Ok.. I am stupid.
How does that work? A property is worth what it is worth. How does this whole extra 5% increase in value based on closing costs thing work?
The house I live in currently appraises for about $20-25k less than I bought it for. But I can still afford the payment on the loan contract that I am responsible for. So the reduction in value really has nothing to do with my ability to pay that which I agreed to and contracted on.
The resale value could drop down to 1/2 what it currently is.... I can still afford to pay what I contracted for.
I knew that the market was very likely to change over the 30 year loan. I knew it could go down as well as up.
I still make sure I pay what I contracted to pay regardless.
I'm not being sarcastic when I say this...just honest.
The bottom line is....a property is only worth what someone is willing to pay for it.
However....just because someone is willing to pay a particular price....does not mean the property will appraise for the same price.
Let me try to explain the way it works... so that it makes sense... and why property values are dropping....
A 100-house subdivision is developed and takes three years to "build out". A builder asks for a specific price on each house in the subdivision. The first houses built cost $200-250,000, depending on upgrades an individual buyer picks. This price is based upon cost of materials, initial land costs and development of the infrastructure (streets, curbs (curbing is more expensive as is the addition of sidewalks), sewers(FHA and VA loans require that houes be hooked up to a sewer system if available from main road, so if price is to be within FHA or VA guideline price, developer will do sewers rather than septic systems), utilities, any subdivision amenities such as neighborhood pool, tennis courts, soccer fields, etc.
During the 3yr time span of completion of the subdivision, prices per house increase due to materials cost, and desirability of the subdivision due to location, quality of construction, and the number of houses still available.
When the first 100 are built, given the choice
and ability to qualify for a mortgage....most buyers are going to pick a new house rather than a "used" house. The buyer is able to pick their own paint colors, carpet/vinyl, and oh yeah, the builder will "throw in" a few hundred dollars in upgraded light fixtures. And while the house is being constructed, the wife decides she wants a screen porch..so that's another $5000 and built-ins in the family room for knick-knacks, the TV/sound system, and books and that's another $1500 (builtins can be added into the mortgage payment and furniture can't).
So, while that's and additional $6500 in cost and added to the mortgage...if the mortgage interest is 5%...that additional $6500 is only costing $32.50 per month...not counting taxes and hazard insurance. (don't get technical with me on the interest rate....math is not my friend, and I'm making this easy for me to figure out)
Now, on this house...it's
cost has increased only $7000 (remember the builder kicked in some money for upgraded light fixtures)....it's
value has increased probably by $10000 because of the screen porch and don't the builtins look pretty? The "gently used" house down the street does not have either and they only have the original light package... which usually is only around $1500 in this price range and depending on the number of rooms that is rapidly gone through - here, smoke detectors and doorbells are included in the light fixture "package" and smoke detectors are required in each bedroom, the kitchen, attic and garage. I sold new construction for 5 years in this price range up to $400000...and it really made buyers mad when they found out the smoke detectors and doorbell ate into their lighting cost.
Given the choice....a buyer will most likely pick the new house over a resale at this point, because the
price of each is quite similar. Therefore, a seller who needs to sell because of job transfer/loss - neither of which is usually predictable, divorce, etc....in other words....real life happens. This puts the seller between a rock and a hard place.
While the second hundred is being built...depending on the popularity of the subdivision....buyers will start looking at the "gently used" houses if there are any on the market. The new ones have increased up to $250-350000, the resales are being sold for 5-10% above what was paid for them. Have to cover a realtor's commission and some appreciation depending on the local market. Still somewhat difficult for a resale, but it is starting to even out a bit from what it was...
While the third hundred is being built...the new ones have gone up to $300-400000....so the "gently used" resales are looking pretty good, because they are less and the seller/buyer can buy a can of paint, and replace the carpet cheaper than a brand one can be built. Plus there is now the time factor....a buyer might not have the time to wait for a new house to be built. Now the resales become more attractive, because they are appealing to a buyer who doesn't qualify for the higher priced new ones. They have
increased in value due to the
cost of the new homes being 100k higher than the originals cost.
At the end of 3 years ...there's a lovely subdivision. Popular area, good schools, landscaping is growing up, ta-da, ta-da.
Keep in mind...where there is one lovely subdivision....there are more. They are like rabbits...new ones keep popping up until all the land is gone.
