Housing Tax Credit and Sullivan County

The $787B economic stimulus bill signed into law this week includes an $8,000 tax credit for first time home buyers who purchase a house anytime in 2009. (The housing tax credit is similar to the $7,500 credit available during the 2nd half of 2008, but differs in a few key ways.) Here's the thumbnail:

• A tax credit of $8,000, or 10% of the purchase price of a home priced under $80,000, that can be applied to either 2008 or 2009 taxes. This is an actual tax credit, not a tax deduction.
• Limited to first time home buyers, or home buyers who have not owned a home during the previous three years.
• The full credit is available for single purchasers with incomes up to $75,000 and couples with incomes up to $150,000, with a phase out of the credit for incomes slightly above these levels.
• The credit only applies to the purchase of single family residences, including houses, condominiums and coops.
• The home must be a primary residence. Second homes don't qualify. (Even if you rent in the city, and the house you buy in Sullivan is your first purchased home, it is not your primary home if primary place of residence remains in NYC.)
• The credit is no longer a 15 year loan that must be repaid (like under the 2008 program.) However, if you own the home for less than 3 years, the credit must be repaid.

The housing tax credit has implications for Sullivan County, and not all good. The core of the second home market here over the past few years has been younger 30-something buyers who feel priced out of buying in the city. They wanted to buy some real estate, and often chose to continue renting in the city and put their "buy energy" into a place in the country.

That "rent in the city / buy in the country" equation that's favored Sullivan County may be changing. Coop, condo and home prices in New York City and the surrounding suburbs, by all reports, are dropping. Even in Manhattan, prices could drop 20%. That makes buying a primary residence more attractive. Many industry watchers believe that the government is going to work to push mortgage interest rates lower, with a target of 4.5% frequently bandied about. That makes home ownership more affordable. Sweeten the pot with the $8,000 tax credit, and buying that primary home in or around NYC starts to look very appealing.

A couple earning $150,000 can qualify to buy roughly a $500,000 to $600,000 property. That probably won't get you a fancy loft or a junior 4 in Chelsea, but it covers a lot of the real estate landscape in the NYC area — a house in Maplewood, a new construction one bedroom condo in Brooklyn, a 2 bedroom coop in Inwood or Washington Heights, a single family home in Jersey City or even a 3 or 4 bedroom coop in Riverdale. (Keep in mind, also, that FHA and conventional conforming loan limits are substantially higher in the New York Metro area.)

I don't think the stimulative effect of the tax credit will have a significant immediate impact on NYC real estate. But I expect that some buyers will begin shifting their thinking and getting their ducks in a row. They'll be following price trends in the city and surrounding areas, to see if and how far they drop. They'll be watching mortgage rates to see if they actually do move into the mid 4% range. If those two factors come together — lower prices and lower interest rates — I expect that many city renters will seriously consider pulling the buy trigger in a big way, probably starting during the 3rd quarter. And that means that some of those folks just won't be buying up here, at least for the time being.

Comments

[ar]

This blog promotes interest in the purchase and sale of second homes because that is the business of the blog's owner. Nothing wrong with that. But there is something that I think gets obscured sometimes on this blog: That is, what an extraordinary luxury it is to have a second home. A second home is simply not something that comes remotely close to a "need." Consequently, I humbly suggest that if the analysis indicates a close call on affordability, it is ridiculous for someone to consider stretching for a second home. In other words, unless the money to buy/maintain the second home (including debt service) is sheer gravy that the buyer will never miss, it is nuts for that buyer to go for the second home. It is no answer, I think, to talk about how everybody has different values. Nobody -- nobody -- needs a second home, and any home purchase claims an enormous share of most people's financial resources. So, if the buying decision pivots on a few thousand dollars without which the purchase is a stretch, it is imprudent to buy the second home. That was true during the boom, when decisions were fueled by the illusion that the purchase was a great investment certain to appreciate, and it is true today, when we see unmistakably that real estate is as risky an investment as any other.

[SHO]

There is not a family who makes less than $150,000 who can afford a residence in NYC (rent or own) plus a weekend house in the Catskills. A family on that income is either in a rent-stabilized apartment in NYC or has a very long commute into the city. So there is no one who qualifies for this tax credit who has the choice between buying in the city vs. the Catskills.

This bill simply does not apply the NYC real estate market.

The real question is how the COLLAPSE of NYC will effect the Sullivan County real estate market. A 20% drop in some segments of the NYC market has already happened. There is a long way down still to come. Wall Street paid 20% of the state revenue. The top 1% of earners pay 40% of the state income tax. How are we going to continue to pay for the public services that make the city and safe and a nice place to live? Real estate prices may drop dramatically in the city, but the question will be whether it's still a place where people will want to live (think Dinkens era).

