Underwater owners by town

We are one of the underwater owners. Our condo value depreciates very rapidly. Similar unit that is on the market is asking for $209.9K and the last recent similar sold unit is $194K. We cannot afford to sell it because that would mean we need to pay $35-40K out of pocket to repay the loan. Our 7 year ARM is resetting in 2 years and I don't think the bank would refinance us because we owe more than the home value. We cannot go into foreclosure either because that would mean we cannot buy another property for at least 3 years. We need to move to a single fmaily home for the sake of our 2 young kids. We don't want them to grow up in a condo lifestyle. We're not in financial trouble, we can afford two property with 20% down payment but we rather own one property.

The only option now is staying put or buy the second home and rent out the condo. But then again, we don't want to be a landlord...too much headache.
What a mess!

Have any idea what their statistics are based on? I have a very hard time believing that there are so many places in the boston area where less than 20% of the people who bought between 2005 and 2008 are underwater. Based on the asking prices I'm seeing these days, even in places like Newton, I would think that well over half of people who bought during that time period would be underwater in almost every town.

Cash-out refinancing aside.... does this mean that 40% of all homes in some of these towns have changed hands since 2005? We all know that not to be the case. I think these numbers need some additional scruitiny.

Now with my gripe aside. If this information is accurate, all I can say is "Wow".

[Ed. Note: Good catch. It's the share of buyers since 2005, as the map says. I've corrected the text of the post.]

it is going to get much, much worse...

ni : "We cannot go into foreclosure either because that would mean we cannot buy another property for at least 3 years. "

3 years? Yeah right. Try at least 7 years.

ni: We have one young kid and another due any day now. We were motivated by the same things as you and last year moved from a condo near the city to a house just outside the city. Because the housing market had already started its decline, we couldn't get what we wanted for the condo and ended up renting it (thus "accidental landlord").

It doesn't sound like you have much choice other than renting frankly. $35-40K is a crazy amount of money to lose. If you choose to go the landlord route, here is my deep wisdom after one whole year of it grasshopper:

If the condo is close to the city, rent for a few years and you probably won't lose as much. Between the eventual market return to "normal" and inflation, values will start to increase again, albeit by maybe 4 or 5% instead of the 10% we saw for awhile.

In two years your mortgage goes adjustable, but there's probably an annual cap on how high it can go: figure out a worst case scenario for when it happens. If you can save and swing it for a couple of more years, that's giving four full years for things to recover enough to reduce your loss.

Rent should pay for all housing costs, but I know many people lose a little every month. Property depreciation is a very big chunk off of your taxes, and will probably make up for that.

If the condo is close to the city (especially one of the colleges) and a T stop, you won't have too much trouble renting. And you'll have a better choice of tenant, which is for me the key. I can deal with getting a plumber there at 1 a.m., what keeps me up at night is the thought of six months without rent while paying a lawyer to evict some scumbag. Pick your tenants well. When you get good ones, keep them happy.

If the place is in half-decent shape, it's easy work. Anticipate and fix problems before they happen.

Keep a nice amount of untouchable liquid savings for when the boiler finally goes and the above mentioned scumbags stop paying rent.

Get umbrella insurance for when your tenant's buddy slips on the stairs and sues you. $100 a year will get you $1 million extra insurance. Important.

Re: foreclosure and home sale repurchase, I'd consult an bankruptcy attorney about home purchase abilities after foreclosure or bankruptcy. It may be different -- for better or worse -- than you imagine. Also, if Barney Frank's new relief bill is actually enacted, that may impact lenders' abilities and approaches. It apparently is framed as a voluntary program, but he has been clear that if banks do not take advantage of it, then less voluntary measures could follow. Tough words, we'll see as to action.

Accidental Landlord, I hope you are referring to two unrelated events when you say "the boiler finally goes and the above mentioned scumbags stop paying rent." If the boiler doesn't work, then your tenant is fully justified in withholding rent, both morally and legally.

guppy troup: 3 years after foreclosure or 2 years after bankruptcy on FHA loan.
4 years after bankruptcy for conventional loan; not sure about foreclosure.

accidental landlord: Ah...that's how you became accidental landlord. Those are the things I am afraid of for being a landlord.

Editor - OK, so when we see 40% underwater, it means 40% of buyers since 2005 are underwater. Thank you for the clarification. In that case, this map appears to be pretty much inline with what I have gathered myself (looking at my own towns).

