Market Conditions: Zillow Report Claims 19% of Homes Underwater in Chicagoland
According to the Sun-Times, Zillow released a report on Feb 3 stating that $79 billion in home owner wealth has been lost in the Chicagoland area in the last year.
Zillow also found that 23.4 percent of homes sold in the area in the fourth quarter sold for a loss, and 19 percent of homeowners in the area were upside down on their mortgages at the end of the year.
Zillow also found that the median value in 2008 dropped 10.2% to $225,018 year-over-year.
The Zillow data on the percentage of homes sold at a loss “sounds high to me,” said Pat Callan, president of the Illinois Association of Realtors.
“It might be distorted because the people that are selling are people that need to move . . . that have more immediate pressure to sell.”
Other homeowners are holding their homes off of the market now, he said.
Callan, who is also broker-owner of Wheaton-based Realty Executives Premiere, estimated that in about 10 percent of the sales his company handled last quarter, buyers sold at a loss.
“I think most sellers are going to find they are going to sell for something less than they think their current real value is,” he noted.
And what about homeowners who have to sell after only a year (or two)?
Leverage is not what 29-year-old Angela Ewald had when she and her husband put their Rogers Park three-bedroom condo on the market less than a year after buying it in May 2007 for $315,000.
Ewald, a recent law school graduate and the mother of two small children, decided she wanted to be closer to her family in Ohio, she said.
But Ewald hadn’t thought their condo would draw almost no interest — even after lowering the price from $319,000 to $299,900.
“We had some showings, but no offers,” Ewald said Monday.
The couple took their condo off the market in September and decided to rent it. They took a chance, deciding to uproot to Ohio, without having jobs.
When they couldn’t find work in Ohio, they decided to stay in Chicago and are now renting a house in Roscoe Village. Ewald said the rent from their condo covers only about 80 percent of their mortgage.
“I guess it’s just frustrating,” Ewald said of trying to sell in the current market. “You feel absolutely powerless.”
Down $79B: Real estate Web site Zillow says that’s how much value Chicago area homes lost last year [Francine Knowles and Stefano Esposito, Sun-Times, Feb 3, 2009]
Most curious people here:
“The Zillow data on the percentage of homes sold at a loss ‘sounds high to me,’ said Pat Callan, president of the Illinois Association of Realtors.
‘It might be distorted because the people that are selling are people that need to move . . . that have more immediate pressure to sell.'”
So the data is distorted because it only includes homes being sold?!?!? So if people who didn’t need to sell their homes sold their homes then prices would be higher? Those IAR folks sure are smart.
And these Ewalds…1) Realize you want to be close to family one year after you buy a home 2)rent out your home at a loss and move to Ohio without jobs 3) Then move back to Chicago and rent another place. No wonder these people are losing their asses.
One word describes these folks. Fiscalstupidability. I’ll see you in BK court!
Sonies,
At least they can do all the paperwork and filings themselves!
They buy a condo in 2007 because everyone’s doing it. They move to Roscoe Village because every late 20-something/early 30-something stroller pushing couple is doing it. You’ll never teach some gazelles that the herd can be as equally as dangerous.
This article is full of win. The quote from Pat Callan, the story about the Ewalds. Ohboyohboyohboyohboy.
There is no bottom!
Actually after reading my comment, I won’t actually see them in BK court because 1) I’m not a BK lawyer and 2) I won’t be declaring BK since I wasn’t a retard and commited financial suicide.
These Ewalds are sure pieces of work. They seem to make major life decisions without any regard for the financial repercussions. They are either REALLY dim or have a crazy-nice safety net to fall back on. It is really hard to feel sorry for people making decisions like this so capriciously.
So that means that 80% of owners sold for a profit. Sounds like a good investment to me 🙂
SH:
Depends on what you think a good investment is. if you buy at 500K and sell at $510K I wouldn’t necessarily think 10K “profit” is a good investment if I put 100K down, unless it sold after 1 year. You elementary math doesn’t include people like the Ewalds who couldn’t sell, but are still losing their arse.
It also does not include all those people who could sell but are happy where they live. Lets remember the people we are highlighting are selling their units at the worst time in the past 20 years. This is like highlighting every stock trade that happened in Vovember of 2008. Obviously everyone who sold during this time did not have a happy story. Where will housing prices and stock prices be next year is anyone’s guess…
“It might be distorted because the people that are selling are people that need to move…”
This statement by Mr Callan is very indicitive of what peoples view of housing had become…an investment, almost exclusively.
People rarely used to sell and move unless they had to. You’d buy your starter home and as your family grew maybe you’d sell and get a larger home if you needed the space, or if you were relocating, or if the kids had left, you were getting older and wanted something smaller and more manageable. You bought a house for its function not its investment potential. Mr Callan seems to believe the housing decadance of the last decade either is or should be the new standard and that “needing to move” is just for the great unwashed and the unfortunate.
#Steve Heitman on February 4th, 2009 at 10:08 am
So that means that 80% of owners sold for a profit. Sounds like a good investment to me 🙂
Uh, yeah, probably because they bought 10+ years ago. The fact is that even though they made a profit, its probably a lot less than it would have been had this bubble not occurred and created a depression in (for ease of calculation) their straight line appreciation.
TftInChi,
I fear the Ewards are actually quite common in Roscoe Village. I will try to dig up, if I can find it, a posting by a young yup couple in RV on a different board whose kid is about to enter school and they don’t know what to do because #2 is on the way. The guy flat out says they were counting on appreciation from their condo to upsize by this time period but now feel stuck. Its really, really hard to feel empathy for people like this. This is why I don’t support any sort of bailout for housing. Let the chips fall where they may and lets allow the winners to seperate from the losers. Is this still an America where we do that?