This recession may be temporary for our country, but it's going to be a lasting structural change for NYC. NYC will no longer be the Mecca of finance, and there will not be a need for high income earners to put up with communal living in an apartment building while paying exorbitant taxes.

The big banks are impaired and they are the only reason NYC is the center of finance. They are now partially owned by the government, and bureaucrats are now making decisions on compensation. The travesty is that government control is further destroying the value of the banks, which we tax payers now partly own. The smaller boutique banks who didn’t take government money can now afford to attract top talent from the big banks and they can be more competitive on the price of their services because they don’t have the huge overhead. Since the banks' only true assets are people, they will not be able to compete with smaller boutique banks. With high taxes, high cost of living, low quality of living, there is little reason for a boutique bank or hedge fund to be located in NYC. Add to that the dramatic changes in technology such as video conferencing, we will see a steady movement of high income earners out of the city--permanently. And they will take their tax dollars with them.

For the ones who do stay, pay will not be as high as it was for financial services because the industry is undergoing a structural change. In the last ten years, compensation on Wall Street rose to the highest levels ever on an inflation adjusted basis. This industry moves in cycles, and we won’t see those levels for another 30 years. So, even if the impact of movement outside of NYC is less dramatic, the incomes (and tax revenues) generated by Wall Street will not bounce back even when the rest of the country bounces back.

I could write another chapter on what this means for Sullivan County, but I am curious to hear what others think. Certainly Sullivan County will still offer an environment that can’t be found anywhere else 2 hours from NYC.

[Nick]

Responding to this:

"Consequently, I humbly suggest that if the analysis indicates a close call on affordability, it is ridiculous for someone to consider stretching for a second home. In other words, unless the money to buy/maintain the second home (including debt service) is sheer gravy that the buyer will never miss, it is nuts for that buyer to go for the second home. It is no answer, I think, to talk about how everybody has different values. Nobody -- nobody -- needs a second home, and any home purchase claims an enormous share of most people's financial resources. So, if the buying decision pivots on a few thousand dollars without which the purchase is a stretch, it is imprudent to buy the second home."

I guess you can't really argue with this point of view without defining what you mean by "stretch" and "close call" and so on. Those are very subjective terms. So I don't know who you're talking to or what your metrics would be.

But assuming I understand your general principle I disagree. I don't know of too many people aside from the truly wealthy who have money that's "sheer gravy" that they will "never miss." I think for the dramatic majority of us living in the real world there's no money that we wouldn't notice missing. The question is more about trade-offs. I bought a second home in Sullivan because I value having some space and a place to get away from the city. There was definitely some stretching involved, but it depends on what you mean. I qualified easily for the mortgage and the loan, and could have afforded to spend more, sort of. But I bought at the upper limit of my price range (hence "stretch") because that's where I saw the properties that I could realistically see still being happy with 5 or 10 years from now, and not feel constrained or compromised.

As a result I've had to cut back drastically on other expenses. We used to do quite a bit of travel and ate out in the city often and the like, now we spend our weekends refinishing trim and sanding floors, or will for a bit at least. The couple vacations we still take are now done almost exclusively with airline/hotel points and miles and cut drastically back in terms of cost. We don't order takeout anymore on weeknights. We haven't bought much in the way of clothes for awhile. And so on, you get the idea.

The goal is to get our house, which is being renovated, up to speed, be able to pay for all that in cash as we go for the updates and work and furniture and the usual stuff. We can handle the mortgage with little problem once these expenses are taken care of, but add in all the stuff you need when you first buy and need to get up and running and it's a stretch. We're going to be really strapped this year, and maybe next year.

But so what? I'm buying stuff that I'll still have once I've spent the money. That cash would have gone other places, maybe to stuff I don't need. When we make sure to drive to the cheaper supermarket and buy in bulk rather than the corner store to be frugal that's not the biggest deal. Assuming I can "stretch" through this I will have paid cash for many of the massive improvements/renovations to the place, over and above a 10% down payment. The loan on the house will be something I can pay, and even if I assume the house loses 25% of it's value (doubtful as I bought recently, after the main decline, but still possible of course) then it'll still be well above what I owe on it.

So I'm stretching to purchase a second home. I could have bought a much cheaper place. I could have borrowed more money for the renovation work so I don't have to come up with tons of cash right now to pay contractor bills. And so on. But by stretching I have something that will easily accommodate a family (I'm recently married, with no kids yet but sooner or later...) and I can't see ever growing out of it. I intend for my kids to have memories of playing in the woods around it that they bring their kids too one day. Literally. Who knows what the future holds, my job is highly stable (as much as anything these days) but something could happen, I could be ruined, forced to sell. I could also be hit by a bus tomorrow. There's a limit to how much you can obsess over this stuff.

