Yesterday, we discussed walking away, and today, I want to explore the issue a little further and look at both an Irvine property owner and a Wall Street Journal columnist who are 10% underwater and thinking about walking away.
Irvine Home Address … 25 BOMBAY Irvine, CA 92620
Resale Home Price …… $699,000
we’re flesh and bone
together and alone
and we’re looking for a home
silver moonlight fills the sky
calling gently to the evening tide
you’re unfolding right before my eyes
and when you move
you move right through me
Underwater — Delerium
Underwater homeowners — homedebtors — as they have become derisively known on bubble blogs, each followed a different path to their destruction. I came across a Wall Street Journal article on Patrick.net, Underwater Houseowner Should Have Waited Longer To Buy, actually the title is Confessions of an Underwater Homeowner. By BRIAN R. FITZGERALD.
“One in four borrowers is underwater on a mortgage in the U.S.
Count me among them.
My family’s modest, suburban New Jersey house is now worth about
$30,000 less than our current balance. We never dreamed of walking
away, but the idea of “strategically defaulting,” is something we had
to at least consider. Many others have, too, as my colleague Mark
Whitehouse reported in Thursday’s Journal (See American Dream 2: Default, Then Rent.)
We’re not home flippers or boom-era borrowers who opted for an
exotic loan with no documentation. In buying our house, we believed we
were making a life decision.”
The author spends some time describing his house search, then he added:
“We weren’t oblivious to the fact that people were stretching to buy
homes. We were adamant about getting a fixed-rate loan–rates really had
nowhere to go but up, so why would we want an adjustable rate? (That
line of thinking turned out to be an epic fail–30-year fixed rates have
been at less than 5% for weeks lately.)”
What? This guys sees his decision to use a 30-year fixed at historic low interest rates as an epic fail? He really thinks that because the Federal Reserve is doing something it has never in history done — direct purchase of Agency debt to support mortgage interest rates — and because of this interest rates ticked down slightly, so this was an epic fail on his part? It was the most intelligent thing the guy did, and he thinks it was a mistake! If people believe fixed-rate mortgages are a mistake, then we are going to be in for decades of housing market instability.
“It came time to deal with the finances. Because we were plunking down only 7% or so on the down payment, we were faced with a steep insurance fee. I was naively insulted by this PMI-the idea that we were risky borrowers out of the box. So we opted for a “piggyback” loan, a second loan that would cover the rest of the down payment and allow us to avoid the PMI. We would pay about the same per month, and when our home’s value rose, we would refinance and combine the two loans into one. A lot of the people I turned to for advice were recent homebuying colleagues facing similar questions, or longtime owners who were doe-eyed by low interest rates. I don’t recall anyone saying “Dude, wait a few years.””
Apparently, this guy wasn’t reading the bubble blogs that were loudly proclaiming that he was an idiot, and that he should have waited a few years.
Notice the idea that you refinanced into a larger mortgage later after the house value goes up. Sounds very rational, and it works really well as long as house prices only go up. The author goes on,
“We never considered purposefully defaulting, but then again we’re not falling down a catastrophic, high six-figure equity hole. After reading Mr. White’s paper, though, we decided to run some numbers, pulling together basic info on our loan, tax bracket and rental prices for comparable homes in our area, and plugged them into this calculator at PayorGo.com. This was by no means a scientific appraisal. I had to enter how long we expected to be in our home, and I really couldn’t answer “as long as it makes financial sense.” So I said seven years. I don’t know how realistic that is — my kids will be about 12 years old then. Apparently, if my home doesn’t rise 1.94% in value over the next seven years, we should call it quits.
We wouldn’t. Although, if I were laid off and unemployed for more than a few months we might have to.”
This guy should call it quits because his house is probably not going to rise in value by 1.94% every year for the next seven years. In fact, it probably will not rise at all, and it will very likely decline more in the interim. He continues,
“The price drop sometimes feels like an apparition. On paper, my home is considered less valuable than what I am paying for it. In reality, it is the same home (warts and all) that I liked when I signed the papers.”
Part of the reason it feels like an apparition is because this guy is in denial! He doesn’t have to face the consequences of his mistake, so it doesn’t feel like one. I leave the author with the last word,
“I’m not blind to the pitfalls-if I was offered a job in another city, we wouldn’t be able to sell; we can’t get a home-equity line of credit because we already tapped it. Still, my biggest challenge week to week is operating the leafblower. And if I knew in 2006 that in 2009 I’d be able to get the same home for a 20% discount AND still get a low rate, I never would have pulled the trigger.
What I do know is that this is our first home. It is where our kids-going on 5 years old- are growing up. We love our neighbors and the school system. We put in central air. I still remember the feeling of getting those keys handed to me the first time. We have sentimental equity. Home buying wasn’t a zero-sum financial game of win or lose.
The Fitzgeralds are technically underwater, but we don’t feel like we are drowning.”
Brian R. Fitzgerald is an editor at WSJ.com. Email: Brian-R.Fitzgerald@wsj.com
Irvine Home Address … 25 BOMBAY Irvine, CA 92620
Resale Home Price … $699,000
Income Requirement ……. $146,056
Downpayment Needed … $139,800
20% Down Conventional
Home Purchase Price … $737,500
Home Purchase Date …. 9/17/2004
Net Gain (Loss) ………. $(80,440)
Percent Change ………. -5.2%
Annual Appreciation … -1.0%
Mortgage Interest Rate ………. 5.08%
Monthly Mortgage Payment … $3,029
Monthly Cash Outlays ………… $4,130
Monthly Cost of Ownership … $3,150
Baths 2 full 1 part baths
Size 2,300 sq ft
($304 / sq ft)
Lot Size n/a
Year Built 2004
Days on Market 3
Listing Updated 12/16/2009
MLS Number S599151
Property Type Condominium, Residential
’tis the Season to get a Great Deal! This incredible ‘almost new’ Bella Rosa detached home offers a private, cul-de-sac location in the gated area of Northwood II. This open layout features, a downstairs bedroom and bath, a beautiful granite countered, gourmet kitchen with a center island, that opens to the spacious family room and dining area. On this same level is the indoor laundry room. The direct access garage is appointed with built-ins. Upstairs has a HUGE Master bedroom, with two walk-in closets, and a luxurious master bath with sunken tub, separate shower, and dual vanities. Two additional bedrooms, a bath, and an office niche complete the second level. The enclosed yard is an entertainer’s delight… very private and the beautiful hardscape makes for a great area to hold parties. The ammenities of this gated community includes a resort-style pool, clubhouse, picnic areas, outdoor fireplace, and more. Location is everything here…This is a must-see before it is gone!
This is a must-see before it is gone! It feels urgent to me, does it feel urgent to you?