Market Conditions: Chicago Tops Case-Shiller 20 City Index: Is the Worst Over?
We normally don’t chatter about the Case-Shiller updates in a regular post (just within the comments) but since Chicago topped the 20 city index in May, I thought I’d give the bears and the bulls the chance to debate their case.
Chicago home prices jumped 4.5% in May, the largest one month price increase since Case-Shiller started keeping records in 1987.
Still, year over year, home prices were down 3% in May.
They are also down about 36% since the peak in September 2006. Home prices currently stand at February 2001 levels.
“We thought we saw the bottom in 2009. We thought we saw the bottom in 2010. We thought we saw the bottom in 2011,” said Maureen Maitland, vice president at S&P Dow Jones Indices. “Yes, there’s no doubt these numbers were good. It’s all good news, but it is two months of data.”
According to the data, all segments of the Chicago market saw improvement, but the largest percentage gain was in homes that sold between $147,048 and $249,933. Those average home prices climbed 4.1%.
Was the glass half empty or half full with this report?
Case-Shiller has rebounded 3 other times since the housing bust began- only to see further declines.
Chicago makes biggest gain in key home price index [Chicago Tribune, Mary Ellen Podmolik, July 31, 2012]
Seasonal bounce. Watch for new lows later this year.
Even on a seasonally adjusted basis this was the largest monthly increase in 24 years. As we’ve discussed it’s all about the inventory: http://ChicagoHousingStats.com see the 4th graph down. It’s a graph through June but I’m pretty sure July will look the same.
Where is Clio to tell us the CSI means nothing?!?
Oh, that’s only when it doesn’t suit him. Moving on…
“According to the data, all segments of the Chicago market saw improvement, but the largest percentage gain was in homes that sold between $147,048 and $249,933. Those average home prices climbed 4.1%.”
How do you have three segments, with the highest at +4.1%, and have +4.5% overall? Are the tiers only SA?
“As we’ve discussed it’s all about the inventory: http://ChicagoHousingStats.com see the 4th graph down.”
Great graphs Gary. The inventory one, in particular, is striking.
But I’m just wondering what will happen when all that inventory that was there in 2008/2009 comes back on the market. I’m assuming it was mainly rented out (as we know sales weren’t high enough to clear it out.)
Yeah, all this shadow inventory will have to clear the market and as prices rise and more owners have more time to have their mortgage balances amortize, you will see more owners willing to sell for that $40K loss instead of $60K 3 years ago. There are so many units being rented out by accidental landlords.
“year over year, home prices were down 3% in May”
what is the debate about? prices are STILL dropping.
“what is the debate about? prices are STILL dropping.”
You do not understand what year over year means. Take the following example:
1) 200k
2) 195k
3) 190k
4) 185k
5) 180k
6) 175k
7) 170k
8) 165k
9) 170k
10) 175k
11) 180k
12) 185k
13) 190k
So, year over year, prices went from 200k to 190k. However, that clearly does not mean that prices are “STILL dropping”.
I have to admit that I’ve been surprised at how well the “shadow inventory” has been trickled out, and now wonder if it will ever just be dumped onto the market or not. Is the expectation that some Spring, coming soon, will see a ginormous increase in listings, like we’ve never seen before? Or will the trickling continue for another year or two, so we’ll see only a flattening in prices?
“Or will the trickling continue for another year or two, so we’ll see only a flattening in prices?”
I believe this will be the case. But it might be longer than a year or two.
“what is the debate about? prices are STILL dropping”
Sure, closed sales–the prices might still be dropping as many of those are short sales that went under contract 6+ months ago. Here in the ‘streets’ buyers are not finding the same prices they did a year ago and 6 months / a year from now the reports will be of solid increase.
BUT if the prices do go down further—may of us happy investors will be thrilled to snap up props that are providing awesome returns.
The other ball (a new wave of foreclosures) has yet to drop. According to the WSJ, “The number of homeowners who are current on their mortgage, but calling the Homeowner Preservation Hotline, increased 70% in June. A sign that could signal a new wave of foreclosures.”
I think prices will continue to decrease for at least a decade.
It’s just the annual bottom call, folks. Expect more for years to come.
Chuk only speak up if you know what you’re talking about. YOY is a measure form one time period (in this case May 2011 vs. May 2012) to another YEAR OVER YEAR (i.e dec2009 to dec2010 or March 1998 to mar 1999). So the average sales price of a home in Chicago has dropped 3% from May 2011 to May 2012, hence “dropping prices”.
Everybody who read your example, and especially the ones who gave it the thumbs up, are now dumber for having read it, and may god have mercy on your soul.
if you look at any YOY from 2011 to 2012 for homes prices, I would guess there is a DECREASE in values
The reason we aren’t seeing all those “accidental landlord” condos come back on the market is the landlords are realizing how profitable it is to rent them out. They may have been forced to do so at first but going forward it will be their choice. I don’t think we see a deluge of properties on the market until either prices rise or rents fall. Also, many of the first time landlords were hesitant to rent out having never done so before. Now that they have experience they are more comfortable with being a landlord and it becomes a mathematical exercise. At least that is based on my experience and the experience of those I know.
vlajos sez:
“I think prices will continue to decrease for at least a decade.”
a DECADE? Sheeze, I’ll be an old lady by then… I’m not quite that pessimistic, and hope that in a few years my sister and I can finally sell our little 2-flat with enough coming out of it to boost our retirement accounts.
GMT, Chicago is a leader in new filings. Combine that with govt attempts to reinflate the bubble, a huge shadow inventory, new apt construction, and the latest crop of infestors and the trend for more affordable housing will continue.
What I don’t understand is how any decent human being doesn’t see increasing affordability as a good thing?
“closed sales–the prices might still be dropping” but
“Here in the ‘streets’ buyers are not finding the same prices they did a year ago”
you HAVE to be a realtor. numbers don’t lie, say it with me now….numbers don’t lie
“Everybody who read your example, and especially the ones who gave it the thumbs up, are now dumber for having read it, and may god have mercy on your soul.”
That was just a billy madison quote, not tryin to be mean
Housing Bear, reading those kind of comments from chuk is like seeing a monkey fapping at the zoo. Best to avert your eyes and move along.
“So the average sales price of a home in Chicago has dropped 3% from May 2011 to May 2012, hence “dropping prices”.”