But I disagree with your premise. Real Estate is not as risky an investment as any other. Many investments (most) are far more risky. The decline in the S&P recently dwarfs real estate declines. Leverage changes how that affects people, but it's still true. And you don't get to have dinner parties or lazy Sunday afternoons inside your lovely stock portfolio.

But that's assuming you compare a second home purchase with investment at all. If you were to live very frugally and put all the saved cash in treasuries then sure, that would be less risky. But then what do you do all day? Most second home purchasers are making a VERY different trade off, between consumption and consumption. They go from spending money on bed and breakfasts and hotels to their second home. They cut down on going out to expensive NYC restaurants and spend the money on a nice range and a trip to the farmers market or the Shop-Rite. They forgo spending $300 on tickets to a concert or show on a Saturday night and spend it on an antique light fixture on a Saturday afternoon.

There's no question when it's framed in those terms. Middle class or upper middle class NYC residents who shift money from immediate consumption to stretching (ie forgoing things they used to do) for a second home may be making a very smart long term decision. The mortgage payments won't change (assuming conventional financing) and sure taxes and upkeep matter but I'll assume you're not making a stretch there, that would be crazy. In a number of years you'll still have the house and the stuff you put in it. A weekend house is a very good substitute for certain consumption goods. Most obviously spending on vacations and weekend trips, but also spending on nights out in the city. I don't know if you live in NYC yourself, but if you did you may have had the experience of taking $200 out of the ATM to meet friends for food and drinks and find yourself needing to go back to the ATM in a few hours. The city can bleed you financially like nothing else. Hell I have to pay THIRTEEN DOLLARS for a six pack of beer in bottles at the local SUPERMARKET. Not just the corner convenience store, the big supermarket. That adds up fast.

If people are "stretching" by reorienting towards a second home I don't see the problem. If people are mortgaging themselves to death and are basically unable to afford something without racking up massive credit card debt, and would be financially screwed by a blown boiler or new roof... well that's different. That's not "stretching" that's outright irresponsible.

But I suggest you get a little Zen going in your life. You said this:

"Nobody -- nobody -- needs a second home"

Correct. Nobody needs anything except air, water, food, shelter, and perhaps companionship. The rest is all optional, from the TV to the iPod to the David Hasslehoff poster on the wall. Or whatever it is that describes every other single thing that you own. You don't really need any of it. But of course we all buy stuff.

Being financially responsible is a good value to have. Sometimes being financially responsible requires stretching a bit to purchase an asset that you believe will be valuable to you in the future. Those things aren't incompatible.

[compo]

Well said Nick. I am thinking about purchasing a second home in Sullivan County and my family is in the above $150,000 income level. We are not rich by any stretch and we own our primary residence in NYC so the tax credit has no bearing on our decision. We too would have to shift our spending away from the vacations, restaurants, take out, etc. but that is something we are willing to do. We will still be able to fully fund two 401K accounts and put aside money for my daughter's education. The savings beyond that may not be significant. I already have a cash reserve to ride out any sudden changes in income.

I ask myself do I want to go to the grave with more money in savings or do I want to think about me, my wife and my daughter running around the woods or playing in the snow just before I leave this life. I choose the latter.

I have learned life is too short to try and anticipate every potential turn. Sometimes you have to forge ahead and take what ever life delivers. AR's paint brush is way too wide.....

[cfranch]

The collapse of NYC real estate seems to be accelerating. Just read www.Urbandigs.com, use the search function on www.streeteasy.com or browse the articles at www.therealdeal.com. What will this mean for Manhattan? I moved from the 'burbs to Manhattan in 1982 to start my career. I rented a 2bdrm apartment in the far west village for $750. It was much easier for young, creative people to migrate to Manhattan then. It has been nearly impossible for the same demographic to come here in at least the past 10 years. The city has suffered as a result. Madonna nailed it and said NY had become boring. I expect the crumbling of rents will allow the return of a class of people any city desperately needs. NY reinvents itself. None of this can be good for Sullivan or other getaway counties in the near future.

[Anonmoose]

I think you are on the money with this one David. I'm a young buyer who bought a very modest home in Sullivan because I love the area, but also because I could not afford the city. I'd love to get in on this tax credit to buy a primary home, but I'm out of luck.

[i am eating ramen forever now]

Me too!

[cp]

I think many who post on this board (along with our host) are relative newcomers to Sullivan County and major recessions.

Many have only had property up here for less than seven or eight years - or post 9/11 - and have yet to really feel what a true recession can do.

Try not to compare what we are presently going through with say the time period of 2002-2003 (post DotCom / post Enron) - but to major recessions such as 1982 - 1983 or 1973 - 1974.

