San Diego Housing Bubble News and Analysis

What part of town ?

When does the ARM reset ?
What is the index and margin of the reset ?

Since you are a few years into loan it is likely to increase significantly. Is the 500-700 per month negative based on the I/O loan ?

Is 8400 per year (negative cash flow) a lot of money to you ?

How much will your cash flow improve by moving ?
Raise in new job/ lower cost to rent.

If your new job pays more and your new rent (in the place you move to) is less than you can rent your old place for, you could consider keeping the place and renting it out.

1 BR condos are at the bottom of the food chain. Your unit seems to be on the leading edge of the bust (down at least 25% already). It's value will probably drop to the point where someone could buy it as a rental and have positive cash flow. That means another 50K or more in depreciation.
That said, it might be difficult to sell at the price you want to sell it. FOr the 70K or so you might have to bring to closing, you might be able to carry the negative for about a decade. Sometimes it's too late to sell.

Is your credit good ?

What about working on a rent to own program. Give soemone the purchase to buy at the end of a period of time. Structure the contract so that it is win win. You ahve income coming in , they are responsible for upkeep. Might be a decent fit for you.

Long time lurker, first time poster. I just want to say, this blog is outstanding, I've enjoyed reading commentary on here for months, but have been shy to post. I'm only 25, and new to the real estate game, this site has taught me so much.

I am in a similar situation. My wife and I bought a condo in Carmel Mountain Ranch about 2 1/2 yrs ago. Wish I had discovered piggington before then, but thats in the past! We bought a 1 BR condo for 275k. We got a govt CHFA loan which is 30yr fixed at 4.5%. We put 20% down also. The place seemed like a great deal at the time, but now Im seeing an identical unit listed for short sale at 235k....ugh

My wife and I would like to start a family at some point, and dont know what to do with our condo. After reading this site, I think its best that we rent a house and rent our condo for several years until the market improves. I dont know if its even possible to rent a place with a CHFA loan, so we may have to refi. Our combined income now is about 95k with great credit. Our mortgage with $200 HOA is about 1600. So most likely looking at a 500 or 600 dollar expense to rent out

We are looking to move sometime summer/fall 2008. What do you guys think?

PS: sorry to hijack your thread 2008, I just dont want to post a new topic thats similar.

I'll have to dig up my mortgage papers when I'm at home, so I don't know the Index or Margin. The reset occurs at the end of 2010. The condo is in Rancho Bernardo. Great credit

I could probably rent out between 1100 and 1200. My cash out is $1700

New gig and situation has my income increasing slightly and I would pay in rent about what I could rent out my condo for.

Its definitely not a good situation - just trying to figure out the best route to take. My instinct is to hold on to the place and see what conditions are like in 2010. Either way, it beats coughing up the cash if I were to sell now.

CMRJoe

I would look and see if the CHFA loan is an assumable mortgate. If you look to sell it could provide a value add and get you more money for your home. Run the numbers and see what it is worth to save 1.5% on a mortgage. If someone is willing to pay 235k but have to take out a 6.5% mortgage they ahve $1485 monthly payment. With your 4.5% rate you could charge up to 293K and the person would have the same payment. This give you a nice bargaining chip if you find the right buyer. Good Luck

I didnt even think about that, great idea.

The CHFA loan IS assumable, the person must meet the requirements for CHFA though. The main requirement is that they are a first time home buyer, and make less than 80k combined or so.

So yeah, if I could find the right buyer, I might not have to sell at a loss afterall. Very cool.

2008 - OK. Since you have good credit and increasing income you have to weigh the potential future prospect of losses and carrying costs versus the guaranteed loss of selling now in the weakest market in over a decade.

Your property is already down 25%. What's the opportunity cost of spending the 70K to unload the property versus spreading that out via negative income over the next decade ?
Assuming you make less than 150K, you'll get a decent tax break on the rental loss. Including depreciation, I'm guessing you'll likely get a tax loss of about 16-18K per year, saving you up to about 6K in taxes. (Depreciation of a 275K condo would equate to 10K per year in depreciation loss for tax purposes).