But what you said is that “prices are STILL dropping.” That is very different. In my experience in dealing with people of limited intelligence, it sometimes helps if you use an exaggerated example. Let me try that for you:
1) 1,200,001
2) 100,000
3) 200,000
4) 300,000
5) 400,000
6) 500,000
7) 600,000
8) 700,000
9) 800,000
10) 900,000
11) 1,000,000
12) 1,100,000
13) 1,200,000
Prices down year over year? Yes
Prices “still dropping”? No
“Housing Bear, reading those kind of comments from chuk is like seeing a monkey fapping at the zoo. ”
What part of my post do you disagree with? nb: I never said that prices will not go back down again, just that they are not “still going down”.
“not tryin to be mean”
Why is it mean to suggest that greedy people may not have their greed satisfied?
“But I’m just wondering what will happen when all that inventory that was there in 2008/2009 comes back on the market. I’m assuming it was mainly rented out (as we know sales weren’t high enough to clear it out.)”
I think all that is what prevents prices from really bouncing back in a big way. And as Yoss said, renting is becoming really profitable – until all the new apartments hit the market. But we may be at an equilibrium point finally where all the inventory in the shadows trickles out only as pricing improves. And by improves I mean 5% year over year as an upper limit – if it ever reaches that.
The biggest driver will be local employment. Add a couple hundred thousand jobs in the area and then we could see some real price improvement – but that ain’t happening any time soon.
We all do it, chuk. The problem is your compulsion to share.
“I think all that is what prevents prices from really bouncing back in a big way.”
Interesting. So, the bubble was the norm and the correction is the anomaly?
It’s more likely that you can’t see past your source of income and recent purchase. Funny thing is, after 3 straight years of bottom calls you were too scared to call one this year (yet.)
“Interesting. So, the bubble was the norm and the correction is the anomaly?”
Or maybe somewhere in between?
“fap fap fap fap”
“The biggest driver will be local employment.”
This. If I was looking to sink hundreds of millions of dollars of capital in a factory or move my corporate headquarters, it would take a massive and very long term tax incentive for me to move the People’s Republik of Illinois, especially Crook County. The long tail liabilities of the various levels of government around here are insane and I’d much rather locate in a place like Texas, South Dakota or in the South where I wouldn’t have to worry about 50% hikes in corporate taxes, 66% hikes in personal income taxes, soaring property taxes and sales taxes in the 10% range, not to mention an abject failure to even moderately close the budget deficit even with huge tax hikes.
Sabrina,
The 2008/2009 inventory is not coming on the market any time soon b/c it is being rented out profitably. Only when the rent bubble explodes a few years from now will these hit the market.
“But I’m just wondering what will happen when all that inventory that was there in 2008/2009 comes back on the market. I’m assuming it was mainly rented out (as we know sales weren’t high enough to clear it out.)”
Gary is correct regarding jobs and employment. The latest BLS figures show yoy employment growth of almost 100,000 in the Chicago metro.
urban mommy, I agree and it will be a trickle. I know quite a few who are renting 2/2’s and pocketing $500-1,000/month. They are in no rush to sell.
Yawn. Yes, in some ways, the data are cause to view the glass as half empty, while in other respects it should be viewed as half full. And yes, there’s lots of folks renting out or about to rent out their fairly generic condos, and many more are under construction. But it’s still very hard to find a quality place (or even decent) to buy in an outstanding location. I’ve seen very few “steals” on purchases over the past three years; with rare exceptions, good places have been trading at 10% off peak, give or take. As for finding a quality (or even decent) place *to rent* in an outstanding location, that plight is as bad as ever.
We’ll be looking to sell our place in the not too distant future, as soon as spring 13 and as late as spring 14. I won’t fret if all we can get is what we paid in 2010 (which was basically 10% off the closest unit comp, which had been purchased near the peak). What will be unfortunate is that we’ll likely need rent a place while we work to sell our current place, and that rental will almost certainly be both (much) more expensive and inferior to our current place.
Does the BLS report how many are at reduced wages to their prior employment?
http://data.bls.gov/timeseries/LAUDV17169705?data_tool=XGtable
Chicago Metro employment
6/12 3,760,000
6/11 3,666,000
Your good at stats G, look it up.
The market might have bottomed or the bottom is coming soon. Either way, I believe that it is a very good time to buy, considering the money printing effect Fed gives to us. At least, for me, it is cheaper to own than rent in the current market condition.
“I know quite a few who are renting 2/2?s and pocketing $500-1,000/month. They are in no rush to sell.”
I guess if you don’t count the considerable down payment they put down in order to cash flow like that, then sure they are pocketing cash. Attempting to recoup would be more accurate.
Accidental landlording is easiest when future rental inventory is not yet on he market.
Perception
try it sometime
“an abject failure to even moderately close the budget deficit even with huge tax hikes”
The ’12 budget was initially -$5b, and the ’13 budget is projected as “only” $1.8b. They’ve “moderately” closed the *deficit*, but failed at anything else (except partially funding their own retirement). There’s no need to exaggerate how bad things are; the truth is bad enough.
“calling the Homeowner Preservation Hotline, increased 70% in June”
From 10 to 17, or from 1,000,000 to 1,700,000?
“Sara Lee” CEOs increased by 100% in June, too.
“Accidental landlording is easiest when future rental inventory is not yet on he market.”
isnt that by definition always the case?
I guess if you don’t count the considerable down payment they put down in order to cash flow like that, then sure they are pocketing cash. Attempting to recoup would be more accurate.
I’m sure those downpayments would have been better utilized making 1% interest in savings accounts or god knows what in stock market right and those homeowners getting gouged by renting right?
Most “accidental landlords” down payments were minimal, so you’re actually fortifying the opposing viewpoint more than anything
How do we interpret the data point? It’s people who have been on the sidelines for 3 years, finally doing something. What do they call these events, bull-blips in a bear market, or bull trap?
Definition of ‘Bull Trap’
A false signal indicating that a declining trend in an index has reversed and is heading upwards when, in fact, the index will continue to decline.
They didn’t have minimal down if they are currently pocketing $500-$1,000 per month on a 2/2.
Most acccental landlords of 2/2 units who put little down are subsidizing their tenants.
“They didn’t have minimal down if they are currently pocketing $500-$1,000 per month on a 2/2.”
Define “pocketing”.
“Your good at stats G, look it up.”
OK.
“just 7 percent of those who lost jobs after the financial crisis have returned to or exceeded their previous financial position and maintained their lifestyles. ”
http://www.nytimes.com/2011/12/02/business/for-jobless-little-hope-of-full-recovery-study-says.html?_r=2&pagewanted=all
all you chicago bears, read this, it will make you feel better
http://www.chicagotribune.com/news/opinion/ct-perspec-0801-chicago-20120801,0,6602946.story
G – You have it backwards – the tenants are subsidizing the landlords. Regardless of if the owner is under water or not they are comparing rent vs sell based on market prices. So the underwater owners can either sell at a loss or collect a 5-8% return. Given that treasury yields are at all time lows the choice is obvious.