Take a look:
http://www.fiendbear.com/

I would suspect that more than a few on board were not even born back in 1974. Very painful -especially for discretionary purchases.

CP
---------------------

Today's article about The Fed:

http://finance.yahoo.com/news/Fed-downgrades-economic-apf-14402221.html

Fed downgrades economic forecast for this year, warns of long road to recovery

Jeannine Aversa, AP Economics Writer
Wednesday February 18, 2009, 2:49 pm EST

WASHINGTON (AP) -- The Federal Reserve on Wednesday sharply downgraded its projections for the country's economic performance this year, predicting the economy will actually shrink and unemployment will rise higher.

Under the new projections, the unemployment rate will rise to between 8.5 and 8.8 percent this year. The old forecasts, issued in mid-November, predicted the jobless rate would rise to between 7.1 and 7.6 percent.

The Fed also believes the economy will contract this year between 0.5 and 1.3 percent. The old forecast said the economy could shrink by 0.2 percent or expand by 1.1 percent.

The last time the economy registered a contraction for a full year was in 1991, by 0.2 percent. If the Fed's new predictions prove correct, it would mark the weakest showing since a 1.9 percent drop in 1982, when the country had suffered through a severe recession.

The bleaker outlook represents the growing toll of the worst housing, credit and financial crises since the 1930s. All of those negative forces have plunged the nation into a recession, now in its second year.

"Given the strength of the forces currently weighing on the economy," Fed officials "generally expected that the recovery would be unusually gradual and prolonged," according to documents on the Fed's updated economic outlook.

Against that backdrop, unemployment -- now at 7.6 percent, the highest in more than 16 years -- will keep climbing and stay elevated for quite some time, the Fed predicted.

Fed officials anticipated that unemployment would remain "substantially" higher than normal at the end of 2011 "even absent further economic shocks."

The Fed forecast calls for the jobless rate to dip to between 8 and 8.3 percent next year, and to between 7.5 and 6.7 percent in 2011. All those projections are worse than the Fed's previous estimates and would put unemployment higher than the normal range around 5 percent.

Employment is usually the last piece of the economy to heal once the country is out of recession and in recovery mode. Businesses are usually reluctant to ramp up hiring until they feel confident that any recovery has staying power.

Under the Fed's new projections, the economy should grow between 2.5 and 3.3 percent next year. Fed officials "generally expected that strains in financial markets would ebb only slowly and hence that the pace of recovery in 2010 would be damped," according to the Fed documents.

Fed officials, however, predicted the economy would pick up speed in 2011, growing by as much as 5 percent, which would be considered robust.

Still, given all the economy's problems, there are risks that the Fed's forecasts could turn out to be too optimistic.

And a few Fed officials -- none are identified -- feared that it could take five or six years for the economy and employment to get back into a sustainable mode of health.

On the inflation front, the weak economy should mean that companies will keep a lid on price increases this year as they try to lure skittish consumers.

The Fed expects prices to rise between 0.3 and 1 percent this year, down from a projection of between 1.3 and 2 percent in the fall. Prices will pick up slightly in 2010 and 2011 as the economy strengthens.

For now, Fed officials are more worried about falling prices, than rising ones.

The Fed didn't use the word "deflation," which is a dangerous bout of falling prices, but officials noted "some risk of a protracted period of excessively low inflation."

Falling prices sound like a gift at first -- at least to consumers. But a widespread and prolonged decline can wreak more havoc on the economy, dragging down Americans' wages, and clobbering already-stricken home and stock prices. Dropping prices already are hurting businesses' profits, forcing them to slice capital investments and lay off workers.

America's last serious case of deflation was during the Great Depression in the 1930s. Japan was gripped with a period of deflation during the 1990s, and it took a decade for that country to overcome those problems.

[henry]

Right on the money, dave. I was a member of the "30-something buyers who feel priced out of buying in the city" club. Actually, I was not priced out but felt NYC prices were more "bubblicious" than other places, and just wanted to own a place. Further, buying a lake house with a lower price tag was less of a risk. ie 20%+ drop would cause less of a loss in (absolute) dollars. While a fan of SC, I never ended up buying b/c I just couldn't stomach 50K+ in annual all-in costs (even if I could afford it) given all the summer vacation substitutes that one could afford with 50K. I now am looking in the city... though I will likely rent a bigger place (for less money)... before I buy in manhattan in the next 1-3 years... as it is still a MUCH better deal to rent and since I see further downside in manhattan apartment prices in the near term.

