the world to change…
Income Requirement: $87,250
Downpayment Needed: $69,800
Monthly Equity Burn: $2,908
Purchase Price: $424,000
Purchase Date: 8/4/2005
Address: 189 Pinewood, Irvine, CA 92620
Beds: | 2 |
Baths: | 2 |
Sq. Ft.: | 1,202 |
$/Sq. Ft.: | $290 |
Lot Size: | 760 Sq. Ft. |
Property Type: | Condominium |
Style: | Townhouse |
Year Built: | 1977 |
Stories: | 2 Levels |
View: | Lake Front |
Area: | Northwood |
County: | Orange |
MLS#: | P649161 |
Source: | SoCalMLS |
Status: | Active |
On Redfin: | 1 day |
New Listing (24 hours)
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NO Short Sale? Not according to the property records.
Great Value? If you want to own your $1,500 a month apartment, and if you are willing to overpay for it, I guess it is a great value. Properties like this will go for under $200,000 to a cashflow investor in a few years.
This property was purchased on 8/4/2005 for $424,000. The owner used a $339,200 first mortgage, a $84,800 second and a $0 downpayment. I don't see how this is not a short sale, unless the seller has $100,000 to bring to the closing table. If this property sells for its asking price and a 6% commission is paid, the total loss to First Franklin will be $95,940. I guess that is one way to retire the debt…
.
me and all my friends
we're all misunderstood
they say we stand for nothing and
there's no way we ever could
now we see everything that's going wrong
with the world and those who lead it
we just feel like we don't have the means
to rise above and beat it
so we keep waiting
waiting on the world to change
we keep on waiting
waiting on the world to change
it's hard to beat the system
when we're standing at a distance
so we keep waiting
waiting on the world to change
now if we had the power
to bring our neighbors home from war
they would have never missed a Christmas
no more ribbons on their door
and when you trust your television
what you get is what you got
cause when they own the information, oh
they can bend it all they want
that's why we're waiting
waiting on the world to change
we keep on waiting
waiting on the world to change
Waiting on the World to Change — John Mayer