Wednesday, May 2, 2012

Foreclosure!

No, not me, not my island.  My little enclave of sanity has been long paid off, over twenty years ago, no mortgage for me. It is not so hard to do when you buy a shack which is pretty much what I did over 40 years ago.  It was the worst house in the neighborhood and about 800 square feet with no foundation when I bought it for $8,375.  No typo there, that is what I paid.  $1,500 down and $75 a month payments.  Over the years as I could afford it I improved it, first with a foundation and then additions until its present 2,200 square feet.
What it is worth to me is home.  It is where I live and dream, share with my wife and raise my daughters. It is a continuous "art project" and alters with my needs, once adding a back yard shop and now my art studio, my organic garden.  It is my island of sanity in a pretty crazy world.  I have never borrowed a dime off it, never treated it as a bank.
   At the height of the housing market when it seemed that housing was inflating by thousands of dollars a day, they claimed my house was worth $335,000.  Those were like lottery days when there were thought to be so many winners.  Some people would refinance every couple of years and turn their "profits" into super vacations and new cars, expensive clothes and nights on the town.  Money was easy this way.  Monopoly Money.  I admit as a contractor I benefited from this craze and got a lot of work improving other's houses as they mortgaged theirs to add ornamental fencing and pretty nice entry gates.  Those were the days, I had a lot of work.
   Then it crashed.  Although the crash in the housing market has caused a lot of pain and the financial ruin of many, it just had to come and I was predicting it years before reality struck and foreclosures became common.
Housing would double in price and wages were stagnant.  The math just didn't add up.  Today they say my house is worth about $165,000, just about half from its height.  It makes no difference, it is my home and not for sale but I will explain how this adjustment came to be.  It is quite simple math really.
   Banks loan money based on a house's value.  There is an appraisal and comparable sale figures of nearby houses are compared. What one paid for a house means nothing, it is all determined by the sale of the house next door, or down the street.  If your neighbor's house gets foreclosed it will drastically bring down the value of your house.
    Here is a case in point:    Ten years ago, before the housing boom, a friend of mine bought a small "fixer-upper" house for $45,000.  He put a great deal of work into it adding an expensive bathroom and a modern kitchen, new flooring and windows.  Pretty much a total remodel and renovation, even adding a studio shop in the backyard.  Then the market "took off" and he saw another opportunity (I am thinking it must have been a house and not a home) so he sold it, "flipped it" as the expression became, for $127,000 and bought another.  This is an older neighborhood of 900 square foot homes and nothing fancy or modern but housing went nuts and the new owners soon refinanced in order to take advantage of the times and buy a new truck
(with their "winnings!").  Now the mortgage became $177,000!!!  The neighbors were happy and they pretty much did the same thing and soon all had new cars sitting in their driveways.
   Then the dream became a nightmare!  The guy who bought my friend's house, this house with a $177,000 mortgage lost his job.  Something went wrong and there are no "living wage jobs" in our town anymore.  He stuck a For Sale Sign in the yard and moved to Colorado where he did find work and the house didn't sell.
Finally it was foreclosed upon and sold for $95,000, that is a loss of $82,000 for the bank!!!! AND an automatic devaluing of the neighboring houses by almost HALF!  Comparable values.
   This is not the end of the story.  The IRS will look upon the loss of $82,000 by the bank as a gift to the owner (the guy who moved to Colorado to find a job) and he will have the tax burden as if he received this money on next year's Income Tax.  We are not out of this mess yet.
   A friend of mine has a little garden nursery selling plants and  vegetable starts to the gardeners.  He tells me he no longer sells apple trees and I asked him how is that?  It takes, he explains to me, seven years for a young apple tree to produce apples.  People don't stay in a house that long.  Not long enough to make it a home.

3 comments:

Tiffiny said...

Well, you just explained this better than anyone else I've heard talk about it. What doesn't make sense to me is why banks would rather take such a loss on homes than work with people. It seems if they did they would eventually get the full amount of whats owed and people could stay in their homes. Allot of people who lost their homes was due to balloon payments. If they could have just got the payment at an affordable rate they could have kept them.

You were smart not to jump on the bandwagon with mortgages.

CrimsonLeaves said...

We've lost a house before and it does hurt. We haven't yet bought this one but hope to by year's end. It needs much much updating but still, it is home and I don't want to lose it.

CrimsonLeaves said...

And I agree with Tiffiny. We tried to get the bank to work with us and they simply would not. That house is now valued at half what I paid for it.