Few additional points... Dave, as you consider affordability (lower prices and interest rates, partially offset by lower income, assets, employment, credit availability and desire to lever up for the american dream) in nyc, you need to consider the alternative: renting. Rents are also falling fast given the well documented issues in NYC. With the runup in prices and consequence that it has been about 2x as expensive to buy versus rent in recent years, there is still room for manhattan apartment prices (already down 20-25%) to fall. Further, with respect to manhattan, jumbo loans are the norm, and we have not seen much movement in jumbo rates as banks have to hold them on the books at this point (ie can't sell).

As an aside... Interesting nyt article about manhattan office space being down as much as 50%. Crazy that, only a few years ago, prime spaces were being sold at 3% cap rates (like treasuries!) under the assumption of rapidly rising rents. Now cap rates are skyrocketing while rents are falling and debt is much more expensive and less available. Ugly combo... and residential is facing a similar issues. Here is the link: http://www.nytimes.com/2009/02/18/realestate/commercial/18value.html?_r=1&partner=rss&emc=rss

[Jeff]

Here's the perspective of one guy who rents in the city and owns in the country: I bought my place in 2004 because I thought Manhattan real estate was ridiculously overpriced, unsustainable and headed for an inevitable fall. (Of course, I also love it here.)

I'm old enough to remember the housing downturn of the late 80s/early 90s. In the city, the market's peak to trough took nearly 5 years. In my borderline, gentrifying neighborhood (Manhattan Valley on the West Side), you couldn't give apartments away. Two-bedroom places that sold in 1987-88 for $200K were in foreclosure, and getting picked up for $35K. (I rented an enormous 3 bedroom/2.5 bath apt with a back yard steps from Central Park. When my roommates moved out in 1991, I literally couldn't find new roommates to rent the other two bedrooms, in part because of rising crime during the Dinkins years. And it was cheap even then: total rent for that apt. was $1,400, or less than $500 per share. I wish I could have bought then, but I had no money. I gave up the big apartment and rented a small rent-stabilized one bedroom a block away for $595 per month. Ah, those were the days!)

That's a long way of saying that I don't think we have even begun to see price depreciation in Manhattan.

But while I think David is right that big drops in NYC home prices could alter the math for some who were planning to buy in the country while renting in the city, it won't for all. Yes, a second home is a luxury. But a modest place in SC is a lot less of a commitment than buying a place in the city. It's not irrational for younger buyers to make a modest home purchase in SC while maintaining flexibility to chase better deals on a primary rental home in the city.

In either case, I don't see the $8K tax credit having much of an impact on that decision.

On a happier note, I encourage people to see this article in the latest issue of the Atlantic Monthly:
http://www.theatlantic.com/doc/200903/meltdown-geography

It discusses which regions of the country are likely to win and lose as a result of the economic crisis. Interestingly, it argues that NYC is poised to do better than most other areas of the country.

[David Knudsen]

Really interesting thread going here. I wasn't quite expecting the fierce defense of decisions to forego urban trinkets for country dirt. The arguments about making that tradeoff are very compelling. However, Nick, I don't think your $13 buck six pack is Bud Light. Not withstanding your taste in beer, the city can be like a vacuum cleaner to your wallet. I can easily dribble a hundred dollars away in an evening without a major entertainment purchase like a Broadway show ticket.

I would not agree with the statement that a New York City family making $150,000 can't afford a place in the country. True, you probably aren't living in Manhattan, or at least in Manhattan south of 168th Street unless your parents lived in the Ladies Garment Workers Coops in Chelsea and you inherited, or you have some super rent stabilization deal. But you can be in Riverdale, Kew Gardens or Jersey City and probably make it work. And here in the country, you probably can't afford a renovated farmhouse out of the pages of "Country Living" or a house that could grace the pages of Dwell, but there are plenty of options on the more affordable end of the scale.

A number of commenters hit it on the head — you decide your priorities. If having a place in the country is a priority, then restaurant meals, four buck cups of coffee and that leather jacket at Barneys — even if its on sale — fall on the sword.

[Nick]

Dave, you got me, I'm talking about Brooklyn beer in this case. But when Bud Light in bottles is $10.99 anyways what would you do?

Brutal I tell ya, brutal.

[henry]

You decide your priorities GIVEN YOUR OPPORTUNITY SET. Income and the cost of goods (including home prices) are important parts of the equation/decision. Changing prices do and should change priorities.

I think that we all applaud old-fashioned sacrifice to achieve the american dream, home ownership. Unfortunately, all too often in recent years, "stretching" has meant a more aggressive or creative mortgage. The result of which has been home price appreciation that far outpaced income growth in the last decade. We are now seeing that this is unsustainable. The great news is that lower home prices open the market to new buyers that have been priced out (or chose not to chase spiraling home prices).