If your loan were a fixed rate loan and you were negative $500 per month as a rental I would recommend keeping the property at this point. The problem is that you do not know what your payments will be in 2010. You need to know this and project out what it would likely be.

The worst thing to do in my opinion would be to keep it for now, then unload it in 2010 when your payment resets and you can't afford the escalated payment at a point when the market is near its lows another 10 or 15 % below today's value.

CMRJoe
If you want to find the right buyer I would contact a few of the people at the san diego Housing Commission. They ahve a lot of first time homebuyers who sometime make too much money to qualify for Moderate income Housing. Your unit with the CHFA loan would present a good alternative. They could be a gret source of referrals. I would geta few names and write them a letter. That, or stop by and let them know what you are looking to do. Again, this is win win. They are not realators they are city employees looking to help families. Your CHFA loan is designed to help families. Work together and all could make out. If this advice works out make a donation to a charitable organization. It will bring good karma.

Thanks FormerSanDiegan.

If my rate resets 2 points in 2010, which I believe is the maximum reset on my 80% loan, and my payments creap up another 500-600/month, with the write-off on negative income and depreciation, it sounds like I'm better off if I just hold on till at least 2012- versus selling today and realizing an immediate 70K loss.

Not sure what the tax savings would be, but I would lose 6K the next 3 years per year and 12K the 2 thereafter totaling 42K loss in rental income. Even without the tax write-off, still ahead vs taking a 70K loss right now.

Does my logic sound about right?

CMRJoe, you said you thought 275K was a good deal for a 1BR condo. As I would like to try to understand what was going on in people's minds a few years ago, please clarify:

Did you think 275K was a good deal because that's what 1BR condos are worth, or did you think 275K was a good deal because you would be selling it for 400K in 2 years?

I sold a 1BR condo in the early 90's for 29K. That plus some inflation is about what a 1BR condo is worth.

Well, what did you expect, afterall CMRjoe called it the real estate game. I guess when you've never seen real estate prices go down, it all starts becoming a game........
Well, game over, live and learn........

275K for a 1 bedroom condo, that is what a commom/run in the mill single family house should cost in most San diego counties.
haha, amazing what some people will do when it starts becoming a game to them. Kiss your down payment goodbye, and thank you for playing!

I'm not following your rationale - I'm expecting the market to bottom in 2012 so holding to sell at that point doesn't make sense (from my perspective) - your $70K loss today is likely to be as much as twice that in 2012

1bdrm and studio condos are just about worthless from an investment standpoint - a 2 brdrm mobile home is probably a better investment

it is possible that your condo will NEVER be worth what you paid for it - assuming that the market will ever get back to 2005 levels is a fools' bet

4plexowner - look I'm screwed any way you look at it, I'm trying to figure out how to minimize the pain, so I'm looking at taking the obvious loss today, versus writing off the loss from rental over the next decade as FormerSD suggested. Or the next 5 years. Not buying into any rationale at this point, just trying to understand the best route to go. I do not expect my condo to go back to 2005 values.

What do you suggest I do?

2008 - After 5 years your loss on monthly carrying costs is about 42K. But you still have the 70K loss as well as any additional loss/gain in value over the next 5 years. (I'm guessing another 15% loss or about another 30K).

So, you can either take a guaranteed 70K hit now, or gamble and take a 70K +/- any additional depreciation, plus another 42K loss (plus about 28 K reduction in taxes) over 5 years.

I think this is a bad 5-year bet. If you are likely to sell in 5 years, then you ought to sell now. If you plan to hold for 10 years or more, however, it would probably work out OK.

Also, if you have sufficient assets (e.g. 70K) to sell now and pay the loss, then you probably could also handle the risk of carrying this as a rental.

I sold a 1BR condo in the early 90's for 29K.

OOOps. So, we should take your advice ?

I would pay 125-150K for a unit that rents for $1000/ month.
Unless we had 10% inflation the last 16 years I don't think 29K plus inflation from the early 1990's gets you there.