“fap fap fap…Define “pocketing” …fap fap fap.”
Ask vlakas.
Ha! What accidental landlord wants to admit they’re losing money on their ‘investment’? Especially to friends, family and co-workers? Do you intimately know the finances of these individuals? I do – I see it all the time. Most are subsidizing their tenant’s rent, or breaking even, however they want to compute it in their minds – but making money? Nah. I’ve always said the one-up condo units in owner-occupied buildings are terrible investments.
” G (August 1, 2012, 11:06 am)
They didn’t have minimal down if they are currently pocketing $500-$1,000 per month on a 2/2.
Most acccental landlords of 2/2 units who put little down are subsidizing their tenants.”
“G – You have it backwards – the tenants are subsidizing the landlords. Regardless of if the owner is under water or not they are comparing rent vs sell based on market prices. So the underwater owners can either sell at a loss or collect a 5-8% return. Given that treasury yields are at all time lows the choice is obvious.”
RE Taxes, assessments, insurance AND monthly interest expense are rarely covered by today’s rents. Most underwater condo types are spending $3000+ per month on the aforementioned. They don’t get that kind of rent.
“So the underwater owners can either sell at a loss or collect a 5-8% return.”
And then rent from another accidental landlord? You do realize that most 2/2 buyers who put little down can’t qualify for another loan, right?
“Ha! What accidental landlord wants to admit they’re losing money on their ‘investment’? ”
Yep. Especially when everyone knows the bottom has passed and rents and prices only go up from here.
helmet – Rents in Chicago are at all time highs. RE taxes and mortgage interest are tax deductible. Insurance costs are nominal. Interest rates (and therefore mortgage rates for those with mortgages) are at all time lows. Your statement is not based on fact.
G – Again you undermine your own argument. You are just further illustrating that there is a captive audience that will keep rents high because they don’t have any other options. Accidental landlords have mostly moved and are just renting out their starter apartments for investment purposes. Those who don’t have the financial flexibility to move from their starter places are just making due and praying prices go up because they can’t afford to rent a larger place and also can’t afford to sell. Those aren’t landlords. I believe there was an article highlighted on cribchatter a few months ago regarding this phenomenon.
“RE Taxes, assessments, insurance AND monthly interest expense are rarely covered by today’s rents.”
Really? You might want to check the math on that.
Interest on 200k note = $500
Taxes = $600
Insurance = $50
Assessments = $500
Total = $1650. How many decent 2/2’s are you renting for less than $1650?
HD – So your theory is all these landlords saying they are making money are lying? Which is more believable – that they are making $$ because rents are at all time highs (a fact) or that everyone is lying? I know several people (including myself) earning stellar returns renting rather than selling. Some of these people may have net lost money on the apartment (rent collected hasn’t compensated them for the depreciation of their apartment they bought near the highs) but they are definitely making money vs the alternative of selling at the current market price.
“How many decent 2/2?s”
How many decent 2/2s were purchased by their current accidental landlord owners for under $225k? How many of them ALSO have current interest rates under 4 (remember, they’re stuck, and put under 10% down)?
Also, who’s paying $7200 in taxes on a $225k unit?
“How many decent 2/2s were purchased by their current accidental landlord owners for under $225k? ”
OK, let’s refine the scenario.
If you took out a 300k mortgage (333k selling price) in 2008, you would owe about 240k on it now.
Original monthly interest at 4% = $800
If you refi’d the 240k balance at 3% = $600
Taxes = $500
Insurance = $50
Assessments = $500
Total = $1650-1850.
“Original monthly interest at 4% = $800”
Scratch that, wouldn’t have been 4% in 2008. Let’s say 6% for $1200 per month. That makes $1650-2250 per month.
Does anyone else feel like the phrase “rents are at an all time high” is equal to either “real estate never deprecitates” or “its a great time to buy, homes have never been more affordable”
“If you took out a 300k mortgage (333k selling price) in 2008, you would owe about 240k on it now.”
How are you getting a 20% principal payment in 4 years? You’re actually assuming a 15 year loan for our “typical” accidental landlord?
Even at 4% from day one, it’s a $271k remaining balance *at the end of 2012* for a loan made in Jan-08. At 6%, it’s $279k.
Haywood – “Does anyone else feel like the phrase “rents are at an all time high” is equal to either “real estate never deprecitates” or “its a great time to buy, homes have never been more affordable”
Statement 1 – Rents are at an all time high – is a FACT. The other two statements are opinions. If I said “rents are at an all time high and will never go down” that would be an opinion. I’m just curious – did you not learn to differentiate between statements of fact and opinion? If not that would make life very challenging – in my opinion of course!
“How are you getting a 20% principal payment in 4 years? You’re actually assuming a 15 year loan for our “typical” accidental landlord?
Even at 4% from day one, it’s a $271k remaining balance *at the end of 2012* for a loan made in Jan-08. At 6%, it’s $279k.”
I second this. Even if you were forgetting how mortgages work and were just calculating $300,000 over 30 years, that comes out to $10,000/year, or a $260,000 balance today. I’m really confused at how you came up with a remaining balance of $240,000 after only four years.
” I’m really confused at how you came up with a remaining balance of $240,000 after only four years.”
15 year mortgage
” I’m really confused at how you came up with a remaining balance of $240,000 after only four years.”
Silly, prepayment of principal……. gotta do something with all the cash your making….
Funny how chuk’s figures work only if the borrower put down a 10% down payment (despite most mortgages being low or no money down during this time period), having a low interest rate that wasn’t available at the time period, and, requires a 15 year mortgage. So, sure that’s what, 1 in a 1000 case scenario?
yoss = clio using less ALL CAPS
” I’m really confused at how you came up with a remaining balance of $240,000 after only four years.”
He assumed a 15 year am. Which is fantastical.
I wonder if I could rent out my place for 2350 a month
that would be kewl
“Funny how chuk’s figures work only if the borrower put down a 10% down payment (despite most mortgages being low or no money down during this time period),”
Really?
“having a low interest rate that wasn’t available at the time period”
Really?
“So, sure that’s what, 1 in a 1000 case scenario?”
Really?
“Funny how chuk’s figures work only if the borrower put down a 10% down payment (despite most mortgages being low or no money down during this time period)”
Average down payment in 2008 = 9%.
How do you define “most”?