These RV families will be just fine. It’s a nice neighborhood with a ton of kids and a decent elementary school. Sure they’re 2bed condo might be cramped for a few years but they’ll have to deal. They can skimp and save (if the current mortgage isn’t too pricey) and when the kiddies are old enough to attend Jr. High, they’ll have enough saved for a down payment for their dream home in northbrook
The Ewalds in roger’s park? they’re screwed. I lived there for 5 years and I would never rent there again. they should go bk and let the house foreclosure and rent for a couple of years.
HD:
Re BK in their case–think about the ardc impact before giving that advice. Foreclosure might be okay, but I think BK is not a good idea for them. That said, why buy a condo the end of 2L year if you don’t have a good job lined up in that city? And why buy a condo in RP if you already have two kids?
anon(tfo),
You hit the nail on the head. From reading about their situation and the facts you pointed out it appears this couple is still in extended childhood with regard to personal financial decision making.
Sounds like one or both have a well to do mommy and daddy who is more than just emotionally supportive. Law school? Yeah 3 more years of college party on!
I don’t know where you went to law school, but it sure as hell wasn’t a three extension of college partying…
BK and foreclosure are OK with the ARDC but not paying student loans and court reporters will get you in trouble.
There is a mentality of certain rich kids that they ‘deserve’ certain things even though they cannot afford them. I have plenty of friends from law school and college who live lifestyles well beyond their means. I have one friend who got married and they bought a rinky dinky $300,000 condo conversion in 2005 west of western. I haven’t seen it nor do I want to but I guarantee it’s not work anywhere near what they paid. They have incredible student loans. I have other friends from law school with $700k jumbo mortgages and they don’t work in biglaw either. Few of my peers are making any attempt at paying off their student loans in less than 30 yeras. A person in my office said, “homedelete, I plan on dying before I paid off my loans.” This lawyer is 38 years old. This lawyer also lives in a 900,000 house in a fancy hoity toity suburb. Now that the business cycle is slowing down everyone is hurting, it’s just a matter of how well one prepared for the recession. (Except my who decided to move into bk last may). This lawyer works from home to save money on gas. $900,000 home – doesn’t want to spend an extra $30 a week on gas. I have other friends who $10,000 vacations every year. One of the party works for the state’s attorney (not in IL) and the other works at a mid-size. They haev new cars, expensive rental condo, $10,000 vacations once or twice a year…i wonder if they’re still neg am’ing the student loans (Which is still possible btw)
Bob, btw the way law school is not three years of partying….at least at the school I went to . Blago claims to never have seen the library but I don’t trust the veracity of his assertion…
Steve Heitman “Where will housing prices and stock prices be next year is anyone’s guess”
Let me guess: housing prices will be up, because RE always goes up. They don’t make anymore land, you know.
Huuuu, make this “RE always goes up in a long run”.
/Disclaimer: feel free to use whatever time frame you like to define long term, so it proves the above statement./
/sarcasm off/
“BK and foreclosure are OK with the ARDC ”
Not necessarily before you are admitted ….
“Blago claims to never have seen the library but I don’t trust the veracity of his assertion”
C’mon. You knew of people who “never studied”. And it’s not as if Blago was top of the class.
>The couple took their condo off the market in September and decided to rent it. They took a chance, deciding to uproot to Ohio, without having jobs.
When they couldn’t find work in Ohio, they decided to stay in Chicago and are now renting a house in Roscoe Village. Ewald said the rent from their condo covers only about 80 percent of their mortgage.
“I guess it’s just frustrating,” Ewald said of trying to sell in the current market. “You feel absolutely powerless.”
What does this mean after my name in the comments? “Your comment is awaiting moderation.”
YEah, I still have a ton of student loans. Sucks.
“Few of my peers are making any attempt at paying off their student loans in less than 30 yeras.”
Homedelete – I have $60K in student loans that I won’t pay off early either. My interest rate is something like 2%? That’s free money which you should not pay off early. In fact, I’d take as much of that money as possible. Why should your peers pay off their loans unless the interest on it is high?
“Why should your peers pay off their loans unless the interest on it is high?”
For the same reason lawyers should give financial advice… they shouldn’t!
anon(tfo) – law school isn’t undergrad. Of course there are people who ‘didn’t study’ but they were the exception not the rule. Maybe at marshall or cooley students didn’t study but not where I went.
MADFLY – there are plenty of reasons to pay student loans
1) not everyone has student loans at 2%; private loans are adjustable and much higher interest;
2) it’s called debt and it can mess with your dti ratios;
3) paying down debt used to be considered good but nowaday these kids think that debt=wealth when in fact debt=debt regardless of the interest rate…
4) cash flow, cash flow, cash flow. kissing my student loan payment goodbye would really increase my monthly cash flow.
5) again, debt does not equal wealth
6) If we are headed towards deflation (which many think we are) then your nominal debt will stay the same but the value of your dollar increases … and your salary may go down – making your debt more difficult to pay off.
7) and finally I’m a contrarian thinker – whatever MADFLY does, I do the exact opposite..
My financial advice isn’t based upon my training as a lawyer. If you can’t figure out for yourself why you should pay off your debt then that’s your problem, not mine.
“For the same reason lawyers should give financial advice… they shouldn’t!”
anon.. what are you trying to say about people who never studied. Might take this personally 🙂
Blago also said his ACT was 18 or 19 but yet he was admitted into Northwestern….some commentators have questioned whether he has been purposely lied about his score and adjusted it downwards. he also got into pepperdine which is a T2 school if remember correctly so it’s not exactly easy to get into…
I mean how nuts have you got to be to lie about your ACT and make it lower? Blago crazy, that’s how.
what the heck, my actual comments didn’t make it…
just wanted to point out it takes a special kind of self-delusion to confuse consequences for your actions with “powerlessness.”
nobody made those guys move to Ohio without a job to move to, nor made them move back and rent their place for 80% of the mortgage while renting another.
Home Economics 101 should be mandated for ALL high school students, with special attention given to the topics of “why you shouldn’t carry a balance on your credit cards, stupid!” and “why you aren’t entitled to be paid for the privilege of living in a condo/house”
HD- Not appreciating the Marshall comment.
