Getting the F**k out of Dodge: Housing Bubble Escape!

So I’ve participated in more than a few housing bubble threads here. But as we all probably know (and if you haven’t heard, just spend an hour reading and be educated), the housing bubble is crashing, and crashing bigtime.

The short story is very simple: it’s this chart (from page 8 of this report) showing that all the subprime mortgage resets that have happened so far – causing major foreclosures, plummeting property values, and bank losses – are just the tip of the iceberg, and that the wave of them will continue through 2011.

So. My wife and I bought our house in Concord, CA in November of 2002. We paid $385,000, which was in line with the rapidly spiking market – previous sale was a year prior for $340,000. We probably overpaid, but not by too much.

According to Zillow (which isn’t worth much but at least has trend lines), our valuation topped out at about $600K right in mid-2006 or so. However, we were working on getting pregnant and I was in the middle of a big work crunch and we didn’t do as my wife suggested at the time and sell at the peak. Sigh, wave bye-bye to that $120K we could’ve made off the bubble…

Now Zillow estimates our house is worth about $500K. Almost a 20% drop in a year and a half. And my firm expectation is that over the next year it will drop to almost $400K, and that two years from now it’ll be worth about $350K, or less than what we paid for it. By 2011 I wouldn’t be at all surprised if prices were all the way back to 2000 levels, or around $320K for that house.

So we’re fucking selling it. Yep, we’re moving out. We’re going to do our best to get about $450K - $470K for it. Fortunately, we were somewhat intelligent and we didn’t refinance – we had a 90/10/10 financing originally, and we’ve put some extra money into paying down the mortgages, so we owe a total of about $310K on it now.

If we can get $450K for it, then – minus the $30K agent’s fee and the $20K we’re spending to remodel it in order to make it sellable in this market – we’ll clear about $90K. Since we’ve put about $70K in cash into it (not including the marginal principal from mortgage payments), that means we’ll have cleared $20K in profit over five years, or about 30% profit. That’s about 5% a year. Not great, but a hell of a lot better than losing everything and then some.

We’ll then be able to put that $90K into a 23% down payment on a new $400K house… around 2011, when the market bottoms out.

I told the realtor and my wife that they can’t let me anywhere near the buyers, because my main feeling in life right now is GET OUT OF THE HOUSING MARKET, which is obviously the last thing we want our buyers to think :-\

So. Any of you looking at the housing market and deciding to sell while you can still get a down payment out of your house? Anyone else putting their money where their mouth is?

Good luck, Repoman.

Me and the girlfriend bought our house August of '07, and while the market’s gotten worse in the area, it was pretty bad then, so we got a pretty awesome house for our $126k. We would have to re-fi in 2013 since we went with the 7-year ARM, but the end goal is to be looking at newer, bigger houses by 2011 or 2012 anyways.

I don’t think what you’re doing is a bad idea per se, the big question of course being: “Is the house you own too much house for you?” If it isn’t, then it doesn’t really make sense to sell it for something cheaper/smaller. If it is, and you’ll walk away with a big reduction in monthly payments plus more equity, then obviously it’s a no-brainer.

If you’re doing this purely as a financial move, it strikes me as questionable, at best.

IIUC, you will:

  1. Sell current house
  2. Rent new house/apartment
  3. Buy new house, comparable to what you sold in step 1, in ~3 years (hopefully when market is lower)

Some costs that are likely to be associated with this:

  1. Seller’s commission
  2. Buyer’s commission (possibly)
  3. Moving x 2
  4. Rehab projects on current house (to prepare for sale)
  5. Assorted projects on future house (to make it the way you want it, which is unlikely to be exactly the state you buy it in
  6. Miscellaneous costs associated with buying a house, possibly including inspections, mortgage points/initiation fees, etc.
  7. Your time, and lots of it, to make all of the above happen, in a reasonably efficient manner

From what I’ve read, there is some ‘momentum’ in housing prices, so yes, it may be possible to reasonably conclude that there’s a probability that future housing prices in a particular area will be lower than current prices. But efficiently capturing that price change (in reverse - by trying to exit the market for a while and then return) is a costly proposition.

Now, if you’re in a marginal position about buying or selling already (i.e. you’re about to move to a new location, and so must make a buy/rent decision, or something like that), then it may be a good idea to factor in market trends. But what you’re trying to do strikes me as an overreaction. Also, as Machfive says, if you’re not satisfied with your current house for some reason (too big, too small, wrong location, etc), then it may make more sense.

The house we own is not ENOUGH house for us. We want to move up… we have a small three-bedroom now and we need a den/office at least. (A family room & hot tub would be ideal, but we must have an extra room of some kind.)

But in order to move up, we’ll need a 20% down payment – even non-jumbo loans are demanding 20% down these days (and probably for the foreseeable future, given the aftershocks from this whole meltdown).

And in order to have a 20% down payment, we need to be able to sell this house without taking a cash loss… we’ve got to get all the cash we put in back out, and not blow it on agent’s fees or remodeling.

Plus, we’re contemplating leaving Northern California altogether, so being locked into a negative-equity house while we wait a decade for the market to come back up is a must-avoid scenario.

Yeah, if we were fully comfortable in this house, and if we wanted to stay right where we are for the long haul, staying put would be feasible. But that’s not what’s up with us.

If your current house is not a long term option for you, your plan might work out. But you’re basically describing market timing, which under ideal conditions is a roll of the d20. With housing, the high transaction costs that Phil mentioned make it very risky.

We moved up this summer. Nicer, newer, bigger house on the other side of town near the awesome charter school that is working out even better than I had hoped. We really didn’t worry too much about the housing market swings. We kept our old house (renting it out) and, mostly driven by the school factor, should be here at least 8 years. We can afford the new mortgage (though we are already refinancing to a lower rate), so valuation swings don’t mean much to us.