Thanks for your suggestion FormerSanDiegan, a lot to think about and consider. I am hoping that somewhere over the next 3-5 years there will be a slight upturn to sell, versus just down down down. Its tough to consider the condo losing between 30-50% of its value from 2005, but no point in crying over split milk now.

assuming that the market will ever get back to 2005 levels is a fools' bet

Ever ?

If prices revert to 1997 levels (previous bottom), plus inflation when would we get to 2005 prices ?

I am hoping that somewhere over the next 3-5 years there will be a slight upturn to sell, versus just down down down. This is too short a time frame in my opinion. If this is your plan I would put it on the market at the end of January. (I would normally suggest to do so right now, but I think your chances to sell between now and the end of January are about zero).

"If prices revert to 1997 levels (previous bottom), plus inflation when would we get to 2005 prices?"

Who knows, could be 5 years could 15 years. That is the problem with RE right now. The risk of it being illiquid for long time is too high given the current macro-econ picture.

2008 - After 5 years your loss on monthly carrying costs is about 42K. But you still have the 70K loss as well as any additional loss/gain in value over the next 5 years. (I'm guessing another 15% loss or about another 30K).

I think that the key to consider here is in 5 years, you'll STILL HAVE THE $70K LOSS of value + your carrying cost loss. 

Who knows, could be 5 years could 15 years. That is the problem with RE right now. The risk of it being illiquid for long time is too high given the current macro-econ picture.
I agree it could be a very long time. At 12 months supply or more methinks RE is already illiquid. My guess is that those considering selling right now in San Diego will take up to a year to sell their property and will be selling about 15% below what they think today's market value is.
I would also venture to guess that those closing escrow one year from now will be within 10% of the market bottom in terms of price.
Just my opinion.

Re:
"CMRJoe, you said you thought 275K was a good deal for a 1BR condo. As I would like to try to understand what was going on in people's minds a few years ago, please clarify:
Did you think 275K was a good deal because that's what 1BR condos are worth, or did you think 275K was a good deal because you would be selling it for 400K in 2 years?"

I thought that was a good deal because of how much everything was. A 2 BR in the same complex was 350k. I never bought it with the idea that it would be worth 400k, I never thought the condo would go down significantly in value though. We were paying 1200 in rent at the time, so we thought if we could buy a place we would be better off long term.

Live and learn

Your "cash out is $1700"?

Is this your total monthly payment.

While not good, holding might not be as bad as you think. You've got Principle of almost $400/month and you will write off int, tax, depn, hoa & expenses of close to $2k/mo that will return about $500 to your pocket.

The principle and tax write off are real money bringing your carrying cost to about $1k/month (before the reset). I'd just rent it out and hope to minimize vacancy and upkeep expenses. In 15 years you might be able to brag about it.

I feel everyone's pain on this board. I bought in 2004 at the high, $345,000 for a 2br, 1 bath detached house with no yard (practically a condo, but not quite since it's a PUD)... And I put about $25,000 in repairs and improvements to the property, and of course another 5k in closing costs... My ARM just reset, and I've had the property for sale for 3 months with no offers. It's been a tough road waiting for someone to come buy my unit (i'm just trying to break even at this point), but I finally decided to cut my losses and rent it out last month for $1650. So, the reset on my mortgage has my payment at almost $3100 w/ property taxes, and so you can easilly see the deficiency between rent and actual monthly payment...

You have to weigh everything out, and I still am. Good credit says a lot. Today I walked into SD County Credit Union, and opened an account, refinanced my car loan, and transferred one of my high rate Visa cards to their lower rate card, all in a matter of over an hour, with no hastle or fuss. In fact, I only had to show my drivers license, and 1 paycheck stub and the deal was done. That's the beauty of having good credit, you can get stuff done with minimal hastle.

On the other hand, the temptation to walk away from my house is weighing heavily in my head... Good credit versus not having that huge burden, which do you choose?

My suggestion, which actually comes from sdrealtor, is to sit down and make a spreadsheet, and figure out ALL your options and the costs associated with those options. You can bang your head against all the wall all you want, but once you put it all down on paper, it makes it much easier to see what the best thing to do.