Why on Earth would someone with kids buy a place in Rogers Park over Evanston?
Sounds like the Ohhhhh–hiiiiiii–ooooooo couple wanted to impress some friends back home in farm country with a big city address.
Formerly living in Ohio for a few years I hate to see idiots perpetuate the stereotype that everyone from there is like this. They really aren’t doing anything to dispel the stereotype of Buckeye guillability though.
“My financial advice isn’t based upon my training as a lawyer. If you can’t figure out for yourself why you should pay off your debt then that’s your problem, not mine. ”
If you can get a better rate of return on your money elsewhere than on your debt, then invest your money elsewhere.
For example, say you have a 2% rate on your student loans. You can easily beat that with a safe investment such as a AA+ bond. Now when you get into the 5%-25% range of interest rates, every dollar you pay down, you are essentially paying yourself that rate of return, since you don’t need to pay that off anymore.
Low rates are fine to not pay off, high rates are bad.
inflation = 3%
my student loan = 2%
2%
post got cut off…
inflation = 3%
my student loan = 2%
2% is less than 3%
$60 put into the market beats 2% over 30 years 10 times out of 10.
I can’t believe Sonies and I agree.
Debt can be your enemy or your friend. The key is recognizing which is which, and how to utilize it.
MADFLY,
Inflation lately has been probably zero or negative. And although thats the economics class formula, in reality you shouldn’t pay off your loans if you have any debt at a higher rate or if you can find a higher after tax rate of interest on a savings account.
I don’t always follow my own advice either. I’ve got 17k of 1.5% loans so significantly less than you, and although I can get after tax rates on CDs/MM/savings accounts of higher than this, its not enough principal to make it worth the effort. An extra $200/year for a ton of paperwork. I would just pay it off if I didn’t have a plan to go house rich in five years time with a nice down payment. But as I do I might keep it around.
Yes at the bottom of this correction I aspire to be a house baron myself. What more would you expect from a regular CCer? ;D
“what are you trying to say about people who never studied. Might take this personally”
Nothing bad, certainly. Fits me pretty well, too.
As to HD’s points to the contrary, I have intimate knowledge of the study habits of people who attended higher ranked (not necessarily better–that’s a discussion I don’t want to have) law schools than Pepperdine (and knowledge of a few non-Blagos who attended Pepperdine LS) and can state with certainty that (1) “studying hard” is not a requirement for doing reasonably well, unless you consider an 8-hour outline cram studying hard, and (2) “not seeing the inside of the library” does not equal “not studying hard”–the hardest workers often do it all in privacy.
Finally: “Blago also said his ACT was 18 or 19 but yet he was admitted into Northwestern”
As a transfer student. From the University of Tampa. Which I don’t believe I’d ever heard of before looking at Rod’s wikipedia page.
MADFLY:
What about this?
inflation = 1 or 0%
student loan = 2%
income goes down
stuck with $60k debt because I believed that (low interest rate) debt = wealth
Sonies:
where you going to get 5% interest rate on your $200 a month student loan payment? then you have to pay tax on the 5% you earn too probably in the 25% tax bracket. So you make a couple of shekels a year – is it really worth walking around with $60k in debt? Oh that’s right our younger generation grew up on credit cards and Option Arm mortgages. like madfly says low interest rate money = “free money” and he wants more of it. Debt= wealth, sorry, I must have missed that lesson plan in class that day, I was out partying with anon(tfo).
Also 2% student loans were the exception not the rule. I graduated with 60k grad school loan debt a few years ago. Only 18k of the 60 was at 2%. Roughly one third was at 8% and the other third at 5%.
I consider it free money, but I don’t consider it wealth, so it’s a bit annoying you keep repeating that.
Leverage is how to accelerate wealth building (or deccelerate wealth if you mess up). That’s how it works in all types of investments. If you can avoid putting in your own money, you should. Your returns are high, and if the investment falters – well, it wasn’t your money :).
Now, if being conservative with your money works for you Mr. Delete, so be it. That’s how my parents think. But just because someone like me accepts the risk of debt for the potential for higher returns, it doesn’t mean they are idiots. For me, it’s a finance question (and I have 2 degrees in that, and a job that required creating financial models used in litigation), and it’s an easy one.
Madfly,
Its not free in two senses. First the interest you pay. Okay its very low, even by conservative standards, but its still interest. You might argue that chances are it will be the lowest cost debt you can obtain in your lifetime other than intro-balance CC with teaser rates and you’d be right.
The other reason it isn’t free is it depends what you do with the opportunity cost of not paying down the debt as soon as possible. If you didn’t pay it off early and instead put 60k into equities in 2000-2008 or into a downpayment on a condo from 2004 to present then that would be pretty stupid in retrospect.
Mr Fly:
Despite having been out drinking with HD during that part of the course, I agree with you. I do feel that, at a certain outstanding dollar amount, the administrative burden exceeds the benefit; that is, once you only have a few thousand outstanding, I’d rather pay it off and totally forget about it then have the incremental benefit of (say) $6k of 2% money. Now, that’s based on interest rates of the recent past, where you could get HELOC money for sub 5% (maybe sub 3% right now) plus deductibility or unsecured lines for a couple points more; I’d feel differently if prevailing rates were 10%+, but then, we be talking about real money on the spread even in (virtually) risk-free assets.
Nobody’s yet mentioned that student loan debt is harder to eliminate in bankruptcy than, say, mortgage debt. The banks like those terms — that’s part of why they can offer lower rates on it. Is that a reason you might want to pay it down?
MADFLY you remind me of a guy who told me he didn’t want a property tax escrow because he didn’t want the bank to work his money, he wanted his money to work for him. Fast forward two years later and his real estate taxes have been sold for non-payment.
” and if the investment falters – well, it wasn’t your money :). ”
Haven’t you ever heard of personal guarantees?
