It looks like last quarter’s Moody’s Economy.com report on housing price declines, which I have referenced in previous posts, may have been a little too optimistic. Many of our readers have been forwarding links to yesterday’s Merrill Lynch housing report. The report has been all over the news, but in case you’ve missed it, here are a couple takes on it:
Housing prices to free fall in 2008 – CNNMoney.com
Merrill Lynch says U.S. nationwide home prices may fall 30% – MarketWatch.com
sjslapshot
O.K. So, I have a question for everyone. My wife and I made the young, dumb mistake of buying a house in Sparks in June of last year. We weren’t necessarily buying as an investment (although this is obviously one of the underlying reason for owning a home), but more because we had just had a baby and wanted our own place with some stability (we had twice had the house we were renting sold out from under us) and were tired of paying someone else’s mortgage. We are in agreat neighborhood in a great house and we got an alright deal, though not great. With the economy and housing market still projected to get much worse, what should we do? We have seen many houses that are bigger and brand new for sale for much cheaper than what we are in and have joked that maybe we should try and sell, take the obvious hit, and find a better deal. I know, much easier than it sounds. More or less, I know we’re going to take a hit, but in you more experienced opinions, is there anything we can do to make the best of a messy situation.
This blog is great. Diane and Guy do such a good job dissemenating information and their opinions. And, most of the reader comments are very insightful, thus, does anyone have any opinions on my situation.
Thanks!
Allen Murray
SJslapshot, a good friend of mine did exactly what you are talking about. They just sold their 2 year old house near the Home Depot for $310k, this same model was selling for over $400K in its peak a few years ago. They were able to purchase a brand new Lennar home, 800 sq ft. larger with better upgrades in a better neighborhood for the same price, near the high school. Why did somebody purchase their house for $310K when they could have gotten the newer bigger house, I have no idea? Maybe location was the reason, he is a little farther out of town now.
MikeZ
Yun and the NAR are predicting that SFH median prices will rise this year. ROTFLMAO.
They also calculate that median price fell just 1.8% last year.
And, the icing on the clueless trifecta: they have no idea why bloggers, even realtors, burst out laughing when they release these reports.
smarten
O.K. sjslapshot, I’ll give you my take.
You state you’re prepared to “take the hit” on reselling your current home if you can move up during the current/future anticipated housing dip. This tells me you have equity in your present home; one you state is a great house in a great neighborhood. If that’s the case, I have a bit different strategy you may want to consider.
Start looking at mortgage rates with the idea of refinancing. 30 year fixed [I don’t believe in variable] interest rates are now in the low to mid 5% range. Business gurus are predicting the need for another 1/2% drop in the Federal cost of funds rate. If this happens [whether next week or two months from now] you should see further drops in home mortgage interest rates.
I say refinance. You’re in the perfect position because you’re an owner-occupant [the status at which the best mortgage rate is offered] and I’m certain the value of your home doesn’t exceed the “conforming rate” [the amount at which the best mortgage rate is offered]. The first benefit you will realize is you will be able to lock in a historically low mortgage rate for the next 30 years [which should lower your monthly mortgage payment] regardless of what happens with pricing.
Now if you have sufficient equity in your home and can pull out additional funds without paying a premium [i.e., higher loan origination fees for “cash out” or a higher interest rate] as part of the refinance process, I say pull out as much as you can. Why? To use as a down payment towards that housing “trade up” you’re contemplating. This way you won’t be forced to sell your present home.
Since you can still earn over 4% interest on short term FDIC insured CDs, if you can borrow at a little over 5%, your true cost of “cash out” funds becomes minimal.
Once you’re set with your refinance, start looking for a replacement home. Plan on KEEPING your current home [as a rental] and using your refinanced “cash out” as a down payment towards purchase of your replacement home. When the right home comes along at the right price and terms, you’re poised to act quickly.
With dropping mortgage rates, I think you’re going to see new home builders with standing inventory offering incentives which include low down payments and purchase money mortgage assistance. And even if you don’t have enough “cash out” to put down, motivated sellers will always consider helping you out by taking back a portion of the purchase price in the form of a second mortgage.
A couple of years from now when housing prices recover, you can consider selling your current home at a much higher price and putting the equity into your replacement home. In the interim, you should rent it out. Hopefully it will be break even cash flow for you [after tax benefits (negative cash flow, depreciation, etc.)].
Good luck!
bondstevenbond
“Merrill Lynch’s figures are way too pessimistic, and they are unprecedented,” Lawrence Yun, the National Association of Realtors chief economist told CNNMoney.com. “There is so much variation in local housing markets, and we see stable price conditions for 2008.”
Ha! I laugh out loud at every pathetic comment from NAR’s economists. Why haven’t hard working realtor’s shut those people yet? They are damaging the credibility of your profession. Personally, I could get less biased economic advice from crack dealers. On the other hand, when Merrill gets negative I’ll listen, and I’ll wait another year before bidding on one of their still ridiculously overpriced condo’s at the Palladium.
Reno Ignoramus
When Guy first starting posting here, he made the dubious error of citing David Lereah as an expert on the housing market. He was quickly led to the Light, and he has not made that error again. I would be highly surprised if we were ever to see Guy or Diane cite Mr. Yun as an expert on anything on this blog. I suspect that both Guy and Diane are a bit embarrased to be associated with an organization that employs Mr. Yun, but alas they have no choice if they desire to participate in the NNMLS.
MikeZ
For sjslaphsot… Some home owners are choosing “intentional foreclosure”
New Trend In Sacramento: ‘Intentional Foreclosure’
If the above doesn’t work, here’s just the link: http://tinyurl.com/2wdgxk
MikeZ
Let’s try this again (my previous post got mysteriously deleted).
For sjslapshot, here’s an option:
New Trend In Sacramento: ‘Intentional Foreclosure’