Then the
original values of the homes increase, because there are now only resales in the area. And obviously, over time...building materials and labor costs increase....so what was $250000 4-5 yrs ago has now appreciated the yearly percentage amount for the area, more if the subdivision is in a highly desirable area based on quality of schools (this is a biggie) or subdivision amenities, location, convenience to shopping, interstate access, and medical facilities. All of these factors help to determine the
VALUE of the properties.
Remember that value is in the "eye of the beholder"....cost is reality of what is would cost to build
or replace in the event of natural disaster or fire.
A homeowner's original mortgage has not changed...
unless the homeowner refinanced for better terms, to take money out of the equity, or has taken out a home equity loan. What the original mortgage amount was is now not the same amount of the home's current value or cost to replace.
All is right with the world......
Until the housing recession started about 2 years ago...at least in my area....it has varied across the country due to job loss, over building, etc.
Now in this 300 unit subdivision, there are 30 houses on the market. The next subdivision over is smaller, so it only has 15 on the market. The problem now has become....are there 45
qualified buyers out there? Maybe...maybe not. Chances are ...there aren't.
Remember...real life has happened. Job loss, divorce, illness, kids. Many many mortgages are done based on a
two-income family. Only one job has to be eliminated to create a crisis.
Out of these 30 houses in the subdivision on the market...2 or 3 of them are foreclosures. The sales price for these can be 10-50% less than a normal resale price...often even more depending on the condition. What a homeowner will do to their home when they are losing it ....can be extremely destructive. Light fixtures, appliances, sinks, toilets, cabinets, counters can all disappear.
Those homes in the subdivision that are not foreclosed on...are competing with each other to get sold. One lowers their price, the rest have to in order to compete....domino time has started. Then the seller runs into the problem that they cannot sell their home for what the mortgage balance is....and the seller doesn't have the difference to bring to the closing table.
This all starts the decrease in
value of the home. However...it still does not decrease the
cost of the home, in other words....the amount of money needed to replace the home due to natural disaster or fire. Therefore a homeowner cannot reduce the amount of homeowner's hazard insurance...if anything it needs to be increased....nor are the property taxes going to get reduced unless the homeowner goes to the tax assessor and
can prove that the value of the home has decreased from what the tax assessor has assessed the home ...and good luck getting that accomplished.
With the exception of specific low income housing which had/has it's own set of rules....the majority of people do/did not get mortgages that they aren't qualified to receive. The guidelines are very specific with income to debt ratios.
It used to be that foreclosures didn't happen much because the job loss factor wasn't as high as it is now. Plus you add in over building, and there are just more homes on the market than there are buyers.
One of the easiest ways to help the mortgage crisis, is not to decrease the
amount of the mortgage, but to decrease the interest rate. Take ALL of those mortgages that have interest rates in excess of 5%, down to 5%. That would eliminate a huge part of the problem. Many homeowners would be able to afford their payments, reduce the number of foreclosures and/or resales for which there are no buyers. It would help stabilize the housing market all across the country. It would stop the values of homes depreciating. The banks would not make as much money on mortgage interest, but they also wouldn't be losing so much on foreclosed property that they have no hope of recovering the loan amounts. It would help to keep the dominoes standing...they would still be wobbly, but at least they wouldn't be crashing like they are now.
I have to get to work....if you want ....I'll explain how appraisals for mortgage loans and home equity loans are done...though there are a couple of members here who are mortgage lenders who could probably explain all this better.
I do between 30 and 40 Broker Price Opinions on properties per month. These are done for mortgage lenders who are looking at foreclosing on the property. I also do them for home equity loans, refinancing and short sales. I do them for Chase, Citigroup, Countrywide, Bank of America, HSBC, Regions Bank, among others. These are not appraisals, but help to determine what the property will sell for on the current market.
VA loans have been one of the worst for loaning 105% on a property. I understand the theory behind it...to help the military individually for serving their country....however, based on my experience, which is limited as this has not been a "high" military area (no bases around here) until recently with all the military personnel now qualifying due to WOT....the loans themselves actually do a disservice to the buyer. The loan allows the buyer to overcommit in that the buyer can get in for very little money. I have only done one VA loan....it cost the buyer only $388 to get into the house. He was a recruiter, who was transferred a year after they bought the house. They were immediately upside down. Not that they couldn't afford their mortgage payments, but they couldn't sell the house and pay a realtor's commission without bringing money to the closing table. They ended up renting the house. I have had several VA foreclosures...2 of which I had to do the evictions. I cried.