I gotta agree with Madfly on this one. It’s simply mathematics. If you can borrow money cheaper than you can receive, or if that rate is the lowest on the stack of debt you might have. You do not pay it off!
Two issues I’m debating here.
One is my student loan at 2% (might be even less I have to check). I won’t pay this down because over the course of 30 years, I like my chances of getting a better return. The higher this rate, the more likely I’d pay it off, but at 2% or less, it’s less than historical inflation and therefore you can argue I’d be losing 1% by paying it off.
The second issue is debt in general. Homedelete doesn’t like debt at all it seems. I say, it depends. Student loans (due to low rates), home or business loans (which potentially generates returns)… are all fine, when used properly. Credit card balances, car loans, any other loan that does not generate income and/or has a high rate… are bad.
“Inflation lately has been probably zero or negative.”
Only because of the “basket” they use to calculate the rate – it’s been gerrymandered heavily, and now includes loads of non-essential items. But for most of us, when food & energy costs go up, that’s inflation we can feel.
The fact that some egghead decided that cheaper whatchamajigits from China balanced out the increase in the price of eggs is meaningless as I need the eggs, but the whatchamajigit is a luxury good.
Describe to me one real world application of your theory. And of course if you have 2.0% student loans and invest in Cd’s making 2.36% then you make .36% per year! After paying 25% tax (or higher) it’s so worth it baby.
The ‘simple mathmatics’ makes sense in the textbook but in real life it’s not quite so easy….
Option ARMs are simple mathematics: Just refi before the reset/recast and your payment won’t increase b/c your annual 10% apprecation will take care of everything…..uh oh.
“Ze Carioca on February 4th, 2009 at 2:11 pm
I gotta agree with Madfly on this one. It’s simply mathematics. If you can borrow money cheaper than you can receive, or if that rate is the lowest on the stack of debt you might have. You do not pay it off!”
Skeptic. The fact that you think $1.00 more for eggs balances out the decrease in the value of a home… ?????????????????????????????
I never said debt is bad; low interest debt(does not =)’free money’
HELOC then jingle keys, now that’s free money
I understand you like to take your chances elsewhere….but paying off 2% per year is risk free. Tough to beat a risk free return on your money.
The only categories still going up in price is education and health care. most everything else is going down. WE’ve already had our massive inflation, $5.00 gas and $300,000 condo conversions were the pinacle . Now look where we are.
What I am saying is if you have student debt you can carry at 2% and home debt at 6% you shouldn’t pay down a dollar of the student debt.
And actually I’ll take the .36% giggling. Just gunna do it a whole heck of a lotta times 🙂
And HD I really think you have it backwards. Paying off 19% or even 6% has big benefit. Paying down 2% has little benefit and consequently very little risk.
For the record I have no debt. Zero!
“Describe to me one real world application of your theory.”
So, it isn’t a good risk-free arbitrage **today**, but the real world application that you *might* agree with is in building an emergency fund. And, it’s rather likely that sometime in the next thirty years there will be a good risk-free arbitrage opportunity; or that un-re-paid money will become a DP. If it isn’t costing you anything (i.e., you’re earning enough interest to pay your cost of funds), why wouldn’t you stash the cash someplace where it’s available to pay off the loan if necessary?
Well 2008 was the year where ROI morphed from return on investment to return OF investment. Had I to do it all over again I wish I had not contributed to my retirement funds and paid down the debt instead.
If you have similar thoughts on the market being as bad this year but don’t necessarily want to take the risk of shorting it debt paydown is a safe way to improve your financial condition.
“Paying down 2% has little benefit and consequently very little risk. “
Another way of looking at it is if I borrow 2% and only get back .5% and bleed 1.5% for 2-3 years, that is not that bad. Then if after those 3 years I get to lock 5.5% or even 7%. I make up for it pretty quickly. I can take a 1.5% bleed without even noticing it. My risk is so minimal. It’s kinda like I did by dumping all the long bonds that accidentally worked and moving to the super short end to wait
For the record i stopped contributing to my retirement funds and used it paid off debt instead in february 2007.
anon(tfo) an emergency fund goes without saying.
Ze I understand what you mean, for example, why use $100k to pay off a 2% student loan just to turn around and borrow another $100k at 5% for a mortgage? Yeah it doesn’t make a whole lot of sense, except that a mortgage is dischargable in BK but student loans are not. There are pluses and minuses for each but I think it’s a myth to believe that debt=wealth b/c it doesn’t. just because you low interest rates doesn’t obscure the fact that you have to pay back the money some day. it’s the same with option arms loans….the interest rate was (artifically) low, the borrower had no intention of paying it back…
“Ze I understand what you mean, for example, why use $100k to pay off a 2% student loan just to turn around and borrow another $100k at 5% for a mortgage?”
That is all I am saying my BK risk is 0
HD your completely missing Ze’s point. It has nothing to do with mortagages and realestate. Guys I would drop this issue before HD gets his panties in a bunch.
I understand the point and my boxer aren’t in a bunch. The rule is to pay highest interest debt first and so on. I’m commenting more on the debt = wealth meme and also the idea that paying down debt is a purely mathematical thing when there are other real world concerns why a certain debt should be paid off.
I sometimes file bk’s for people; I encourage them to f’k their creditors. so i’m just saying, back to work guys.
“Ze Carioca on February 4th, 2009 at 2:32 pm
What I am saying is if you have student debt you can carry at 2% and home debt at 6% you shouldn’t pay down a dollar of the student debt.
And actually I’ll take the .36% giggling. Just gunna do it a whole heck of a lotta times ”
“
HD – The point is to NEVER payoff a loan with a 2% interest rate. It is free money and if you can;t find a place to earn more than 2% you have problems…
HD, Glad to see your boxers aren’t in a bunch. I agree with you regarding personnel debt, but if you are using debt for an investment that is something very different. If you look at anyone who has a high net worth they have used debt to create wealth. For the record I have zero debt like Ze, but when opportunities do arise in the future I will be utilizing my line of credit.
