10/02/2009

Able and Baker, Two People in the Subprime Economy

Here's what I found in my e-mail today:

Let’s discuss two California families and the real estate market. We’ll call them Able and Baker.

Able sold a home at the top of the real estate market for $500,000 and bought a new home for $800,000, paying 10% down and getting a new adjustable rate mortgage for the remainder. Baker stayed in their existing $500,000 home and we all applauded Able for selling at the top of the market.

There are many different opinions on the amount of the drop in prices but we can all agree prices have dropped, more in some areas than others. For our example, we will use a simplified 35% drop on all homes.

Today, Able is in their home with a loan still around $720,000 and can’t refinance because their value is $520,000. Their property taxes are still hovering around $8,000 per year (my note: but does he know about property tax reduction offered by the county?). This is called being underwater, and they could be facing tax problems because of forgiveness of debt, etc.

Baker decides to sell today and finally move up to a bigger home. Their home has dropped in value and they think they have suffered a loss of $175,000 as the home is worth only $325,000. They sell and buy the former $800,000 home for $520,000. They get a loan for $468,000 at the current rate of under 5% and their taxes will be about $5,200 per year.

They might also qualify for a $8,000 tax credit and other inducements in today’s market. Also, there could be appreciation as the market recovers and would you rather have appreciation start now on a $325,000 home or a $520,000 home? Plus they’re living in their move-up home and the family is happy. So, who is better off now. Able or Baker?

Do you think we're at the bottom of the market?

See http://www.juliahuntsman.com/ for property searches.

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