There is a lot of money sloshing around in Massachusetts. I think a lot more than many of the readers here realize. I have said before and I'll say it again. The family that stretched to buy the 900k home in Natick financed it 95%. The first time buyers of 350k homes in Framingham are financed 98%. The family that bought the 3 million dollar homes in Newton and Wellesley and Southborough paid CASH. That is why, when their home values go down, they are not underwater. This is also why housing market rules are very different at these high price points. They can afford to wait, and they can also afford to sell for less and not lose much of their net worth. Its just a different world than the one that Joe Sixpack lives in. It shouldnt be news to anybody that there is a large wealth gap out there.

With that in mind, expect continued low percentages of underwater buyers in the most prestigeous towns.

Ah, the new era of real estate: jingle mail.

The scary thing is we are fast approaching even those who put down 15-20% being upside down. My wife and I almost bought a home in '07 in an affluent area. We offered what we thought it was worth...with 10% down ( at the time it was projected as a low ball offer and the RE agent was insulted).. The House had been on the market for over a year with no takers. It didnt feel right so we pulled out of the deal... Several months later and after our initial offer, the house went under agreement for what we offered. The home has already lost about 40K. I still believe its got another 60K to lose.. So glad we passed on it... Its not even worth that.. I have friends that bought McMansions the last 3 years with minimal cash down.. They are already looking at 100K loss in equity... Absolutely Brutal!.

We are about to enter a serious crisis... Sit back and enjoy the show...

I wouldn't be lumping in Southborough with Newton and Wellesley. I grew up in Southborough and I am 27. Its a great town but the level isnt close to Wellesley and Newton and Wayland... Right now there are 14 homes for sale listed above 1 Million and 2 of them are over 2 Million. Wellesley has 80 homes listed over $1 Million, 36 over $2 Million and 18 of those are between $3 Million to $7 Million. Again I love Metrowest Northborough Southborough was the best place to grow up but I went to Babson in Wellesley and its not even close.

Middle, that's pretty funny. Care to explain how people in a town (Wellesley) where the average family income is $183K happen to have $3M in cash lying around? Sure, that's a decent income, but it would still take a lifetime of saving and uncharacteristic frugality to come up with $3M. Bottom line: if you didn't pay in cash personally, you are being naive to think that your house's value is protected because everybody around you is rich - chances are, your neighbors borrowed just as much as you.

Yeah No One is dropping Cash to buy high end homes like that... This isnt the Hamptons... Heck even Curt Schilling had a mortgage when he bought his Mansion in Medfield.....

yes, I meant the two things separately. Have money set aside in case either the boiler goes, OR the scumbags stop paying rent. I'm not a slumlord...yet!

The risks do make the heart thump a bit faster, but so does the prospect of losing $35-40K. Think of it this way: what could possibly go wrong while renting your condo that would cost you more than $35,000? If you have proper insurance: nothing. Probably nothing even close. So your burden will be the extra work for maintenance, etc., which I'm telling you is not that bad if the place isn't completely falling apart. (Fat caveat: I've only been at it a year.)

Newton, Wellesley, and SOUTHBOROUGH???? That's a which of these ones is not like the others. My friends and I are the "Newton/Wellesley" demographic. Not only would none of us consider living in Southborough, I frankly hadn't even ever heard of it before this blog. I wouldn't even be able to find it without a map. Nor have I ever heard of someone wanting to find it.

At a guess, I'd imagine southborough is a typical McMansion exurb. Not exactly the sort of place that outperforms in a recession.

Yes, there is a lot of money in Boston. But it thinks Weston is way out there - if I walked into the nearest hedge fund and proposed they live southborough they'd think I lost my mind.

What is the "Newton/Wellesley" demographic? Talk about elitist.... Southborough is a beautiful town with some great houses and happens to be residence of many top executives around Mass.

the condo is mint condition and 80% of the residents are retirees and the other 20% are young families like ours. It is quiet/safe/elevator/garage parking/haymarket bus line at the doorstep and etc...
You're right nothing could go wrong unless the tenant(s) start destroying the property. Oh yeah, if the tenants stop paying rent; just stop paying the mortgage and let bank deal with the mess :) win-win...

Well yes, the tenants could start destroying the property, but that's an unlikely scenario, and certainly wouldn't cost you more than the $35,000 you said you'd lose on a sale.

If they stop paying rent the solution is to have enough savings to pay the mortgage+lawyers fees until you can evict them, then cleanup. I've spoken to a few people who have been in that distressing and horrible situation, and I tend to think in terms of 6-8 months if they're stubborn. Again, the key is to pick tenants wisely.