HD – I don’t resort to personal attacks and I clearly state the analysis behind my conclusions. If you think I’m like Clio it says more about you than me. You can go back and look at my posting history to see I have always been truthful and was a long time bear. My opinions have changed as the data has changed. You can continue to make simplistic comparisons and I will continue to refute your poor analysis with facts and well reasoned arguments.
“How do you define “most”?”
It’s more about how he defines “low downpayment”. HD is pretty clear that he feels anything below 20% is “low”, and you proved his point with the 9% average.
“HD is pretty clear that he feels anything below 20% is “low”, and you proved his point with the 9% average.”
You might want to re-read what he wrote:
“Funny how chuk’s figures work only if the borrower put down a 10% down payment (despite most mortgages being low or no money down during this time period)”
Do you see the word “despite”? If he had said “because” then you would be correct. But he said the opposite.
“Statement 1 – Rents are at an all time high – is a FACT. ”
This is a clio type of statement.
My issue is that people come through my office all the time and the accidental landlords I meet tend to have put down 10% or less, have 2 mortgages totaling somewhere in the high 200’s and mid-300’s, high taxes (because it’s not owner-occupied anymore, right?) plus association dues and it’s a break even scenario at least. Maybe those in LP or east lakeview can charge the highest rent but outside of those elite areas the average 2/2 in logan, wicker, bucktown, etc is breaking even, at best, and usually losing a little bit of money every money, usually no more than a couple hundred bucks, but it’s not a profiting situation.
Any thoughts on how the Obama money is affecting the current market? Those of us who bought in 2009 and took the money have now fulfilled our 3 year owner-occupy requirement and are eligible to move again.
“Statement 1 – Rents are at an all time high – is a FACT. ”
This is a clio type of statement
No, a clio type statement is when he calls you an Idiot.
Oops….. when he calls you and everyone else an idiot.
not directed at you HD 🙂
HD – I am guessing you work as some kind of restructure attorney. Of course you will be seeing the most distressed situations. But you are extrapolating that across the whole of Chicago. Rents are at historic highs in all of Chicago including Logan Sqr / Bucktown / WP. And even the most distressed people you are seeing are “usually losing a little bit of money every money, usually no more than a couple hundred bucks, but it’s not a profiting situation.” So even they aren’t that bad off if they are almost breaking even with their no money down / higher interest / higher tax properties. And claiming I’m like clio for labeling a fact a fact doesn’t make sense. Clio is notorious for labeling opinions as fact.
“You might want to re-read what he wrote”
I don’t need to read what he wrote this time, I know what HD’s position is. Which he just reiterated here:
“the accidental landlords I meet tend to have put down 10% or less”
Which is what he clearly considers “low”. He, like (i hope) all of us here doesn’t really proof his rants for consistency with past positions and typos.
“So, the bubble was the norm and the correction is the anomaly?”
I don’t see how you came up with that.
“It’s more likely that you can’t see past your source of income and recent purchase. Funny thing is, after 3 straight years of bottom calls you were too scared to call one this year (yet.)”
Hah! Given my business model real estate is not my primary source of income. Everyone else gets paid before I do. So that has no influence on my thinking.
But I am afraid to call a bottom. However, once I see a year over year increase in prices, which we have not seen since the bubble burst, I will believe in the bottom.
“The latest BLS figures show yoy employment growth of almost 100,000 in the Chicago metro.”
Yeah, on my stats page that I linked to above I track the employment data for Chicago metro on a graph in the middle of the page.
“I don’t need to read what he wrote this time”
Sure you do, because you have what he said in that post completely backwards. He implied that a 10% down payment was UNLIKELY because of all of the low and zero down mortgages. The reality is that a 10% down payment was LIKELY because of all of the low and zero down mortgages.
“HD – I am guessing you work as some kind of restructure attorney. ”
You could put it that way. But the increase in rents usually isn’t enough to offset the uber-mortgages most people have, especially the 10% down or less crowd. And of course in these examples we’re looking at $300k 2/2’s which were at the lower end of the scale, we see 2/2’s in the $300’s only today, not so much in 2008, in fact, there is a 2/1 listed today on cribchatter that sold for $325,000 as recently as 2004, so if a 2/1 vintage sold at $325,000, what do you tink the new 2/2 sold for just up the block? Only in the most fortunate of situations with near perfect numbers does the rent out the condo and make money situation actually work.
HD – “Only in the most fortunate of situations with near perfect numbers does the rent out the condo and make money situation actually work.” You just took the most distressed group and admitted that they, with the worst numbers, are almost breaking even. There are many people out there who are landlords by choice because they are earning 6-8% on their money net of costs. Then there are people like the ones you encounter who have above rate mortgages with inflated payments (because they are based off the higher purchase price that is now underwater) and if they rent long enough their rental payments will erode the negative equity they currently have.
“And of course in these examples we’re looking at $300k 2/2?s which were at the lower end of the scale, we see 2/2?s in the $300?s only today, not so much in 2008, ”
Take a look at Sabrina’s latest post. Similar to my example.
http://cribchatter.com/?p=15210
Sold in March 2008 for $315,000
Assessments of $185 a month
Taxes of $4590
30 year mortgage of $283.5k (10% down) at 5.5% = $1200 monthly interest now
Assessments = $185
Taxes = $380
Insurance = $50
Total = $1815. Any idea what this would rent for?
A good friend of mine bought his 2/2 place in Lakeview for $439K in 2007 with 3% down. He tried to refinance in 2010 and 2011, but would have had to bring $50-60K to the table in order to do so because the appraisals came in really low. He moved out in mid-2011 to rent his place. His total monthly costs definitely exceed what he is could rent it for (currently renting it for $2,250 a month, $50 higher than last year too). I would guess his interest rate is in the high 5’s/low 6’s range based on the fact that he took out a 30 year mortgage back then. Not sure what his taxes are, but I think they are at least $5-6K annually. Even with the mortgage interest deduction, he’s losing money. He also had to put in a new washing machine last year because the tenant broke it, and his association had a special assessment to seal the side walls last year. These costs add up. I would bet that many who bought in 2007 and 2008 are not “positive cash-flowing” all in.
“Total = $1815. Any idea what this would rent for?”
Better location: http://chicago.craigslist.org/chc/apa/3170590905.html
= negative return
Oh so we don’t count principal repayment in our rent equation?
“Oh so we don’t count principal repayment in our rent equation?”
No, of course not.
chuk – you also forget that P part of the PITI – yes I understand that it’s just a transfer from one asset column, cash, to another asset column, equity, but it’s a payment that needs to be paid every month regardless. So even if in your example the accidental landlord could rent the unit for $1,800 a month based upon costs of $1,800 a month, there’s still the matter of principal that he needs to transfer from the cash to the equity column. Sure he’s breaking even but on a cash flow basis it does not cover expenses.
oilc, you’re comparing a 1bed/1 bath for $1750 on a marginal ELV street to a 2/2 in a different (not necessarily worse) location for 1850? Give me the 2/2 with owner quality finishes every day of the week
“Any idea what this would rent for?”