You should know better steveo, never say never.
“HD – The point is to NEVER payoff a loan with a 2% interest rate.”
Yeah, if someone offers you money at 2-3% interest and you don’t take it, you have very low confidence in your ability to make investments. Because it’s essentially FREE money.
Yeah there’s nothing wrong with credit per se. But to me having non-dischargable student loans at any interest rate, even 2%, is too much. Low interest rate loans is NOT free money – an inheritance from your spinster aunt is free money. The loan has to be repaid whereas the inheritance doesn’t. That’s the difference between debt and wealth. And lately getting any kind of postitive return on your money is difficult I dont’ think I need to explain this concept.
Madfly,
What was your return on equity in 2008? If you don’t mind my asking.
Apparently a lot of people had a lot of confidence in their ability to make investments in and during 2007 and 2008. The Dow was at 14,000 at one point.
Low interest rate loans is NOT free money
Very True!
“MADFLY you remind me of a guy who told me he didn’t want a property tax escrow because he didn’t want the bank to work his money, he wanted his money to work for him. Fast forward two years later and his real estate taxes have been sold for non-payment.”
Unless you don’t have discipline, why would you want the bank to hold your tax money in escrow when you could put it elsewhere and earn a return? That’s your money you are loaning FREE to the bank.
Similarly, why would you want the government to withhold more taxes than you owe? That’s your money you are loaning FREE to the goverment.
The money is not free MADFLY – you have to repay it. How does repay=free. Finding $20 bucks on the street is free money. Borrowing $20 bucks off the street is debt.
“you have very low confidence in your ability to make investments. ”
So are you smarter than 90% of the rock star ivy league educated hedge fund and private equity managers out there? Why aren’t you running citidel?
homedelete,
He’s still stuck in the old paradigm that low interest rate debt = wealth. It ain’t so anymore, Madfly. And if you are so confident in your ability to make more than 1-2% per year you are welcomed to allocate your money as such, or even better yet there might be openings in hedge funds and/or mutual funds.
Lots of empty cubes in those industries these days, apparently they had a bunch of people confident they could get more than 1-2% returns on their money but confidence didn’t translate into actual returns.
Confidence is one of those things anyone can get. I remember in 2003 how confident the Iraqi Information Minister was that American Troops had not reached Baghdad and those bangs in the background were just children playing with fireworks in anticipation of the Iraqi victory celebration.
(Sometimes this board gets so distracting and I get nothing done).
Because in the real world you’re not going to make enough money off your $3,000 tax payment to make it worthwhile to not have a tax escrow. And quite a few people lack the disciple or readily available cash to pay their taxes on time and consequently the late fees and interest far offset any potential earnings from ‘investing’ the money. That’s why !
“Unless you don’t have discipline, why would you want the bank to hold your tax money in escrow when you could put it elsewhere and earn a return? That’s your money you are loaning FREE to the bank.
Similarly, why would you want the government to withhold more taxes than you owe? That’s your money you are loaning FREE to the goverment.”
Homedelete I never remember him saying he is/was smarter than these folks. Instead he said that he is ‘confident’ he can get a return above 1-2%. So I think maybe he is ‘confident’ he is smarter than them. There is a big difference here. I’ve found in life confidence and competence are frequently inversely proportional.
Or maybe confident he can put that 60k into a FDIC insured high-yielding money market account which yields 4%, or 2.6% after taxes and that the paperwork and time involved would be worth it. Maybe for him..
“So are you smarter than 90% of the rock star ivy league educated hedge fund and private equity managers out there? Why aren’t you running citidel?”
I’m with you on this one…but tax withholdings and property tax escrows are two completely different things.
“Similarly, why would you want the government to withhold more taxes than you owe? That’s your money you are loaning FREE to the goverment.”
Bob – I have money in properties, individual stocks and mutual funds. The ROE was certainly negative with the market crash. Honestly I haven’t done the calculation but the stock market lost 40%, right? Well I’m in there.
On the other hand, I used some funds for a start-up business that had revenues of $350k which I am expecting to hit $500k next year. That ROE was 600%. I have another biz launched last month. Point is, I got options to put my money in besides the depressed market.
But shouldn’t we be talking about one year evaluation… returns should be examined over a 30 year time horizon (i.e., the term of the student loan)?
“you have very low confidence in your ability to make investments”
I’m shooting for single digit negative this year and i’ll be happy.
correction: we should NOT be talking about a one year evaluation.
Madfly,
Perhaps right. However as I am early in my career I am low on assets and need to stock up on things such as an emergency fund, etc. Liquidity concerns are always an issue for my job as well. I guess this second fact supports your position.
If I was in your situation I wouldn’t pre-pay the 60k either. I only repaid 40k of mine because the rate was higher than 2%.
I guess we just differ in our risk preference. Which is obvious because you’re a small business owner and that is a very risky profession from my standpoint. Congrats on the biz though–you have a lot more options and less concerns than most of the rest of us with those kind of returns under your belt.
I hate to say it but a lot of people the find themselves in positions like the Ewalds kind of had it coming. You don’t EVER move your family to another state without at least one person having a job first. Especially if you find yourself upside down on your mortgage and/or unable to sell your home.
I’m with homedelete on paying off your loans. If you just figure out what you’d pay in interest over all those years, even if it’s only 1%, that’s still a lot of money. Money you could have in your pockets to take a fun trip, invest in the stock market so it’s earning its own interest, or to put down on a house, or any number of things. Not to mention one less bill to pay.
When I say “FREE”, I mean it in real terms, that the interest rate is lower than inflation. It’s a NEGATIVE interest, thus not only FREE. They are paying me to take money.
Real Interest Rate = Nominal Interest Rate – Inflation
Guys, look it up. I’m not spouting some outlandish theory. It’s simple economics.
“tax withholdings and property tax escrows are two completely different things”
How so? Other than that tax withholdings are requierd by law and you will be penalized if you underpay and property tax escrows are a “convenience”.
