In my previous post, It’s not a double dip. It’s just the continuation of the housing slide, I discussed how we are being led to believe that there is a double dip in the housing market, when it is actually a continuation that looks like a double dip. This was brought about largely because of the $8,000 tax credit Uncle Sam made available to help first time home buyers.
This made me think through what will become of those homeowners who thought this was a good deal for them. What does their home owning future look like for them. Was the “free money” incentive worth it or not? In light of the new reports showing that housing values dropped 1.3% in October, I thought I would follow this out to see where it went.
Everybody knows that if you bought a house in 2006 or 2007, the chances that you owe more on your house than it is worth is overwhelming. Back then, most buyers were doing 100% financing but even if you made a 20% down payment you are upside down.
But what if you or a friend or even your kids, took the $8K bait earlier this year and bought a house. Where would you be today?
Let’s say you bought your house in April of this year for $200,000 using an FHA loan because of the low down payment and easier qualifying requirements.
If the buyer put the FHA minimum 3.5% down, they would have had to come up with $7,000 for the down payment. That makes the base loan amount $193,000, but on an FHA loan, they would have had to pay an upfront fee of 1.5% which is added to the total loan. On a $200,000 FHA purchase the actual amount the borrower would owe on this house at closing is $195,895.
The total house payment on this loan with estimated taxes and insurance and an interest rate at 5% would be about $1,350.00 per month. Based on the area and location, this same house would probably rent for $1,000 to $1,100 per month.
Current housing value figures show that house has already dropped in value by over 3%. That means that a buyer who closed on their new home in April, made their first payment in June was already upside down almost $2,000 by Christmas. Remember, they invested $7,000 and got $8,000 back in the tax credit. In real cash they are up $1,000 so far but on paper and into the future their outcome is much different.
We expect housing prices to drop another 20% or more with a continued fall until 2014. Based on our research, we believe this house will ultimately sell for $160,000 or less in 2014. We expect stagnant housing prices for 3 years after that and moderate growth of 2-5% per year for the next several years.
This means that this new homeowner who is already upside down in their home will be not be able to sell this house for what they owe on it until at least 2018. The costs to sell that house could extend this for an additional year or two.
This optimistic homeowner will have to keep and continue to pay for the property for at least 8 years just to break even. On top of that, they needed a big chunk of money upfront to buy the house, they are paying more than they could have to rent a similar property and they are responsible for the ongoing maintenance of the property.
I had to think this through because it goes against everything we have ever been taught about the American dream of home ownership. For many people who bought their first home, it may end up being a bad dream. Many of them will be joining the over 16 million american families that are underwater in their homes with no way out.
You need to understand the math when buying a home in today’s market. Just because you are buying a short sale or a foreclosure, doesn’t mean that you are getting that house for a bargain. Whatever you paid for your house becomes the comparable property that an appraiser is going to use for future sales. If three people get a steal of a deal in the same neighborhood at about the same time. That now becomes the actual value of all of the similar houses in that neighborhood.