Until, as inevitably must happen given the build in inventory in most places and the lack of income growth in the near term, prices adjust to a level that people can "stretch" to without a creative mortgage (ie return to historical norms of income to home price), markets will remain stagnant. Unfortunately, ASKING prices have only just begun to adjust. In most cases, unless the buyer can negotiate a significant reduction or is willing to take a significant loss for the joy of owning dirt, then old-fashioned stretching is not going to lead to a happy outcome.

I think that those that "stretch" now by postponing home ownership will SOON be rewarded by the cut in asking prices to come. With this in mind, it is time to start getting your ducks in order.

[Nick]

That's a good point. There's different kinds of stretching. There's the creative financing stretching, and the spend as much as you are comfortable affording or maybe a bit more stretching. The former is a recipe for utter disaster, as we've seen. When I bought my place I was adamant about conventional financing, even though my rate wasn't incredible (and I could probably lower it this year and may) and it's possible I could have saved money via other means. But I wanted the absolute certainty that my mortgage could not go UP under any circumstances. Taxes and insurance and fuel costs might rise, every piece of wood in the house could start to rot, who knows. But that payment is utterly fixed for 30 years. And I put down 10%, could have put down 20% but as the house required renovation I decided to hold that back in cash rather than put more down and then deal with financing more money for renovation. Either way the equity in the house is well over 25% of its appraised value 5 months ago.

To me that's just a no-brainer. I am loosely insulated from major changes in my monthly bills. Upkeep of course, but proportionally that's not the biggest deal. And I'm loosely insulated from a situation where I'd have to sell at a loss and/or ruin my credit. If I suffered job loss and disaster, or disability, or even something random like a need to work overseas and just HAD to sell, it's unlikely I'd be underwater in the house, at least not by much. I might lose tens of thousands of dollars. Many tens of thousands. I might have already lost some since I bought in a theoretical sense. But it's money I already earned, not borrowed money.

To me that's not stretching at all. That's just basic common sense. And I agree, there was a massive lack of that in recent years. To me stretching is making a sacrifice to buy something you want. Or maybe paying a little more than feels comfortable in order to not have to go through the process again and trade up later. But that's stretching with your OWN money, not with a bank's money.

To me the test is pretty simple. Is it conceivable that you could pay for the house and its mortgage, etc, if it doesn't appreciate at all for years, if your income doesn't change for years, and if you don't refinance for years? If not then you're doing it wrong. Most of the people who got into trouble would have failed that simple question miserably. Read www.irvinehousingblog.com for more stories than you can count on this topic.

Then there's a second test, something like this: If the house were to lose a substantial but not-insane amount of value (say 25%) and your income were to drop the same amount (say 25%) would you be utterly financially ruined and have no recourse? Or would it just hurt a lot and cause you to have to change your lifestyle, perhaps severely, but in a way that wouldn't cause disaster and bankruptcy. If that's the case then you're being highly responsible.

To me stretching might involve being a little iffy on the second test. But failing the first test is just rank irresponsibility. Not the same.

[wesco]

Buddy,
You are living in a fool's paradise.

Read the following in today's New York Times:

http://www.nytimes.com/2009/02/20/nyregion/20food.html?_r=1&hp

Wesco

[henry]

Nick,

We agree on conservative financing... though I consider 10% down and 30yr mortgages to be in the creative camp. That said, why not take it if you can get it (as long as you can afford the conservative version)? Then, I am a big fan of making a higher 15yr payment on a 30yr mortgage... living frugally to do so if needed.

I also think that your second "stress" test has value (especially given the uncertainty in the world today)... as long as you are applying a current price of ~25% less than peak (notably and roughly, this is where deals are being done today but generally no where near ask prices). To put some numbers around it, take Dave's "benchmark" (3br, 2 bath house on 1/4 acre on swinging bridge lake from this month's report) that would have sold around ~560K at peak. Bluntly/crudely, take 25% off from peak to get to a current price of $420 (noting that I think that the recession and events surrounding lehman have pushed all high end property down at least 20% from a June 2008 price, not 9% as dave suggests in his monthly report). Taking another 25% off for a stress case gets you to $315K. Now, I don't believe that such a house will get to $315K as I believe there is a broad pool of buyers that would step in before this point (assuming that there are still banks in this country). Still, it is a good downside stress case for exactly this reason.

Sellers should be doing a similar calculation to consider their risks. Suppose one bought the benchmark place for $200K many years ago and is asking for 560K (peak price) if not more. They might be able to sell today for $420, an insulting number versus the 560K that they could have gotten a few years ago but attractive versus a downside case of $315K. A large drop in asking price may make a lot of sense for a seller as they consider their situation. Maybe even to 399K to get ahead of the curve and get a sale.