That’s a huge difference!!!!
You aren’t penalized if you underpay, you pay what you owe if you underpay your income taxes. Any idiot can do no withholding on their paychecks, they just better save that extra money and pay it when the tax bill comes due April 15th. Same with property escrows! Sounds like a similar thing to me. Its not like property tax due dates sneak up on you, its every 6 months! But of course they force you to escrow property taxes if you are under 20% LTV. Thanks, arseholes!
“Skeptic. The fact that you think $1.00 more for eggs balances out the decrease in the value of a home… ?????????????????????????????”
It’s not just $1 more for eggs, it’s everything (that’s why it’s called inflation) that has been driven by higher energy/fuel prices, that can’t be balanced out by slave labor wages in Asia and Latin America.
There’s only so much Wal Mart can do to fight the unstoppable force known as inflation- everybody wants a raise/COLA every year, so this quite naturally results in an upward pressure on goods and services pricing. Dairy, energy, etc. cannot be outsourced the same way a disposable DVD player can be.
But specific to your point, not everybody is buying a house every week. Or every month. Or every year. Or ever!
Sonies,
With the federal government if you’re intentionally underwithholding by >10% of your total tax burden you need to settle up with Uncle Sam each quarter end by making estimated tax payments. Underpay on taxes by more than 10% and you will get hit with penalties.
This is my first post, but love this site and insights from you guys. I’ve done my own research, but some of you are part of the reasons why I’m shopping for a rental unit this evening and not looking to buy. My point?
I was excited to buy, but being a (commercial) real estate analyst, it became pretty clear that now was not the time despite low rates.
Any prognosticaters out there willing to guess “the bottom”: when? how much % drop from today? If mortgage rates tick back up when is the time to strike?
I’m comfortable signing a 1yr lease thinking it won’t be til 2010-2011 at earliest and we’ve got 8-10% to go. Thoughts?
“That’s a huge difference!!!!”
Right, and so why would you freely lend your money when you have a choice? You’re defending the use of a P.Tax escrow, while (implicitly) complaining about a FedTax “escrow”. Doesn’t make sense.
Sonies: “You aren’t penalized if you underpay”
As Bob notes, you’re wrong. Try it sometime, Sonies–have nothing withheld (in a year when you will owe). You’ll get a penalty. And probably an audit, too, for your trouble.
I’m not implying anything!
“I’m not implying anything!”
I must have misread:
“I’m with you on this one…but tax withholdings and property tax escrows are two completely different things.
“Similarly, why would you want the government to withhold more taxes than you owe? That’s your money you are loaning FREE to the goverment.””
which seems to say that you agree that one shouldn’t give the gov’t a free loan, but it’s just fine to give your mortgage lender a free loan of your P.Tax money. I guess you meant something else?
I don’t know much about escrow. Does it make property taxes easier to pay by breaking down the semi-annual payments into a monthly one and combining it with your mortgage?
Also I have read that loans without escrow carry 1/4pt higher on the rate or higher points at origination.
“I don’t know much about escrow. Does it make property taxes easier to pay by breaking down the semi-annual payments into a monthly one and combining it with your mortgage?”
Yes.
“Also I have read that loans without escrow carry 1/4pt higher on the rate or higher points at origination.”
Maybe now. My original purcahse mortgage (80/15, in ’01–I’m part of the problem!) required it (no option to pay more); neither re-fi had the same requirement or charged extra.
“But specific to your point, not everybody is buying a house every week. Or every month. Or every year. Or ever!”
-No but if you own one you have it losing value every day and probably considerably by more than the $.50 cents on the eggs.
-Car prices… hmm going down. Its all going down and as for that COLA raise crap good luck when you are praying just to have a company to work at. Prices are coming down not up!
Which MADFLY, that means what if in your financey formula inflation is negative?
“-No but if you own one you have it losing value every day and probably considerably by more than the $.50 cents on the eggs. ”
wrong-o. IMO this is where all of this lunacy starts.
my home’s primary value is the shelter it provides. it’s market value is irrelevant unless I am looking to sell, which I am not.
I do however need to eat, while I do not need to buy a new car (nor have I ever, you can always buy used – why pay a premium for the privilege of driving it off of the lot?), and I do need medical insurance.
prices may come down somewhat, but they’ve been escalating so out of touch with wages for so long that we’re a long way from coming out ahead.
for a far more detailed understanding of these issues, read Kevin Phillip’s book Bad Money – he foresaw all of these problems years ago, and he breaks everything down with raw data.
ANON- Escrowing taxes is to the advanatge of the bank and not the borrower. Itis required if you put down less than 20% and should be avoided at no expense if you do put down 20%.
Why allow a bank to collect interest on your money when you could be collecting interest yourself.
Federal tax rules allow exceptions to underpayments with penalties, such as a year of unexpected increased income or taxes due that are less than 10%. Illinois doesn’t penalize unless the amount owed is over $500. In reality it’s hard to play that game. I’d much rather file my taxes early and get a refund, than pay thousands on April 15. I’s just a psychological thing.
Paying off a 2% loan doesn’t make sense, especially if there is other debt with higher interest rates, or any amount of inflation. Even if you don’t invest the money, raising your standard of living (increased entertainment, etc.) may be more worthwhile. But then there is the psychological thing..
“Describe to me one real world application of your theory. And of course if you have 2.0% student loans and invest in Cd’s making 2.36% then you make .36% per year! After paying 25% tax (or higher) it’s so worth it baby.”
Okay HD – My student loans are at 2.25% for 30 years. Historically (not today but I am sure tomorrow) CD rates are in the 5% range. Do I need to do any further math?
“ANON- Escrowing taxes is to the advanatge of the bank and not the borrower.”
Stevo: If you bothered to actually read, you’d see that I understand that, but thanks.
Explain it to HD, who appears to think (although I’m presently not sure, b/c he’s posted contrary things), because he knows one moron who got his taxes sold, that not escrowing is foolish.
