Sunday, February 8, 2009

A Housing Horror Story In Boonton

Unfortunately, on the edge of GD2 we can see that the housing bubble was like an a economic fairy tale. Money did not grow on trees, in this version it came from the houses. We could afford anything we wanted. Our economic standing was based on our assets - not our liabilities or our ability to pay. And our wealth just continued to increase by a double digit percent every year.

During the bubble things everyone wanted to be in the fairy tale and have a happy ending. House prices were rising so fast that a whole group of people who were planning to eventually buy jumped in early. With property values having double digit annual increases how could this not be a happy ending. Often afraid they would get priced out of the market totally, they paid too much and received to little. Now they are reeling from the consequences from that decision.

Thanks to Greenspan ARMs were still viewed as wonderful tools to help homeowners save money while getting their dream house. Our collective dismissal possibly rising interest rates in the future made these tools seem wonderful tools to help people acquire everything they needed. And if in the future one realized that they could not afford their property - they could just turn around and sell it for a decent profit.

Unfortunately life is not a fairy tale. And right now a happy ending seems no where in site. The economy is more like a horror flick than a Disney movie. Right when we start thinking the economy is turning around and we have the situation under control - the evil darkness of excessive debt rises again. And like horror films, the sequels keep getting worse and gorier!

The amounts that are lost are staggering. And when the bulk of the loss is taken by the homeowners we get squeamish. Which brings us to the horror of a huge loss in today's example. Lets take a look -

Here is the property -

The front of the house.
The stainless and granite kitchen.

The formal living room.

Here is the property info -

Enjoy this retreat!

Spacious Master Suite with private bath and double closet space. Guest Suite also w/ private bath and door directly to the exterior for added privacy. Home features total of 4 bedroom and 4 baths. Gorgeous kitchen with modern and elegant cabinetry with granite counter tops. Family room, seating room, finished basement with bar are just some of the numerous features to mention. Contact us to schedule a private viewing.

Here are the financials -
  • The property was purchased in February 2005 for $750,000.
  • The first mortgage taken at the time of purchase was for $600,000 using an ARM with Bank United.
  • Also on the day of purchase, a second mortgage, commonly called a piggyback loan, was taken for $74,500 with National City Bank.
  • The property is currently for sale with a realtor for $579,000. Note the house was listed since June, 2008.
  • The foreclosure process started with a Lis Pendens filed in October 2008.
  • The taxes for 2009 are $11,927.59.

The property was purchased at the peak of the bubble. With the original mortgage and the piggyback, the owner put down just a tad over 10% - which was a hefty $75,500. The owner did not try to cash out. No HELOCs or ReFis or other equity withdrawals.

The homeowner decided to sell the property just three years later. Probably the high cost of ownership was part of the incentive to sell, since 5 months into the listing the property started the foreclosure process. That indicates non-payment for at least 60 days.

Now the house is listed for $579,000 which is a whopping $171,000 below the peak price - almost 23% of peak price. But since the property is listed through a realtor the amount lost will be even larger. With the standard commission, the property will be costing the buyer - or if a short sale has been negotiated the lender - $205,740 during the 4 years of ownership. That is a loss of $51,435 per year! Some happy ending!!!

Now for those who are looking to buy the property, what would the current carrying costs be. First we will assume the house will sell for the current asking rate. Then the new owner were to put a 20% down payment of $115,800. With today's current Bankrate of 5.42% for a 30 year fixed, the monthly P&I payment would be $2,606.80. Adding in the taxes and your monthly payment will be $3,600.77 for this property to become your own fairy tale palace.

Hopefully the offer will come soon to make the current homeowners financial horror story come to an end!

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