Home owner makes a future’s bet that prices will fall.
February 08, 2011 8:04 PM
“Ah, yes! Something new has been added!”
An old gag line from Loony Tunes cartoons popped into my head the other day
while talking to a homeowner. His story, which I explain below, was unique to
me thus far, but perhaps will be a sort heard more frequently if his logic
catches on. If so, “something new” will have been added to the sea of homes
currently washing ashore on our inventory beaches.
The individual last year intended to sell his current home, in order to move his
growing family into a larger one. However, when his home failed to draw any buyers
at the price he sought, he instead refinanced his home, in order to take
advantage of the historically low rates. Not surprisingly, in the refinance
process, his home was appraised at roughly 20% below the listing price he’d
tried to get. He barely had enough equity to refinance, but the loan got done.
His family, he reasoned at the time, could live in the smaller home a bit longer
while waiting for the real estate market to stabilize. If he sold his home in
the current market, a market he felt was pulled down due to foreclosures and
short sales, he would not be getting a fair price. After all, he reasoned,
homeowners like himself, current on their payments, with good credit and a stable
job, should not be selling into a mucky market unless financially forced to do
Now, with 2011 barely on its feet, this homeowner has had a big change of
heart and a very clever one. A contemplation of his situation led him to a new conclusion. If home
prices continue on their downward slide, he reasoned, his current home might
slip underwater. It that were to happen, the option of selling his current
home, capturing even a small bit of equity, and then moving up to the next home
Further complicating his worries would be a rise in interest rates. The future home he would buy could
go down in value. However, if he waited a year or 2 the mortgage rates could be in the 6-8% range rather than
the 4.75-5% he was looking at now. Making a 20-30 year outlook on his final home purchase it was starting
to make sense that selling his home at a lower price now would make up for it in the long run with the lower
He recognized that if his family which was expecting a new child
were ever to be able to move up, unless he
acted now, they might lose their best chance. So, determined that his
instincts were right, he put his recently re-financed home back on the market,
but this time priced it to sell. He dropped his asking price until he found a
buyer, and one assumes that with a clean seller, and a clean buyer, the fair
market price was reached. The final price was a full 32% below the price he’d
sought last year, and 9% below the appraised value in 2010. I thought about this and it
was making sense to me that this would be looked at 20 years from now as a good decision.
Voila! The “something new”! Owners with homes currently above water, but who
previously planned to sell only after the market seems to stabilize, may
conclude that this is actually the last and best chance to retain whatever
amount of equity they currently have.Should this happen in large numbers,
there will be a new slew of houses washing up on our beaches, with owners who
will take what they can get for fear of having to take even less or , worse,
being stuck in an underwater home next year.
So, has “something new been added” or is this an anomaly? Only time will tell.
Logan Mohtashami is a senior loan officer in his family run Mortgage Company, AMC Lending Group, which has been providing mortgage services for California residents since 1987. LoganMohtashami.com
(c) 2011 Benzinga.com. All rights reserved. This material may not be published in its entirety or redistributed without the approval of Benzinga