It's only free advice, take it or leave it as you will.

Now here's the real nightmare: inflation fears become serious and a concerned Fed begins raising the short-term interest rate. It's currently 2%, but as recently as 2000 the rate was 6%, so let's use that. It depends what index your adjustable rate is tied to, but let's say prime + 2%. Prime is 3% above the Fed rate. So come adjustment time in 2012 you're conceivably paying 9% on your loan.

http://www.moneycafe.com/library/fedfunds.htm

Yikes. But still, you've hopefully bought enough time that you owe less than $35,000 (you've been paying principal for four years remember) and there are more willing buyers out there than there are now.

It's a scary game to play, but given the options....

WD, Elitist? obviously. That's what we are talking about.

I'm sure Southborough is pretty. That isn't the question. The question is whether it is in the same league as Newton/wellesley/Concord/licoln/weston. The answer is obviously not.

First of all, "top executives" don't usually make that much. Secondly, I'd be curious to hear a list of the C level people in Southborough

I personally would choose Southborough over licoln. Low taxes, great schools, 495-pike and the train. Ben please give us the stats of Newton vs Southborough? Just like today, you have some driving ahead of you. I would like to see what does 550k buy me in all the towns discussed. My guess is the Pres of EMC and most of the other top guys live in Southborough. great stuff all around and Kev is right, southborough is no Wellesley.

@anon: actually the average income in wellesley is well over $200k , and it's over $300k in the wellesley hills zip code. weston has the highest average income in the boston area at over $500k (based on 2005 data on the IRS website). i'm an accountant so i think i have a pretty good sense of how much money is really floating around in certain towns. i don't think people are paying cash for $3M homes in newton and wellesley like someone else mentioned, but they're definitely putting down a good chunk for the down payment. Contrary to popular belief, the more expensive the house, the higher percentage the down payment usually is.

whoops. not that anyone cares, but my last calculation was woefully wrong. Fed rate at 6% means prime rate at 9%, plus 2%=11%. (Unless your annual cap leaves you below that.) The horror...

Yeesh. With math skills like that I wouldn't take my advice either.

Whoa! that's just for 1 year adjustment? I may be read my loan document incorrectly. It says the rate adjustment per year is capped at 2%. Isn't that meant, whatever it may be, if my initial fixed rate is 4.25%, the max first adjustment I could ever get is 6.25%? Am I wrong on this?

Yes the loan rate will never get passed 9% (that is the life time cap).

Accidental Landlord-

You are wrong Fed Funds Rate is 2.0% and the Prime Rate is 5.0% Most Mortgages go off of LIBOR anyway.

No you're right, if it's capped at 2% per year, then in the first year you'd only go two 6.25% maximum.

Using my numbers: My 5-year ARM is at 4.5% and adjusts for the first time in October. It caps at 2% a year, maxing at 10.25%. If it were tied to an index that tracked the Fed rate, and the Fed decided to raise rates dramatically to fight inflation, conceivably I could be paying 6.5% the first year after adjustment, 8.5% the next, 10.25% the following.

The point is that for me, that kind of increase is the real nightmare. These days if you don't have at least 20% equity in an investment property you ain't getting a refi. So you're stuck paying whatever the whims of the Rate Gods dictate.

As it happens my rate is tied to the 1-year Treasury Constant Maturity (an average of a bunch of short term treasuries), which I'm learning does NOT follow the Fed rate. To my dismay the CMT has been increasing the past few weeks despite the Fed rate going lower. Yeesh.

A typical CEO at a startup can write themselves an annual paycheck for 150k, and then cash out 40 million when/if their company sells. It happens all of the time.

There is much more to wealth than just income.

Also, in towns of Wellesley and Newton, there is a lot of old money. If you are born rich, you dont even need a salary to stay rich.

I didnt create the wealth gap. I dont approve of it either. It is what it is, and Im sorry to be the bearer of this news.

Some of the largest and most expensive homes built west of Boston are in Southborough. I personally know of two homes whose construction alone exceeded 12 million, each, not including land. You should Zillow the north section of town and draw your own conclusions before questioning me further on this. Since 2000, the money being drawn by that little town is crazy. Unfortunately it does have an issue with highway noise, which places like Dover dont have to dea with.

great point Middle. I came very close to buying in Southborough last year. You could clearly hear the highway noise in almost every new house that was for sale.