Can’t imagine more than $2100, and only bc of the garage.
“chuk – you also forget that P part of the PITI”
No, I didn’t “forget” it.
Sorry I didn’t notice it was a 2 bed/2bath, and oh yeah, i rented from that guy John Rooney before, his places are dumps
so my “real’ cost of living in my condo is a paltry 1850 a month… hah not too shabby
“Even with the mortgage interest deduction, he’s losing money.”
How does that work? Do accidental landlords claim the interest as an offset against their rental income and then double-count it against their OI, too? Otherwise, I don’t understand how it’s relevant once you have rental income.
“Can’t imagine more than $2100, and only bc of the garage.”
So, sounds like this is one of those “rare” properties where the rent more than covers your expenses. I would guess they other 2/1 listed today would as well. 2 for 2. So much for being “rare”.
oilc, you’re comparing a 1bed/1 bath for $1750 on a marginal ELV street to a 2/2 in a different (not necessarily worse) location for 1850? Give me the 2/2 with owner quality finishes every day of the week
Sonies re-read the link its a 2br 2bath. Also you need to take into consideration that the unit will not yield rent for at least 1/2 month per year, cleaning costs at move out, realtor fee (if you use one), painting and maintenance costs, etc.
yeah i retracted my statement @ 2:31
Hey Sonies, didnt see your retraction….. no worries. Not exactly a fair comp. anyway 🙂
Interest is an expense, you won’t pay tax on that, even an investment property.
Can someone summarize this thread? It’s giving me a headache. And no, cdc, I will not define headache.
G doesnt think it’s a bottom
I thought you were taxed on the income you get in rent but used depreciation to offset the taxes
“G doesnt think it’s a bottom”
And I don’t know if it is.
/thread
I net around $800/month after PITI on a newer 2/2 Old Town condo. I’m definitley north of $1k month if I exclude principal.
On the other hand, I’ve lost over $100k on the place. Oh well, life is grand.
“I thought you were taxed on the income you get in rent but used depreciation to offset the taxes”
Interest and Taxes are deductible against income. Principal payment is not. If the depreciation is larger than the principal and your income is exactly what PITI is, you’ll have a tax loss which can offset wage income.
Also, I believe insurance is also an expense you can dedcut against rental income. I know you can for business income and rental income is essentially the same if you aren’t a “Pro”.
“I thought you were taxed on the income you get in rent”
You do, but you get to deduct your expenses, which can include interest expense. And taxes. And insurance. And maintenance. etc etc. You (normally) resort to depreciation only when you need to zero out net income, as it reduces your basis, and increases you LTCG when you eventually sell (or you do a 1031 and kick the can down the road).
Any special structuring needed to do that, or do you just put that on your family 1040?
“Any special structuring needed to do that, or do you just put that on your family 1040?”
IRS page, links to more useful info at bottom of page:
http://www.irs.gov/businesses/small/article/0,,id=238662,00.html
“You (normally) resort to depreciation only when you need to zero out net income…”
You have to take it.
I know exactly one accidental landlord, they are losing money. I herby believe that ALL accidental landlords are losing money and if they day different they are lying or are really an on-purpose landlord in sheep’s clothing.
I know one who is losing and one who is slightly ahead – aaahhh, what does it mean, what does it mean??? My head is exploding.
Oh, the humanity! Of the few people I know who are renting out their condos, not once have they mentioned if they are making or losing money.
“You have to take it.”
Well, you’ll pay the recapture eithwr way, so, more or less. Altho there’s no such thing as a deduction you *must* claim.
“there’s no such thing as a deduction you *must* claim”
Can you really decline to take the standard deduction? I realize you can always send more money to the treasury, but if filling out forms following the instructions/rules, can you choose not to take the deduction?
“Can you really decline to take the standard deduction? I realize you can always send more money to the treasury, but if filling out forms following the instructions/rules, can you choose not to take the deduction?”
S’pose they’d send you a check for your “math error” if you did just skip it.
Should have said *itemized* deduction.
“Should have said *itemized* deduction.”
After posting, I wondered if you said you were doing itemized, and then took none (or only some but less than standard), whether the IRS would give you the benefit of the standard. My guess is prob yes but not sure.
” My guess is prob yes ”
Would also guess “yes”.
“Of the few people I know who are renting out their condos, not once have they mentioned if they are making or losing money.”
Everyone has a different story- of course. But in my experiences, when asked about renting out their property, people will say, “I’m just barely covering my costs.”
And then I’ll say, “that is great. At least you’re able to cover everything.”
And then they’ll confess, “well, it covers almost everything. I have to spend $100 (or $200 or $300) a month to breakeven.”
Me: “That’s not too bad. Better than losing $80,000 or more if you sold it.”
Them: “Yeah.” Shrugs.
I have yet to run into someone renting out a house or a condo who is actually making any money (having bought pre-2009.) You are very, very lucky if you’re even just breaking even.
“Only in the most fortunate of situations with near perfect numbers does the rent out the condo and make money situation actually work.”
We forget now (with the bust) that most 2/2s in Lakeview, LP, River North etc. were $400,000s to $500,000s. The 3/2s were in the $600,000s!
Tell me how the rent will work to cover those costs? (many bought with almost nothing down.) They don’t. That’s why we’re still seeing endless short sales. There are some 1-bedrooms that were bought back in the day where the rent is coming close to covering it (but they still see a slight loss every month.)
The accidental landlords aren’t making 6% to 8%. No way.
“Rents are at historic highs in all of Chicago including Logan Sqr / Bucktown / WP.”
Yoss- you are referring to parts of the GreenZone. Not everyone who bought the new construction condo in West Town (or East Humboldt Park) can get “record” rents. And not every renter is paying the rent every month either. You’re assuming the perfect scenario where the landlord does little to no maintenance (doesn’t have to paint everytime the renter moves out, replace carpets, get wood floors stripped, replace counter tops, buy new appliances, no specials on the building etc.) AND the renter pays on time each and every month and is the perfect tenant.
Sure- sometimes this happens. But if you’re a landlord for a couple of years, you figure out fast what a pain in the b*tt it is (when the toilet is stopped up or the tenant leaves the bathroom sink running and floods the bathroom, which leaks to the unit below.)