I see your distinction anon(tfo) and I”m having a difficult time articulating the difference between an escrow and a tax withholding. I think the real issue is pre-paying your property taxes (to a 3rd party) as opposed to overpaying on your withholding (to the IRS). both parties theoretically get ‘free use’ of your money for sometime but that’s like saying you shouldn’t pay your bills until exactly the due date otherwise the creditor is getting free use of your money, which is academic. The point is not to overpay like the IRS but prepay with the 3rd party as your agent to ensure the bill gets paid timely. You try not to overpay your mortgage escrow.
I know more than one moron who had his taxes sold. There’s a very busy dept on the 4th floor of the county building devoted to issuing estmates of redemption. If every person who waived a tax escrow was as diligent as cribchatter posters then a lot of county workers would be out of a job. There would be no need for estimate of redemptions, period, because in the cribchatter world, everyone has the discipline to pay their prop taxes on time. I’m not saying it’s foolish waive an escrow, I’m saying that the amount of interest you’re going to earn on your $10,000 in property taxes at 2.36% Cd at Midwest bank (for a 6 month cd IIRC ) ($237 minus taxes) is so f’in negligable that it’s academic at this point to say that “why let the bank make money off my money”.
“The point is not to overpay like the IRS but prepay with the 3rd party as your agent to ensure the bill gets paid timely. You try not to overpay your mortgage escrow.”
Fair enough, but (1) Escrow amounts are not necessarily consistent and you don’t get to pick the amount, (2) I was assuming proper w-4 management of withholding, (3) sometimes the escrow company screws up (happens a scary amount), (4) when you sell, the escrow company usually holds the money for a while, and (5) I don’t find the “service” of holding my money and cutting a check twice a year worth much.
Any thoughts on how the $15000 (or up to 10%) tax credit for the purchase of primary residences in 2009 will impact the housing market?
http://www.google.com/hostednews/ap/article/ALeqM5gdDrWnoMueqVFI-Uo1ClxVZur22AD96526Q00
“Explain it to HD, who appears to think (although I’m presently not sure, b/c he’s posted contrary things), because he knows one moron who got his taxes sold, that not escrowing is foolish.”
HD – Try to assume the advice we are giving in our posts as directed to the “non moron” group.
The Senate voted Wednesday night to give a tax break of up to $15,000 to homebuyers in hopes of revitalizing the housing industry, a victory for Republicans eager to leave their mark on a mammoth economic stimulus bill at the heart of President Barack Obama’s recovery plan.
HD maybe you should call stevo, I sure he can hook you up with a great property.
Now we are talking Valasko.
Do you sell studios in uptown Steve?
HD- LMAO
Escrow is a complete waste, and it becomes even more of a headache if you buy into new construction or if, for some reason the PINs get changed on your property. Yes, you pay a monthly amount along with your property taxes that is supposed to be 1/12th of your annual tax bill. But, lenders also keep a reserve (i.e. you fund a cushion, and they are permitted to do this legally) on top of that equal to about 1/6th of your annual tax bill. So, you are essentially overpaying and losing the opportunity cost of interest and you have to deal with inept bank back office folks who don’t know how they determine your monthly escrow payment.
Set up an online savings account and dump money in there on a monthly basis. Throughout the course of the year that will take up 10 minutes of your time.
If you can’t pay your property tax bill on time yourself, you shouldn’t own a home.
Waiving escrow doesn’t cost you a cent at close and will not cost you anything on the rate if you have 20% down.
_D_
This is one of the main reasons not to escrow. Bank errors. I see over/under payment and divided pin issues all the time. However, waiving escrows is NOT free at 99% of banks. Banks typically charge .25% premium (.25% x loan amount = actual cost) which usually will equate to a .125% increase in the final interest rate to the consumer to waive escrows. Allowing a borrower to waive the property tax escrow is riskier for the bank, so they are going to charge for it.
The tax credit could have an effect of getting some first time home buyers off the fence- but they still have to have the downpayment and credit score.
Otherwise- everyone else has to sell first and then buy again but that’s not exactly happening.
We’re already at near record homeownership rates and that’s not going to go higher anytime soon.
skeptic…. don’t need a book. Remark your assets and create your balance sheet. Those eggs don’t come close to your net worth loss. Why is it when home prices went up people loved calculating their wealth and now it is ONLY a place to live. silly people.
Oh and clothes.. cheaper.. restaurants… cheaper… hotel rooms… cheaper… all getting cheaper…
This is not as hard as you are making it.
Edumakated, you just get your broker to eat the cost.
Ze,
LOL how true. I remember how my pa used to brag about his 401k balance. He’s been mum lately curiously enough.
Ze, what makes you think I and the thousands like me were ever part of this ridiculous mindset that a house “made money” just by sitting there? I’m 37, and my largely-college educated and then some crowd has been laughing our asses off for years at all of these get-rich-quick schemers.
A home depreciates in value as it gets older, that’s why you can write some of it off on your taxes. What tends to raise in value is the cost of the land itself, being that you can’t make any more of the stuff, and the population continues to grow and zoning/land-use restrictions.
The only way that fundamental economic truth changes is if raw materials escalate in price vastly out of proportion to inflation, or zoning laws are relaxed to allow a glut of new housing – but even then, there will always be people who want actual land, not just a box in a tall building, no matter how luxurious.
but on inflation you’re just dead wrong. you can’t conflate restaurant tabs & hotel rooms with essential goods. there’s a reason they’ve jerryrigged the inflation stat, it’s to make inflation artificially lower, just like they do with the unemployment rate – one of the reasons Bush actually went against his own party a year ago in (I believe he caved eventually) extended unemployment benefits was that it would bump the unemployment rate, something politicians hate like the plague.
but don’t take my word for it, just read this for a taste:
http://www.nytimes.com/2008/04/21/books/21gewen.html
“A home depreciates in value as it gets older, that’s why you can write some of it off on your taxes”
Um, if it’s your primary residence, no, you can’t. That’d be tax fraud. And mortgage interest and property tax deductions have policy bases totally different from depreciation.
