Malcolm Berko Column
Be careful: An ARM may end up costing an arm and a leg
Dear Mr. Berko: In May of 2005 we bought a condominium on St. Pete Beach, Fla., for $885,000. Five months ago my wife and I lost our jobs in the travel industry. We immediately put our condo on the market and have lowered the price twice, finally to what we paid for it, even though our unit looks out over the Gulf of Mexico. While our purchase price was $885,000 our mortgage is an $878,000 adjustable rate at 4.75 percent. Last week we got a lowball offer of $795,000, which is the only offer we've had since we listed the unit. At first we thought the offer was a joke because shortly after we bought our unit, two other condos in our building just like ours sold for $1.1 million. Then we were shocked at the possibility we might have to take an $83,000 loss.
Now we are frightened that we may have to keep the unit making mortgage and interest payments and paying maintenance taxes and insurance until the market gets stronger. That would certainly bankrupt us because we can't afford the $7,000 monthly costs. It's killing us and the possibility of taking an $83,000 loss would wipe out all our savings, our two Individual Retirement Accounts and we'd still be about $18,000 short. We've read that the experts believe housing prices will increase this year between 3 percent and 7 percent. It seems that interest rates have stopped rising. So do you think when rates begin to fall again that the condominium market will get stronger? If so how long do you think it will take?
D.S.
Delray Beach, Fla.
Dear D.S.: You folks are in big trouble and so are tens of thousands of others who bought homes with zero money down using an adjustable rate mortgage. And the banks may be in deep do-do, too, because in almost every instance the amount of those mortgages exceeds the market value of those homes. In many of those instances, they may be forced to swallow the differences.
I'm quite familiar with that section of Florida and I know that the number of resale listings has increased fourfold in the past five months. Your unit is competing against a surging glut of thousands of resales as well as a record number of unsold new units sitting empty and a soaring number of unsold "new builds" that will soon triple the already swollen unsold inventories.
Now I know my advice is going to be hard to swallow, but the crux of the matter is that you've got to consider the circumstances and take your loss and lump it.
The housing boom - no matter what the experts, real estate agents or builders tell us - is going bust. I learned years ago never ask a barber if you need a haircut or a banker if you need a certificate of deposit. And never ask a real estate agent if he thinks property prices will come down. Of course housing experts (who are these experts?) are predicting a 3 percent to 7 percent increase in property values this year. But these well-paid idiots completely ignore the fact that there wasn't a sane reason for the astronomical rise in housing costs during the past five years when Middle America's wealth imploded in the bear market.
During the past five years wages haven't moved off the dime as inflation averaged a modest 2.5 percent to 3.5 percent increase, depending on the government agency with whom you visit. But housing prices on the other hand exploded just as the tech and dot-com booms when Lucent was trading at $80, Juniper Networks was $240 and Ciena was $150.
Common-sense valuations suggest that as of January the prices of most homes and condos were 40 percent to 50 percent too high. Even if we experience a strong growth in the wage base, a surge in gross domestic product and inflation at 5 percent, I believe the average home value can fall 25 percent to 30 percent in the next three years. Last year, 45 percent of new-home buyers, like you, bought their homes without a down payment and 35 percent of all new mortgages were interest only.
Making matters even more precarious, over $3 trillion in mortgages will adjust during the next 12 months. So consider a typical $250,000 ARM with a 2 percent cap rate-hike and a current $1,100 monthly payment. The monthly payment climbs to $1,424 after the first increase and then to $1,750 after the second increase. That's $650 a month, or $7,800 a year. Then plug in soaring insurance costs and higher state taxes and the annual nut just increased by almost $10,000. I'd like to know how a middle-class family taking home $40,000 after taxes can afford an extra $10,000 and still fill up their gas tanks.
So sell that unit before the buyer rescinds his offer.
Be careful: An ARM may end up costing an arm and a leg
Dear Mr. Berko: In May of 2005 we bought a condominium on St. Pete Beach, Fla., for $885,000. Five months ago my wife and I lost our jobs in the travel industry. We immediately put our condo on the market and have lowered the price twice, finally to what we paid for it, even though our unit looks out over the Gulf of Mexico. While our purchase price was $885,000 our mortgage is an $878,000 adjustable rate at 4.75 percent. Last week we got a lowball offer of $795,000, which is the only offer we've had since we listed the unit. At first we thought the offer was a joke because shortly after we bought our unit, two other condos in our building just like ours sold for $1.1 million. Then we were shocked at the possibility we might have to take an $83,000 loss.
Now we are frightened that we may have to keep the unit making mortgage and interest payments and paying maintenance taxes and insurance until the market gets stronger. That would certainly bankrupt us because we can't afford the $7,000 monthly costs. It's killing us and the possibility of taking an $83,000 loss would wipe out all our savings, our two Individual Retirement Accounts and we'd still be about $18,000 short. We've read that the experts believe housing prices will increase this year between 3 percent and 7 percent. It seems that interest rates have stopped rising. So do you think when rates begin to fall again that the condominium market will get stronger? If so how long do you think it will take?
D.S.
Delray Beach, Fla.
Dear D.S.: You folks are in big trouble and so are tens of thousands of others who bought homes with zero money down using an adjustable rate mortgage. And the banks may be in deep do-do, too, because in almost every instance the amount of those mortgages exceeds the market value of those homes. In many of those instances, they may be forced to swallow the differences.
I'm quite familiar with that section of Florida and I know that the number of resale listings has increased fourfold in the past five months. Your unit is competing against a surging glut of thousands of resales as well as a record number of unsold new units sitting empty and a soaring number of unsold "new builds" that will soon triple the already swollen unsold inventories.
Now I know my advice is going to be hard to swallow, but the crux of the matter is that you've got to consider the circumstances and take your loss and lump it.
The housing boom - no matter what the experts, real estate agents or builders tell us - is going bust. I learned years ago never ask a barber if you need a haircut or a banker if you need a certificate of deposit. And never ask a real estate agent if he thinks property prices will come down. Of course housing experts (who are these experts?) are predicting a 3 percent to 7 percent increase in property values this year. But these well-paid idiots completely ignore the fact that there wasn't a sane reason for the astronomical rise in housing costs during the past five years when Middle America's wealth imploded in the bear market.
During the past five years wages haven't moved off the dime as inflation averaged a modest 2.5 percent to 3.5 percent increase, depending on the government agency with whom you visit. But housing prices on the other hand exploded just as the tech and dot-com booms when Lucent was trading at $80, Juniper Networks was $240 and Ciena was $150.
Common-sense valuations suggest that as of January the prices of most homes and condos were 40 percent to 50 percent too high. Even if we experience a strong growth in the wage base, a surge in gross domestic product and inflation at 5 percent, I believe the average home value can fall 25 percent to 30 percent in the next three years. Last year, 45 percent of new-home buyers, like you, bought their homes without a down payment and 35 percent of all new mortgages were interest only.
Making matters even more precarious, over $3 trillion in mortgages will adjust during the next 12 months. So consider a typical $250,000 ARM with a 2 percent cap rate-hike and a current $1,100 monthly payment. The monthly payment climbs to $1,424 after the first increase and then to $1,750 after the second increase. That's $650 a month, or $7,800 a year. Then plug in soaring insurance costs and higher state taxes and the annual nut just increased by almost $10,000. I'd like to know how a middle-class family taking home $40,000 after taxes can afford an extra $10,000 and still fill up their gas tanks.
So sell that unit before the buyer rescinds his offer.