“Any thoughts on how the Obama money is affecting the current market? Those of us who bought in 2009 and took the money have now fulfilled our 3 year owner-occupy requirement and are eligible to move again.”
The home buyers tax credit will have NO affect on anything because those who bought in 2009 are further underwater than the money they got under the stimulus. The 2009 buyers can’t sell even if they wanted to.
“A good friend of mine bought his 2/2 place in Lakeview for $439K in 2007 with 3% down. He tried to refinance in 2010 and 2011, but would have had to bring $50-60K to the table in order to do so because the appraisals came in really low. He moved out in mid-2011 to rent his place. His total monthly costs definitely exceed what he is could rent it for (currently renting it for $2,250 a month, $50 higher than last year too). I would guess his interest rate is in the high 5?s/low 6?s range based on the fact that he took out a 30 year mortgage back then. Not sure what his taxes are, but I think they are at least $5-6K annually. Even with the mortgage interest deduction, he’s losing money. He also had to put in a new washing machine last year because the tenant broke it, and his association had a special assessment to seal the side walls last year. These costs add up. I would bet that many who bought in 2007 and 2008 are not “positive cash-flowing” all in.’
Read this again. Everyone. Reality.
OK – I think people are confused by something. There are two concepts here – 1. Making a sound investment decision that yields 6-8% return against the alternative. 2. Underwater “accidental landlords” being able to rent out there places to cover their costs (which includes amortizing their losses on the principal).
For an underwater landlord they are making the decision between taking a $50-150k loss on the apartment now (by being forced to bring money to the table) vs. breaking even or being cash flow negative month to month. With rents being so high they can take the small loss per year via negative cash flow by renting and slowly that $50-150k loss on their initial investment will go down. So they are making 6-8% return vs taking the loss right now. For an investor that can buy the property at the current market price and has no loss on the market value that 6-8% return is what most people consider a return on investment – they are actually making 6-8% cash carry on the value of the property. For the accidental landlords that have no assets and don’t care about ruining their credit – they will do a short sale. For those that aren’t eligible or have financial flexibility they will continue to rent out their place (sometimes at a loss) because it is more economical than taking the large loss now.
” I think people are confused by something.”
Looking back, yoss, it seems you started it with this:
“The reason we aren’t seeing all those “accidental landlord” condos come back on the market is the landlords are realizing how profitable it is to rent them out.”
And, you seem to be assuming that the accidental landlords are marking to market, which is only slightly more reasonable than chuk’s assumption of a 15-year mortgage on a $350k condo by someone (a) buying in ’08, (b) with 10% or less down and (c) “stuck” an accidental landlord in ’12.
In other words, first, let’s assume we have a can opener. Then we can ignore all evidence about the “typical” Chicago accidental landlord, and base our conclusions on the relatively few savvy stuck owners.
“OK – I think people are confused by something. There are two concepts here – 1. Making a sound investment decision that yields 6-8% return against the alternative. 2. Underwater “accidental landlords” being able to rent out there places to cover their costs (which includes amortizing their losses on the principal).”
This is correct.
If “your friend” who put 3% down has an FHA loan that closed before June 09, he should do a streamline refinance and change that 6% rate to a 3.25%-3.5% rate
“Well, you’ll pay the recapture eithwr way, so, more or less. Altho there’s no such thing as a deduction you *must* claim.”
(I’ll respond because I enjoy a good discussion of taxes now and then.) It may be only synthetically that you “have to take it” because you have to recapture. The IRS may amend your return to reflect it if you don’t take it, but I’m not sure. I’ve only had “bank errors in my favor”-type windfalls on state returns, the feds either aren’t looking that closely or TurboTax and I are just good enough. But if complete accuracy is your goal you shouldn’t lead out with a statement like “You (normally) resort to depreciation only when you need to zero out net income.” I think that the code is very clear that you’re not allowed to “right-size” depreciation and that you’re supposed to be taking it on the appropriate schedule based on the nature of the asset. The whole point is to prevent being able to get income from an asset throughout its useful life and then taking an artificial capital loss at the end of its life.
Good God, you guys are still debating this issue. There is no way that most accidental landlords are making 6-8%. If you were to take a typical condo and run the numbers without a mortgage you won’t even hit a 6% ROI. Remeber we are talking accidental landlords that bought at the peak, not people who bought foreclosures with all cash.
anon (tfo) – So you are saying people aren’t going to compare taking a $50-150k immediate hit on their 2/2 to taking a much lower loss over time by renting it out? I strongly disagree with that. And my statement that they are realizing it is profitable to rent out the apartments is explained in my last post. It is profitable vs. the alternative of selling at a major loss.
“But if complete accuracy is your goal you shouldn’t lead out with a statement like “You (normally) resort to depreciation only when you need to zero out net income.” ”
You’re right; I was wrong. Should know better than to off the cuff tax issues.
“There is no way that most accidental landlords are making 6-8%.”
See yoss’s comment from 8:41am. Two separate ideas.
1) It is possible for some “accidental landlords” to cover their expenses with today’s rents
2) It is possible to make 6-8% by buying a foreclosure now and renting it out.
chuk (August 2, 2012, 9:17 am)
“There is no way that most accidental landlords are making 6-8%.”
See yoss’s comment from 8:41am. Two separate ideas.
1) It is possible for some “accidental landlords” to cover their expenses with today’s rents
2) It is possible to make 6-8% by buying a foreclosure now and renting it out.
yoss (August 1, 2012, 11:17 am)
G – You have it backwards – the tenants are subsidizing the landlords. Regardless of if the owner is under water or not they are comparing rent vs sell based on market prices. So the underwater owners can either sell at a loss or collect a 5-8% return. Given that treasury yields are at all time lows the choice is obvious.
See yoss comment early comment above……. she changed her position.
“So you are saying people aren’t going to compare taking a $50-150k immediate hit on their 2/2 to taking a much lower loss over time by renting it out?”
No, I’m saying that you don’t hit 6-8% (gross) retun on a “typical” condo/TH/House purchased at 2007 peak prices based on that peak purchase price. Mark the “investment” down to current market price, sure, in some (and perhaps many) cases, but that’s not realistic, and doesn’t accurately represent a “typical” stuck buyer’s personal financial situation.
And, then, making 6% on (say) $300k, when you are still paying 6% on (say) $350k remaining balance from your $425k ’07 mortgage isn’t actually “making 6%” on your “investment”, even if it is mitigating your loss.
I agree that most accidental landlords aren’t doing that well. To Sabrina’s point, a lot of that probably has to do with the initial purchase price. It’s a lot easier on a 2/2 if you’re only in to it for the low to mid 300s or below. There are plenty of 2/2s there that were pushing $500k and plenty of 3/2s with a small third bedroom that were pushing $600k. In those situations it’s probably never going to be an income instead of an expense, but some of those folks probably realize that and are planning to hold it for a few years until they can get a better sale price.