Where will you rent? Most places don’t have many rental options that will be more spacious than what you describe now. Though we have friends getting a fantastic deal on renting a nearby 5000 square foot home. It’s owned by a realtor/investor who gave up trying to sell it this summer.

I seriously doubt it will drop to $350,000. That wouldn’t be a crash, it would be nuclear. Renting isn’t a good option if people continue to lose their homes, unless housing prices do go nuclear.

Oh, it’ll drop alright, particularly in california. But what he’s describing doesn’t really add up. There are too many “ifs”, and he forgot about paying capital gains on the 90k. My guess is if he follows his plan he’ll get out breaking even at best.

But that’s actually pretty good. You get your $400k back and you invest it somewhere safe making 5%. And in the meantime, you and your wife can rent a frickin palace from some poor schmuck paying less than his mortgage and sit out the storm.

All of that assumes that you plan to move soon and/or are unhappy with your house. If you’d just as soon stay… stay. Your house is not an investment, appreciation is not guaranteed and in fact historically nonexistent, it’s where you live. So live there.

It’s not nuclear, it’s a correction of something that should not have happened in the first place. Home prices doubling and tripling in 3-5 years is the oddity, not slow normal growth (or even some periods of stagnation).

Note that this does not mean I agree with the original post, just that I am still amazed at the people in the selling market who for some reason believe that those fake gigantic valuation “gains” made from 2001-2005 or so are real and somehow should not be lost.

Yeah, and factor in what a wildcard it could be if things end up as bad as you are betting and whoever you are renting from wants out or gets foreclosed on.

I’m at least happy to stay where I’m at and ride it out so I have that going for me. I totally understand your thought process; I just think it’s a matter of the devil you know.

It’s easy to talk about “the market”, and how “the market” should correct itself. Repo is talking about his money. If he can grab any of that false appreciation before it dissipates, well, more power to him. But I don’t think that’s realistic. The crash is far from over, but it’s very public.

Capital gains on the house sale? Unless I’m reading the tax guidelines wrong, as of 1997 gains are excluded up to something like $250k in profit (double that if you’re married) if you’ve lived in the house for 2 years. So the numbers cited are about right even if there are a lot of “ifs.”

If you are talking about me, you got me wrong (and I would understand why from rereading my post, which explained it poorly). My response on sellers not believing that money should be lost was not to suggest Repo should not recover as much money as he can. It was merely stating that I find it strange that home sellers somehow believe the market should not go down in price, that their gains will somehow be locked in forever and they will not have to (and should not) lower their prices to sell their homes.

I’m still not explaining it very well, but it was in reaction to suggesting house prices could not drop to what they were 3-5 years ago, because that would be “nuclear.” I disagree. Housing prices being what they are now (and what they were a year or two ago) are what are nuclear.

I may not be remembering properly, but isn’t that only if you roll it over into another house within a certain time period?

So in summary, I was trying to say that relying on the market not dropping that badly because it would be “nuclear” or somehow impossible seems to be ducking your head in the sand, like a lot of current homeowners (and sellers) are doing.

Per RepoMan, he paid $385K for his house in November 2002, and it was about $340K about a year earlier. It went to ~$600K per the rather inexact Zillow in mid-2006. That’s a bit over a 50% increase in ~3.5 years (from when he bought it), and a bit more over the slightly longer timespan starting from when the previous owner bought it.

That’s rapid price appreciation, but hardly “nuclear”, IMO.

I don’t know much about the market RepoMan is in, but I find his thinking that his house will reach a value of $350K in ~2010 to be rather pessimistic. That would imply a price change, over the ~8 year period from when he bought it, of roughly -$35K, or about a 9% drop. And that’s in nominal terms (before adjusting for inflation). Moreover, it’s a 30% drop from the current Zillow estimate. 30% drops in 2 years aren’t inconceivable, but given that some of the air is already out of the market, that seems rather pessimistic.

Again though, I don’t know the specifics of RepoMan’s market.

I’m still trying to get into the housing market as a first-time buyer, but I just did another MLS search for houses here within my price range. 4 results. :(

Prices skyrocketed here over the last over the last five or so years, but I’m not sure it was really a bubble here. It was driven more by actual scarcity of homes and explosive growth within the city, so maybe we’ve simply turned into one of those gentrified places that are just inherently expensive to live in. Our fortunes tend to rise and fall with the oil industry though, so maybe I just have to wait for the price of oil to crash. Let me check up on that trend…

(Or maybe I’m just being too picky. I’ve been trying to limit myself to around $280k to fit a reasonable budget, but that seems low compared to what other people seem to be willing to spend. And I’m trying to avoid condos, but perhaps the (North) American dream of having your own house, yard, etc. is just no longer realistic…)

That used to be the rule. The rules changed in 1997 so that realized capital gains are taxable, but I believe it’s only gains above $250K ($500K for married couples).

If you’re going to sell in the next couple years, sooner is better than later. I’m not sure you’ll be able to sell, though, because who wants to buy in a falling market? The longer they wait, the less it costs them.

The best gauge of where the market should settle out is rents in the area. In a balanced market the cost of buying (including property tax and maintenance) should be about the same as renting it, because that’s the true supply-and-demand measure of housing affordability in the area. Ergo, the monthly mortgage payment (with 25% down) should be less than what the same property would rent for. Until you get to that point, the market has further to fall.

You’re right, I was thinking of the old law. Actually they’re tax exempt from $500k of capital gains as a married couple.

Prices will drop to their historical values, linked to fundamentals like rent. Adjusted for inflation, that means that a house that cost $400k in 2000 should cost around $500k today.

A 33% drop would be a correction. More than that and it would be nuclear.

These things always overshoot a bit.