These downside cases should be taken seriously as the market is down 25% and is likely to head down farther. I have written previously that I guesstimated prices had to go down 30% to normalize the historical income to home price relationships (more or less by market) and could overshoot. As the recession keeps getting worse, I think there is downside to my guesstimate.

For me, given the uncertainty in the world, I am happy to be sleeping on a pile of cash (well diversified) and look forward to the opportunities in a year, once I get a sense of how bad this recession is going to get. It is a good time to be especially conservative and patient.

[Bix]

Nice long thread and only one post about the Federal Reserve! I agree with a lot of what's been said. I rent in NYC (rent stabilized, a good deal but not mind-boggling), and I had gotten sick of throwing my money down the hole, but I could not afford a place in the city that was worth a damn. Also, having vacationed in Sullivan Co. when I was a kid, I've always had a certain nostalgia for the area.

Then some people we know bought in Livingston Manor and the envy factor crept in.

So for me it was a very hard decision, and simply involved waiting until I had the current income to plunge ahead. I don't want to be like my father, who had massive savings when he died and always lived in a cramped apartment. There's an old Jewish saying, "Shrouds don't have pockets."

Besides, regardless of the downturn, having real estate is a good investment decision. I didn't exhaust my savings by any means, though I have to admit that they're a lot less nowadays. For people of modest incomes there really is no better place for a summer home.

[Bix]

I meant to say above NOT a very hard decision.

[Nick]

Bix you and me sound real similar. I'm also stabilized in the city in a place I'm VERY happy with. It's too small for a family, so one day it'll have to go, but just like you I spent summers as a kid running around in Sullivan and when a couple things all came together at the same time I was ready to do it. I also really like DIY stuff, a lot, and honestly spending an entire weekend refinishing trim or building stuff adds so much to my life, which is otherwise spent in front of my computer and out in bars and whatnot talking to people about stuff because that's my job. Some people think old house = headache. I think it's a good excuse to get my hands dirty and fall asleep tired. Everyone has their own set of reasons.

And henry, if you think a 30 year conventional is "creative" financing I don't know what to tell ya. As mentioned the 10% down was just on paper. Of the total amount spent on the house and renovation it's about 65% financed and the other 35% paid in cash. Assuming that I've taken some hit on equity due to the decline, even since this past fall, gives me a rough estimate of 20-25% equity, or so. I dunno, when the renovation's done I'll see if David's willing to swing by and tell me what it's actually worth and if I've just ruined my life. ;-)

But even so, a 30 year conventional mortgage at a decent interest rate is pretty much as safe as things go. I don't see any reason to do a 15 year mortgage with rates as they are and the government willing to subsidize the interest for you. The key being that you've got no chance of payments rising, which has been the death of most people. Agreed that 10% isn't enough of a buffer to remove any chance of being "underwater" but assuming you can make the payments and have a reserve of 1-2 years of payments in other cash-equivalent investments you're not really at much risk of being totally stuck. Beyond that I'm paying an additional 10% a month (ie my scheduled payment plus 10% more) just to knock the principal down a little faster. But I like having the option of slowing or speeding that up and not being tied to a 15 year level payment. If I buy in the city one day I might need that wiggle room.

[True words]

If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.

Thomas Jefferson

[henry]

Nick,

We are pretty close to 100% agreement on the topic of financing. 30 yr mortages, along with buying down the interest rate, ARMs and other devices, were used to get people into places that they couldn't afford under a traditional 15yr fixed with 20-25% down. That was the only point. I didn't mean to suggest that you were in the over-levered camp "as you can afford the conservative version." Further, as noted above, you should take the cheap financing (with "wiggle" room) if offered.

[b.]

Good morning all,
It's Friday.

Friday, February 20th to be exact with one more week to finish off the second month of '09.

How about the current three month median and averages?

Here we go...

===============================================================
Three month - SULLIVAN COUNTY, NY: 11/20/2008 through 2/20/2009

Average: $160,000* (One home @1.75MM skews data)
Median: >>$126,000<<

Total Sales in three month period: 98 Homes
================================================================

Dave's posted three month data are:

Average: 178k
Median: 149k

==================================================================

That is a current drop of:

(-15%) in the median to $126,000
(-10%) in the average to $160,000
===================================================================

No matter how you cut it - we are still fa l l l l i n g.

And, as far as the "luxury buyers" that Dave mentions - take that with a grain of salt (or sugar) - please read the following:

http://www.bloomberg.com/apps/news?pid=20601087&sid=a0O1vDxlPEBA&refer=home

Jumbo Loan Defaults Rise at Fast Pace as Rich Suffer (Update1)

By Bob Ivry

Feb. 20 (Bloomberg) -- Luxury homeowners are falling behind on mortgage payments at the fastest pace in more than 15 years, a sign the U.S. financial crisis that began with the poorest Americans has reached the wealthiest.

