Thought On Affordable Housing


I spent an awesome weekend camping with an awesome bunch of guys and their awesome daughters.  6 dads, 6 girls.  Lots of fun; little sleep.

However, we did have the chance to talk loud and sound smart after the little princesses went to bed.  One night, after awhile, the conversation touched, touched I tell you, on politics and specifically the housing crisis.

I need your thoughts.

I tried making the point that people who claimed they couldn’t take a job because it would force them to move were throwing up a canard.  I feel that as the value of the home they currently live in declines, so too would the home they buy have lost value and, in the end, they would come out close to even, if not more so.

A financial wizard next to me jumped out of his seat and called me a fool.  The cash flow position would be such that they would be out the money the home depreciated over the last 2-3 years and that while they may walk into a bargain, their cash position would be worse, much worse.

Uncharacteristically I decided that discretion would be the better part of valor and agreed that I was a fool.  However, when I came home, I took a nap.  And after the nap, I ran the numbers.  Check it:

So, you have 2 homes, one for $200k and one for $400k.  You want the one because it’s freakin’ awesome, you want the other because it’s more affordable.  You choose the cheaper home.

A 20% down payment is $40,000, thee other would have been $80,000.  You make the purchase and after the last 3 years the home is now worth $150,000.  A net loss of 25%.  You sell.  You have to kick in $10,000.  You’re down 10k.

Now suppose you want to buy that $400,000 home.  But, BUT it too has depreciated 25%.  It’s now worth $300,000.  The down payment is $60,000.  That, PLUS the $10k your down on the sale of your old home means your out of pocket $70,000.  Which is $10,000 less that the 80k you would have had to put down had the home been worth $400,000.

In this case, you get a $400,000 house for $10,000 less than you otherwise would have.

Am I right?

That is a good thing, right?

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7 comments
  1. Pino,

    The finance guy is right. Your example assumes that the $300k house is still worth $400k. Plus, even if it is worth $400k, you still have $10k less in cash today (because you don’t immediately realize the gain on the house.).

    Additionally, you also lose another $9,000 in cash on the 6% commission to real estate agents, that you otherwise wouldn’t lose if you’d stayed put.

    Then there are moving expenses, which a company may not cover in today’s buyer employment market.

    • pino said:

      Plus, even if it is worth $400k, you still have $10k less in cash today (because you don’t immediately realize the gain on the house.).

      Fair enough, but if I had bought it at $400,000 I would have been out $80k.

      Further, let’s take the same example. $200,000 home in Lubuck, TX. Your new job is in Buloxi, MS. You wanna buy a home there. If the TX house went from 200k to 150k you are down 10k in TX. If homes in MS took an equal hit a 200k home is now 150k. To buy the 150k home in MS you would have to come up with 30k. Combine that with the 10k you’re down in TX and you are out 40k. Exactly what you were out in TX.

      Yes moving costs should be included, but that incidental and not the fault of the housing crash.

      My point….if you took a loss on the way out, you are taking a gain on the way in.

  2. Just to add some interesting color. I bought my house at a 27% discount from its all time high. Now, it is worth 6% less than the price for which I purchased it. I believe it will be worth more than what I paid in 20 years, but I’m not so sure it will be in ten years.

  3. Branden Pronk said:

    I have been reading a great book titled “Economic Facts and Fallacies ” by the author Thomas Sowell.
    In this book he talks about the affect that rent control and other form of government intervention have on the inflation of housing prices. Although not directly related to the issue of selling your 25% depreciated 200k home to buy a 25% depreciated 400k home, it creates a better understanding of the forces behind housing prices as a whole. I highly recommend this book.
    (http://www.amazon.com/Economic-Facts-Fallacies-Thomas-Sowell/dp/0465003494/ref=cm_cr_pr_product_top)

  4. Branden Pronk said:

    sorry, *effect.

  5. Alan Scott said:

    Pino ,

    I’m usually pretty good with numbers , but I don’t even want to try . I am confused by the whole premise anyway . I can see being out settlement and moving costs but, you’d have to explain the cash depreciation to me again, because wouldn’t the cash depreciation be the same on their existing house verses their new house as was your original premise ? Assuming same initial value .

    As I see it , the question is really whether the value of the new job is greater than the closing and moving costs , plus whether the new area is likely to depreciate faster than the old area . If one is moving from an area without jobs to an area with jobs that should not be the case .

    Changing the subject just a little. I have a friend who lives in Maryland a little east of DC . He is looking for his first home . He and his wife looked at foreclosures and short sales in the under $ 200,000 range . Many of them were dumps with renters/squatters in them . It sure doesn’t seem the banks are going to get that inventory off of their books soon .

    They have since bumped it up to a max of $ 250,000 and the quality goes up markedly . The thing that surprised me is that an FHA mortgage for that priced home would have mortgage insurance of about $ 233 per month . He is looking at other mortgage options .

    • pino said:

      you’d have to explain the cash depreciation to me again, because wouldn’t the cash depreciation be the same on their existing house verses their new house as was your original premise ? Assuming same initial value .

      You have a choice of :

      A: $200,000 home
      B: $400,000 home

      Choice A costs 40k – 20% down.
      Choice B costs 80k – Same 20%.

      In 5 years each house has lost 25% of it’s value.

      A: $150,000
      B: $300,000

      If you bought A and now wanted to change your mind and buy B, you have to sell A and lose $10k. AND then buy B for $60k.

      The $10k loss plus the $60k down comes to $70k.

      And THAT is $10k CHEAPER than if you had ought B to begin with.

      What people forget is that you HAVE to live SOMEwhere.

      Now, Sean has a point in that you are out closing costs and what not, however, in the course of 5 years you have paid some principle so the $10k loss isn’t really 10k. However, y overall larger point is that I call bullshit on people that claim they’re stuck in their house. Sell it for market and buy another at market; you’re out nothing.

      Many of them were dumps with renters/squatters in them . It sure doesn’t seem the banks are going to get that inventory off of their books soon .

      The powerful disincentives of rental “rights” combined with “anti-foreclosure” programs prevents these homes from clearing.

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