The question is whether and how they planned. I’ve never bought a property I didn’t think that I could rent out if I had to. If you are solvent enough that a short sale hurts your credit or financial condition, but aren’t solvent enough to refinance to the lowest mortgage rates ever, you might be in a tough spot. It’s a lot easier on the numbers when you’re paying 3% interest instead of 6% interest. If you have some cash to make improvements and repairs as needed, you’ll be in a better position than the guy who is trying to rent out a condo unimproved for a decade. It’s also about the nature of the property. If you’re trying to rent out a property that wasn’t planned to be a rental, you might have a tougher time – there are plenty of people who thought the 3/3 they bought for $600k in 2005 would be worth $800k by now, when realistically you can’t even get $3500 out of it to cover your costs if you’re got a big mortgage balance on most of a bubble-era purchase price.
anon (tfo) – As with every investment it depends on the initial conditions. Not all accidental landlords are better off renting out there places. If they have high interest rate loans and are far enough underwater it is better to sell at a loss. But given rents are at all time highs in many cases it is better to rent out their places. And not every accidental landlord bought at the top of the market – those who bought a few years before the bubble and a few years after the bubble will be less underwater than the top tick buyers and therefore have better economics for renting.
“anon (tfo) – As with every investment it depends on the initial conditions. Not all accidental landlords are better off renting out there places. If they have high interest rate loans and are far enough underwater it is better to sell at a loss.”
Most accidental landlords have negative equity and no savings or investments. Their best financial decision is to walk away from the property- The bank takes the loss not the individual.
“not every accidental landlord bought at the top of the market”
Notwithstanding CS, condos were damn close to the peak from ’04 on.
“those who bought a few years before the bubble”
Yes, those who bought in 1996 are going to do just fine.
“and a few years after the bubble ”
Yes, people who buy now are mostly going to be fine, too.
anon (tfo) – Peak was 2006. 3 yr prior to peak (10/03) = 20% lower. 2 yr prior (10/04) = 13% lower. 2 yrs after peak (10/08) = 14% lower. 3 yrs after the peak (10/09) = 22% lower. For a place that cost $425k at peak that is 55k to 93.5k difference in purchase price. That is a big difference. You are using an example of someone who purchase at the top of the market to make your argument. There are many who bought at a significant difference from that price.
oilc – “Most accidental landlords have negative equity and no savings or investments. Their best financial decision is to walk away from the property- The bank takes the loss not the individual.” How do you know that is the case? I would argue most of those with no saving or investments and underwater have already handed the keys back to the banks or done a short sale given we are 6 years from the peak. The accidental landlords that are left are now enjoying all time high rents and probably have at least moderate assets or else they would have done a short sale already because the bank will absorb the loss.
“Peak was 2006. 3 yr prior to peak (10/03) = 20% lower. 2 yr prior (10/04) = 13% lower. 2 yrs after peak (10/08) = 14% lower. 3 yrs after the peak (10/09) = 22% lower.”
Like I said, notwithstanding CS; ie I don’t consider that valid. That doesn’t tell an accurate tale of individual units (gawd, sound like clio).
Whatever, you’ll slice and dice to defend as “typical” the accidental landlord who makes 6-8% on their condo.
” I would argue most of those with no saving or investments and underwater have already handed the keys back to the banks or done a short sale given we are 6 years from the peak.”
Stats say that 33% of Chicago owners with a mortgage are underwater. You think that those folks *all* have non-retirement savings/investements they are protecting?
anon (tfo) – “” I would argue most of those with no saving or investments and underwater have already handed the keys back to the banks or done a short sale given we are 6 years from the peak.”
Stats say that 33% of Chicago owners with a mortgage are underwater. You think that those folks *all* have non-retirement savings/investements they are protecting?”
My statement is that I think most people with nothing to lose have already done a short sale – not that all of the currently underwater homeowners have non-retirement savings / investments to protect. You are attempting to attribute statements to me that I didn’t make to further your argument.
“Like I said, notwithstanding CS; ie I don’t consider that valid. That doesn’t tell an accurate tale of individual units (gawd, sound like clio).”
Here you are ignoring the facts so you do sound like clio. Please tell me why you don’t consider CS valid. My issue is that you’re assuming the worst possible scenario for accidental landlords. I contend that many didn’t buy at the peak so aren’t as bad off as you claim and that the worst off aren’t the current accidental landlords because they were the ones doing short sales over the last 6 years.
The median new worth for a 25-34 yo is $8,525 (source Nielsen Charitas)
Wonder if this information includes their underwater realestate positions?
“Please tell me why you don’t consider CS valid.”
Do you really believe that CS is a near-perfect tracker for an *individual* unit?
I don’t consider CS valid for an individual unit *bc the CS methodolgy says it isn’t*. It’s not intended to be predictive of the sale price of an individual unit, it’s intended to show the state of the overall market. Using it for indiivdual units is misusing the index.
Sales volume at the peak was much higher too, so many people bought at that time. My friend with the $439K place actually bought it for less than his neighbor who bought the same floor unit but a year earlier in 2006 for $40K more.
No one is mentioning potential condo rental caps in specific condo associations. That can be pretty bad for your investment if your building is a 6 unit, and 2 units are already rented and the building only allows 2 rentals.
How do you feel about zillow for an individual unit valuation?
“Do you really believe that CS is a near-perfect tracker for an *individual* unit?”
Where did I say its a “near-perfect tracker” for an individual unit? I was using the index exactly how one should use it – to generalize about populations of home buyers and how far underwater they are likely to be.
““Please tell me why you don’t consider CS valid.”
…
I don’t consider CS valid for an individual unit *bc the CS methodolgy says it isn’t*. It’s not intended to be predictive of the sale price of an individual unit, it’s intended to show the state of the overall market. Using it for indiivdual units is misusing the index.”
According to your methodology doing any analysis on any single unit is meaningless because we don’t have an index of that one unit. Please provide a better way to benchmark the housing market.
anon – you really are starting to sound like clio – “Case Shiller is irrelevant and can’t be used when analyzing individual units!!!”
yoss (August 2, 2012, 1:52 pm)
anon – you really are starting to sound like clio – “Case Shiller is irrelevant and can’t be used when analyzing individual units!!!”
anon, I hate to say but Yoss has you on that one…… boy that’s a Clio statement if I ever heard one.
I’m out. You win yoss.