About 2.57 percent of prime borrowers who took out jumbo loans last year were at least 60 days delinquent, a percentage reached within 10 months and the fastest since at least 1992, according to LPS Applied Analytics, a mortgage data service in Jacksonville, Florida. That’s almost twice as quickly as 2007 and a level 2006 owners haven’t attained after almost three years.

===============

Have a pleasant weekend.

B.

[David Knudsen]

b., I can't replicate your numbers from the Sullivan MLS, so it's clear we're using different data sources. Given that, you're not comparing apples to apples. I pull from the Sullivan MLS, without merging in any other data from the Credit Bulletin or Greater Hudson MLS. When I pull from the Sullivan MLS for single family sales, Sullivan County, start date 11/20/08, end date 2/20/09, I get 81 sales with a median sales price of $129,000 and an average of $165.076.

[alex]

Considering being only 2 hrs from nyc, Sullivan is still worth every penny, at the right price. The day will come again when today's geniuses and PH. D's, who seem to be so sure about the economy, as on this blog, will regretfully moan "Oh Geez, should have bought then, only if I knew".

It's us same geniuses and PH. D's from the city who push the market to foolish levels, then let the realtors toy with us, and now bitch and moan.

A decent home selling for 300K, should really be selling for 150k, but again, we the city geniuses buy them at 300, now bitch that were lucky if we get 200. I think the average home on Freda's website is probably in the 400's.....are we that dumb....you thing permanent sullivan residents are buying these...by the way, I happen to be on of the dumb ones, like all you..!!!!

[b.]

Knudsen writes:
"When I pull from the Sullivan MLS for single family sales, Sullivan County, start date 11/20/08, end date 2/20/09, I get 81 sales with a median sales price of $129,000 and an average of $165.076."
-------------------

Well, that's right about what I posted above Dave.

Your numbers (or mine) for the median and average are off by only 5k. Not too bad.

b. dk
160k / 165k (-5k)
126k / 129k (-3k)

Regardless, that's quite different that the current three month data (11/1/08 through 1/30/09) you have on your home page by about 15%.

The trend is down by friend.
=====================

Average: $160,000
Median: >>$126,000<<

[Nick]

A 30 year mortgage is new or creative? Google and read about the HOLC. Longer term mortgages date back to the 1930's and were extremely common by the 1950's.

Maybe you're distinguishing between first and second home mortgages, or something. But my grandparents had a 30 year mortgage, it's not exactly some recent creative innovation. Lower down payments -- yeah that's more of a recent trend (excluding first time buyer programs, GI loan stuff, etc..). But the 30 year term can't be blamed for the current disaster.

[henry]

That is not my point. A 30 year mortgage is not new, but it was used and promoted in a different way in recent years. Namely as a vehicle (often combined with others) to lower monthly interest rate payments. As many were (erroneously) only looking at the monthly payment to determine affordability, they then found that they could "afford" a larger home.

A 30 yr mortgage likely made more sense for your/my grandparents as people stayed in jobs/homes for long periods. What is the median duration of ownership of a home today? 5 years? 7 years?

Honestly, 30 year mortgages have their place in the world. They just shouldn't be used to justify affordability in most cases.

[b.]

A 30 year fixed rate mortgage with 20% down is still one of the most common home loan package in the past and present - and also one of the most conservative - since the individual goes through a credit and income check along with anteing up some of their cash to put down in their home.

Simply put, chances are that if there had been more regulation about which individuals were approved for home mortgages during the past five years - and those applicants were required to put a minimum of 20% down in equity - (or take out PMI) if they had less, we wouldn't be in the crapper that we're in today.

Of course, you would not have seen the run-up in prices from 2002 to 2007 and accompanying froth as well.

Did you check out those three month medians boys? $126,000. And, Henry, you better hope that some of the Sullivan home buyers have adjusted their median home duration for more than a decade since it's going to be about 2013 - 2015 or so when we get back to 2006 peak numbers.

That's if we do.

B.

http://en.wikipedia.org/wiki/Fixed_rate_mortgage

http://en.wikipedia.org/wiki/Subprime_mortgage_crisis

http://en.wikipedia.org/wiki/HOLC

[David Knudsen]

I've been very clear that the trend is down. In my last market conditions report, I posted single month data as well as the 3 month average, and the trend from November through January was down, with January at a $129K median. The really troubling aspect of recent sales data isn't so much price as volume. So far in February, there have only been 10 closed single family sales reported in the Sullivan MLS. Even if there is a surge in closings over the next 8 days, it's still going to be a sales volume bloodbath.

[mal]

B: According to the 2008 Sullivan County Report, the median home ownership period for second home owners in Sullivan County is 16 years.