_D_
That is my point, your broker doesn’t just eat the cost. It is isn’t free to the broker or the bank. You are paying for it through a slightly higher interest rate.
Ed, i absolutely understand what you are saying. same can be said for doing a “no cost” refi. but, brokers can eat it through a lower commission in the end. just get your quote before asking to waive escrow. if you are already getting squeezed 1/8th, then it doesn’t matter if your rate stays the same as the initial quote.
laner is a good guy.
“Um, if it’s your primary residence, no, you can’t. That’d be tax fraud. And mortgage interest and property tax deductions have policy bases totally different from depreciation.”
As I’ve had several different professional tax accountants make a mention of depreciation (granted I’m not asking them to prove it in the tax code), you’ll need to do better than just claim that as fact to sway me.
but regardless, the larger point is that a building physically depreciates is just common sense – unless you have some sort of “robotic smart house” that fixes itself – a house is like a car, it’s a physical asset that breaks down over time and loses value (unless you put the value back into the asset by repairing it).
“As I’ve had several different professional tax accountants make a mention of depreciation”
OOOOH, hearsay. A powerful comeback if there ever were one.
From the IRS website:
“In order for a taxpayer to be allowed a depreciation deduction for a property, the property must meet all the following requirements:
[1] The taxpayer must own the property. Taxpayers may also depreciate any capital improvements for property the taxpayer leases.
[2] A taxpayer must use the property in business or in an income-producing activity. If a taxpayer uses a property for business and for personal purposes, the taxpayer can only deduct depreciation based only on the business use of that property.
[3] The property must have a determinable useful life of more than one year.”
Link: http://www.irs.gov/businesses/small/article/0,,id=137026,00.html
So, go for it. You have some accountants on your side, who will rely on the “you misunderstood” defense* when you get audited.
*unless they’re crooked, like Wes Snipes’ accountants.
I’m guessing we’ve been told this as we have a multi-unit building, but fair enough it can’t hurt to ask a few more questions this year at tax time. Not sure which is the greater crime, hearsay or incorrect assumptions.
but again, the point (did you miss it twice in a row?) is that depreciation is due to deterioration, which a house most certainly does in a climate like ours.
skeptic, you are simply 100% wrong about being able to depreciate a residence. That’s the equivalent of claiming living expenses as business expenses–you don’t get to deduct your costs of living, no matter what they are. Only businesses get to deduct costs. I’m frankly amazed you’ve had any accountant who would have told you otherwise.
“but again, the point (did you miss it twice in a row?) is that depreciation is due to deterioration,”
Didn’t miss it, just didn’t have anything to say about it.
“we have a multi-unit building”
Then you can depreciate the portion that is not attributable to your residence. It probably isn’t a straight “4-units with 3 rentals means depreciate 75%” calculation, but you should surely be able to use depreciation to avoid paying a penny of tax on rental income.
Skeptic..
Depreciation is built into the tax code by lobbyists. Period!
No you can not depreciate primary residence.
3 you are either long or short housing and if prices go down you are benefiting by LOWER prices. You still have not given an example of anything that has increased in price in the last 6 months other than eggs. Thanks though. Now i have learned if I want to hedge out 100% of my inflation risk all I need to do is buy a fucking chicken!
p.s. You are one lazy bastard if you cant go to irs.gov and read this
hahaha, I thought the commentary on this site was smarter than the usual tripe at yochicago.com, but clearly it is not.
as I originally stated, depreciation is a well-known pheonomenon that involves a physical asset deteriorating with age. capital equipment, cars, houses, none of them IMPROVE with age, this is what economists call a no-brainer.
and ze:
“No you can not depreciate primary residence.”
try reading what is actually written, I have (and pay taxes for) a multi-unit building. if you can show me where I said you can claim depreciation on a SFH I’ll happily concede the point, but since I didn’t, you’re just continuing to harp on a non-point to avoid the fact you don’t know shit from shinola about economic indicators like inflation (and likely unemployment and god only what else).
if you think inflation has gone down due to the housing crash you’re welcome to your opinion, but that doesn’t make it reality.
eggs are only one example (dumbed down so people like you could
theoretically understand it) typically used, health insurance would be another, property taxes, blahblahblah.
the point is that the inflationary index used to calculate the rate is what has been messed up by lobbyists – namely, lobbyists working to show an artificially low increase in the overall creep upwards of goods and services.
the housing market is temporary, and will eventually surge back up – in the meantime, most other necessities are still moving in the “more expensive” direction. note that I am referring to the general trend, not some week by week fluctuation – so don’t waste your time showing me some random stat showing good A dropped in price from July to December, it’s not relevant.
but by all means continue embarrassing yourself, I love popping the hot air balloons of the self righteous.
Skeptic:
You wrote, on February 5th, 2009 at 9:19 am: “A home depreciates in value as it gets older, that’s why you can write some of it off on your taxes.”
Nowhere in that post did you say anything about “multi-unit”. Nor in the next post, where you cited “professional” tax accountants and were insulting. Then, in your third post on the subject, you note that you own a “multi-unit”. That still doesn’t mean your “home” can be depreciated (it can’t), but it makes the misunderstanding clear.
You decry the “commentary” here as beneath you, yet you’re not big enough to admit you were (charitably) unclear, but turn to insulting everyone else. Thanks, but no thanks, friend.
SH are you really serious?
“Okay HD – My student loans are at 2.25% for 30 years. Historically (not today but I am sure tomorrow) CD rates are in the 5% range. Do I need to do any further math?”
So you have the same amount of money in CD as you owe in student loans? That’s the only way your statement can even be taken seriously if you’re implying you make more in interest from the cd. Even then if you have equal amounts in the CD you must be a real idiot to not be using that money to completely pay off your loans.