A Life Reset

We have been one year now in our home in Winston-Salem. It is the first home we ever owned after years of renting apartments and houses. It is a decent house with three bedrooms, master suite, separate dining room, a big back yard and so on. We were under some pressure to get a new home as Andrea was expecting our new child at the time and we needed more space. We thought it probably be better for us to buy a home rather move to another rental. Having property of our own is considered to be a good thing so they say.

So we looked around a bit and after a few walkthroughs we came upon the house we now call our own. Considering that the housing market was on a definite downturn at this time last year, we struck a pretty good deal I thought at the time. We got $11,000 off the original list price and had the sellers pay all closing costs along with some improvements such as radon mitigation ($1200 just for item) and some odd and ends like the refrigerator. We received a decent interest rate of 5.75 from NC Housing as we were first time home buyers. All in all, we were reasonably satisfied with the deal.

Now in our neighbourhood, they were other homes up for sale. Indeed, it was looking at another house that we discovered our home. These homes were on sale before we came to the neighbourhood and remain so months after we moved in. Eventually, in the past few months, they were sold in the face of the economic collapse.

The economic collapse has had many origins but the primary one that everyone agrees upon is the general decline in housing prices across the country, being more pronounced in such states like California, Nevada and Florida. No area was unaffected, not even North Carolina.

One side effect of the decline in home prices is that many people have homes that have mortgages that are more than the price of the home if they try to sell on the open market. This is different from those people who got into exotic mortgage arrangements such as interest only loans or 5 year adjustable rate mortgages and found themselves pinched by escalating house payments, more than they could afford. No, people who find themselves in a negative equity situation in their homes, a term also known as being ‘underwater‘. Millions of people find themselves in this situation. Is not they can not pay their bills or their mortgage; indeed they can manage quite fine provided that they do not face any personal economic shock. They did nothing wrong but just are feeling the effects from collateral damage from the housing prices collapse.

But now, many of them have to consider the value of being in their home now. For some, their home was more of an investment vehicle and since they will not recoup their expenses, it is just easier to walk away from the house and put it into foreclosure. But for most people that really is not option. It is their home and as the economy is weak everywhere now, it is just as well as to stay put where they are. Knowing though that their home is worth less than what they paid for it does act as a sort of an economic depressant. A house is a family’s most significant asset and for many people it is like the saving account and retirement fund they never got around to build. When that house value declines, people feel poorer and start tightening their belts, When millions of people start doing that, then this consumer-driven economy starts slowing down even more.

Knowing all of that, I wondered how my house would fare in the current market. Locally, Winston-Salem has been affected quite a bit by the economic downturn. Local unemployment rate is increasing to 8% now. Credit is tight so even if you are in the market to buy a home, no one may lend you the money.

So I used an internet tool called Zillow to get a rough ideal of what house would sell for in this market. Zillow works like an appraiser, a free one at that, whereby it estimates a price for your home based on the valuations of other home sold in the immediate area. That valuation is a bit of a problem as it looks back at past sales for months and years back which may not be align with the realities of today. If it uses historical prices for homes, it may give an inflated figure for your home. Currently, my Zillow estimate for my home is about $10,000 more than what I paid for it.

Sounds good, right?

Well, no. Zillow has another useful feature where it shows the houses that were sold in your area and displays their actual closing price. That is the critical part of the situation. A home we looked at, a year ago listed then for $170000. The Zillow estimate was $150,000. Five months ago, it sold for $128,000. Around the corner, a home with a Zillow estimate of $204,000, sold for $138,000. These houses were similar in construction to our house with three bedrooms and 2.5 baths. Using those homes and their sale prices as a guideline, I would estimate that my home will sell for $30000 less than what I paid for just a year ago.

In other words, I am underwater on the house.

Now, as I mentioned before, being underwater on the house does not mean I can not pay the mortgage on the home. Nor is my mortgage payment is going to skyrocket in the near future as I have a fixed rate 30 year mortgage. What it does mean is that I am not going anywhere anytime soon. For better or for worse, I will be in Winston-Salem for the next 5-10 years as housing prices slowly recover from their dramatic drop. The era where housing price increases exceed the annual inflation rate by at least 100% are now over. More typically, housing price appreciation will conform to their traditional annual rate of increases which is 1 to 2 points more than the inflation rate though that will vary by region.

I have always prided myself on being quite mobile. It seems that every few years, I pack up everything and move somewhere else, typically in pursuit of employment. That is what brought me here to North Carolina in 2002. Indeed, that is the one strengths of the American workforce, its mobility, the ability to move across a state, a region or the entire country.

If you are a renter or in a similar situation, it is fairly easy to move away but as a homeowner, it is more complicated as you have to sell your house before being able to buy another one. In the boom times of the housing market, you had reasonable expectations of being able to sell your home in a decent amount of time at a price you are comfortable. Now, that option is not readily available to anyone. People are not buying homes and people selling homes can not afford to take major losses if they sell their homes for less for what they owe. So people will remain where they are and not go where regions of the country will experience significant job growth in the near future. Going where the work is comes with a high price tag.

But in any event, I am not planning to go anywhere soon. I like being in Winston-Salem and our house will take care of our needs for years to come. Just wish I had the peace of mind that my home is worth financially what I paid for it.