The vast majority of accidental landlords are making 6-8% gross returns on their acquisition price. The vast majority of currently underwater homeowners are protecting other assets.
“anon, I hate to say but Yoss has you on that one…… boy that’s a Clio statement if I ever heard one.”
Search the thread. That appears twice–once when yoss types it and again when you quote him. Never said it.
“I’m out. You win yoss.
The vast majority of accidental landlords are making 6-8% gross returns on their acquisition price. The vast majority of currently underwater homeowners are protecting other assets.”
Anon, the good news is that we will not see anymore foreclosures, you would have to be an idiot to turn the keys over to bank with returns like that. 🙂
oilc – Please re-read what I have written on this post. I never say its always economical to become a landlord. I said for many of the current accidental landlords its better to take the monthly loss (assuming they even have one) vs. the large up front loss and the return of doing that is attractive.
yoss (August 1, 2012, 11:17 am)
G – You have it backwards – the tenants are subsidizing the landlords. Regardless of if the owner is under water or not they are comparing rent vs sell based on market prices. So the underwater owners can either sell at a loss or collect a 5-8% return. Given that treasury yields are at all time lows the choice is obvious.
Yoss this is what you wrote and this is what started the whole arguement.
oilc – Not to start the whole argument all over but they are comparing rent vs. sell based on current market price (what I have said the last few posts – take loss now vs amortize loss over time for the underwater guys). And in most cases those returns will be 5-8% vs the alternative of selling at a loss now. As mentioned it will depend on how underwater they are and what their initial interest rate was.
Yoss must be a politician.
Impossible, I’m out.
It seems to me that the real question for 99% of accidental landlords out there is not “can I cover my expenses or not” but “is it better to rent or to sell right now?” This is a complex question that can’t be answered with simple math. Consider this situation — which is real and accurate:
“A friend of mine” bought a newer construction 2/2 in Uptown in 2008 for $285k. She got married this year, bought a house and became an accidental landlord. She has a $216k mortgage (refi’d in 2009) at 4.785% which puts her total monthly bill for mortgage (including principal), taxes, assessments and insurance at $1687. She rents the place out for $1600. Another identical unit in her building rents fo $1700, but she wanted hers rented out quickly and to model tenants, so she’s taking the hit for now. So Accidental Landlord loses $87 a month. Yes, she is paying down a mortgage, but subtracting principal seems mighty optimistic given that the value of property could continue to sink so we really don’t know whether that will translate to increased equity.
Should she keep renting? Based on the above numbers, probably not. But it’s much more complicated than that. There are several distressed condos in her neighborhood right now, making it a bad time to sell. Will the foreclosures trickle out soon? She fears not, given the increasing number of jerks out there who continue to walk away from mortgages they could afford to keep paying because there’s nothing in it for them anymore. A new alderman and significant planned improvements to and around the Wilson and Lawrence el stops could improve the neighborhood in the future, but that will take years and you never know how these things will materialize. As for the RE market overall, clearly no one really knows what will happen and she suspects that even if demand starts to improve, that will only provoke others in her situation (like her upstairs neighbor) to put their places on the market, thus driving up supply.
Is it worth throwing in the towel now to save $87 a month? Or should she hold out for a better day? She really has no idea. But it’s easier to install a good tenant and keep the pain at a minimum than to have the place sit empty and pay two mortgages while she looks for a buyer. I suspect that many accidental landlords are motivated by a similar set of circumstances.
kp, The realty of the situation is she will be losing more that $87.00 per month.
There are many more costs involved- maintance, replacing appliances, painting, new carpet, vanancy.
And god forbid she gets a tenant that doesn’t pay or trashes the place.
“given that the value of property could continue to sink so we really don’t know whether that will translate to increased equity.” It could go up also. Best way for her to make the decision is to assume it stays the same and compare renting vs. selling.
“kp, The realty of the situation is she will be losing more that $87.00 per month.”
No, it is not.
That’s not necessarily true, especially if the paper equity in her condo disappears into the ether; the $87 per month she’s paying towards her principal is like being flushed down the toilet.
” chuk (August 2, 2012, 3:50 pm)
“kp, The realty of the situation is she will be losing more that $87.00 per month.”
No, it is not.”
“That’s not necessarily true, especially if the paper equity in her condo disappears into the ether; the $87 per month she’s paying towards her principal is like being flushed down the toilet.”
Or not.
It’s a newer building that has never required an upgrade or repair, so those added expenses are not likely to be significant. Tenants are model renters — nice, quiet, responsible, impeccably clean. That is why the place is rented at $1600/month and not $1700/month like the identical unit upstairs.
But really this is all pretty irrelevant in the final analysis. The point I was trying to make is that it doesn’t come down to a question of whether Accidental Landlord is losing $87/month or $200/month or $0/month. The question is what would the place sell for today vs. next year vs 3-5 years from now? If the value of the home increases by just $10K that would negate several years of losses, especially after you factor in payment of principal. But if it goes down $10K — or at all, really — then renting will prove to have been a bad move.
The real question is does the person have a positive net worth.
If its negative then I would hand the keys to the bank.
“The real question is does the person have a positive net worth. If its negative then I would hand the keys to the bank.”
Really? You wouldn’t have any ethical concerns with exacerbating a huge national problem that drags down the economy and has decimated the savings of countless people to save $87/month?
No, its a business decision, and its allowed by law.
“But if it goes down $10K — or at all, really — then renting will prove to have been a bad move.”
If it goes down $10k in 5 years, and stays rented at a -$87/mo rate that whole time (bad, but simple), there could still be a net cash gain of over $5k, b/c the loan principal is decreasing by $3600++/year.
So, eg, assume it could be sold today for exactly the mortgage balance, and she needs to bring 6% to the table for closing costs–net loss of ~$12,000. In five years, the mortgage balance decreases from ~$205k to ~$184k; the cumulative monthly loss is $5220. A $10k decrease in the value means that no money comes to the table at closing, and she is out $5k, rather than $12k. And if it somehow manages to be worth the same $205k, she gets back her $5220, plus a small part of her down payment.
Similar math, but diferrent upfront decision making if the place is likely to only obtain $160k on the market. Is she willing to just walk? Would the bank approve a short sale at $160k, and forgive the balance? Really all turns on what current value is compared to mortgage.
Making sub-prime mortgages to people who could never afford to pay them off was also allowed by law, but that didn’t make it ok.
“No, its a business decision, and its allowed by law.”
kp, my answer was simplistic and its much more complicated, see anons much better commentary.
“Making sub-prime mortgages to people who could never afford to pay them off was also allowed by law, but that didn’t make it ok.” -Not touching that hot potato.