Don't forget to include your tax implications. If you take an $800 a month loss, depending on what tax bracket you're in, you're probably looking at $350 less in taxes, so you can subtract that from your costs. This of course, assumes you ALREADY have adjusted your W2 at work to compensate for these expenses, some people claim 0 on their W2 even when they're paying $3000 in mortgage interest a month and then get a lot back on their taxes, for me, I go the other way, and claim 9 so I can immediately see the money back, that they would have to refund me anyway when I deduct the mortgage interest.

Best wishes in whatever you decide to do, and be sure to share with all of us your story.

Bloat - are you saying that 2008 can take his entire $2K/mo loss as a writeoff? ($2K/mo loss * 27%ish tax bracket = $500/mo tax savings?)

I don't think that is correct

As a rental the condo's expenses, depreciation and income go onto Schedule E not Schedule A - the benefits from negative income on Schedule E are significantly less than the same deduction on Schedule A - and, as I pointed out in another thread, if you have W-2 income that puts you into AMT territory the tax benefits from losses on Schedule E are reduced even more because the bennies from Sched E are offset by increases in AMT

I'll say it once again: be VERY conservative when making buy/sell decisions based on expected tax bennies - if the deal really hinges on the tax considerations go to a CPA and work through some real numbers

djrobsd

As a follow up "My suggestion, which actually comes from sdrealtor, is to sit down and make a spreadsheet, and figure out ALL your options and the costs associated with those options. You can bang your head against all the wall all you want, but once you put it all down on paper, it makes it much easier to see what the best thing to do.

If you are going to create a spreadsheet determine what path you re going to take before you put the spread sheet together. By this I mean if out come x exceeds outcome y then I sell. If on the other hand the data is the opposite then I will hold tight.

Too often you can put a spreadsheet together and it is an excercise of futility of you don't use the data to give you the best possible outcome. If the oucome doesn't conform to the way you feel it is easy to ratiionale away the outcome or to modify the data set to support your initial feelings.

I believe up to a $25k Schedule E loss carries to the 1040 if income is below $100k, and 50% is allowed between $100k and $150k. Wasn't 2008's income $90k?

I am a CPA with a couple of long held rentals on my Schedule E with a tiny loss that I don't get to write off due to income. I'm rusty on the tax stuff, in fact I avoid it, so best to verify with a CPA who knows more than I.

To 2008, I say run a spreadsheet on it, get it confirmed by an accountant. If you use tax software (TurboTax, etc) run some estimates through the schedule E and see how it plays to the bottom line.

Bloat - I am probably basing my comments on having exceeded the $25K limit on losses (does 'negative income' sound any better?) - I was carrying some pretty hefty negative cashflow some years (what in the world was I thinking?)

I say ignore the pundits and walk away like all the other yahoos. What's done is done. and you are well done, my friend. Burnt toast.
I post foreclosure notices all over the county. I will keep my eyes open for your notice and post with a sad thought in mind for you. I am not totally without empathy. Don't shoot the messenger. However, I am a realist. You can survive a foreclosure and the bad credit that goes with it. Soon enough you will be able to jump back into the market, when prices are more reasonable and more experience under your belt. I feel your pain. Don't prolong the agony. Porkman

2008 - are you familiar with rent-to-own?

Google "Residential Lease with Option to Purchase" and "Rent To Own" and you will find plenty of stuff to look at

I've considered doing a rent-to-own but I never had to - I say 'had to' because I consider rent-to-own as a last ditch effort and not really a win-win situation in most cases

From what I've read only 20% of rent-to-own situations result in a purchase. The other 80% result in a tenant who, for whatever reason, doesn't purchase the property and loses any benefits the option to purchase entitled him to.

In this market I think the odds of a rent-to-own resulting in a purchase are even less than 20/80 so what might you gain by doing this?

You get a higher rent - the rent-to-own tenant pays an above-market rate with the agreement that some of that money will be applied as down payment towards the purchase of the condo

Your tenant takes better care of your place because they think they will ultimately own it

At the end of the option period (two years? three?) you still own the condo but have to deal with a frustrated (and angry?) tenant.