Rental Parity II

XXX Presque Isle Lane $153/sqft. Asking $250,000

Yesterday I promised to show an example of rental parity that's already arrived in Chapel Hill. According to IriveRenters criteria, someone looking to either rent or buy this house should buy it. It's a little cheaper to buy than to rent. If it is cheaper to buy than to rent, then rational market participants should snatch up this property. There should be a price floor at rental parity.

So are we at a price bottom? I don't think so.

Today's property may be rented for $1500/month or mortgaged for $1656/month*. Another house a few doors up may be rented for $1600/month so I would guess that the $1500/month rental rate is pretty accurate.

*Assuming a 5.5% 30-year fixed rate mortgage. Accounting for the tax breaks, the total cost of ownership is $1364/month.

The problem is that today's owners couldn't afford the house at that price. They took out a first mortgage with Central Carolina Bank for 80% of the 265K purchase price in 2004. The took out an immediate HELOC to cover another 10% of the purchase price. They put only 10% down but today's buyer will have to put 20% down. In 2008, the owners refinanced their HELOC with Bank of America to $38K. Assuming they fully tapped their HELOC, they owe $249,950, explaining the $250K price tag. Todays sellers can't negotiate lower.

But bad financing aside, why don't I think today's price for this house is the bottom? Because the monthly cost of ownership hinges on a 5.5% interest rate. When interest rates go up, then buyers for this house would have to pay more per month. If you assume that the buyers today and the buyers tomorrow are the same people making the same ammount, then they can't afford a higher payment. Therefore the demand for the house at todays price point lessens. To match the demand for this house, the price must drop.

If you're buying today at a 5.5% interest rate, then 5 years from now when you want to sell to someone who gets an 8.0% interest rate, then the principal has to drop 17%. (Plug 100K as the price for a house with a 5.5% interest rate into the IHB Calculator, the monthly payment is $662. Plug in 83K as the price for a house with a 8.0% interest rate and the monthly payment is $660). Congratulations, you lost 85% of your down payment.

Rule of thumb: You want to buy when mortgage rates are high. You want to refinance when mortgage rates are low.

Remember, you can refinance your interest rate, you can't refinance your principal.

Rental Parity

XXX Worth $175/sqft. Asking $978,000.

IrvineRenter was one of the first people to publicly announce in 2007 that the housing market was in a bubble. That's when he started his blog, at least. His basis for this conclusion was that it was cheaper to rent than to own. Properties in Irvine had inflated to a point that the monthly mortgage payments were more than the properties could fetch as rentals. Home owners (home debtors) were the ones throwing their money away.

The price point at which IrvineRenter stated he would enter the market was rental parity. Rental parity denotes the price at which it is equivalent to rent or own the property; a break-even point. If you're thinking in terms of "monthly payment" where you factor in the tax incentives and the upkeep costs into the mortgage payments and the home owners insurance payments, then that monthly cash outlay would be equal to the monthly rent someone would be willing to pay.

Since figuring out what the monthly payment is on a house is complicated, IrvineRenter has created a calculator to crunch the numbers for you.

Today's property is both for sale and for rent.

It's really a beautiful property, though, I don't know what a million dollar house should look like.

You could either rent at $3,800/month or buy for $5,438/month*. Plug in the numbers into the calculator. It's cheaper to rent this property than to buy. If you buy this home at this price, you're throwing away your money.

*Assuming a 5.5 30-year fixed rate mortgage.

This house is in Chatham county, so I don't have access to the property records. At least, I haven't started trying to figure out the Chatham county records yet.

...

We're at an interesting point in the deflation of this housing bubble. Some properties I've looked at have deflated to rental parity. The reason seems to be that interest rates are at historic lows. In my next post, I'll run the numbers on a house that's currently at rental parity with a 5.5% mortgage, but that would not be at rental parity at a higher mortgage rate.

Foreclosure in the works

XXX Tinkerbell Road $151/sqft. $389,000.

I'm going to predict that today's property will end up in foreclosure. The "owners" owe $368,037 on this property which they purchased a year and a half ago for $296,500. To avoid a shortsale/foreclosure situation, the owners have to get at least $143/sqft.

In their neighborhood, two houses just sold:

6/30/2009 -- 421 Tinkerbell Road. $119/sqft. $222,350 for 1862 sqft.
6/26/2009 -- 508 Colony Woods Drive. $100/sqft. $233,000 for 2367 sqft.

The next most recent sale in this neighborhood was back in May.

A third house is currently listed for $100/sqft. It's larger than today's property. It's also a few years younger (1968 vs 1962). This third house is priced to sell, and it will. Its owner even stands to make a profit.

When this third house sells, there will be three perfect comps -- comparison sales -- for today's property which an appraiser will use to measure the value of today's property. If the appraisal comes in at $119/sqft (generous), then the bank will only loan $243K. The buyer would have to put up a $143K down payment. If the appraisal comes in at $100/sqft (likely), then the bank would only loan $204K and the buyer would have to put up a $183K down payment. I don't think there are buyers with that much money saved who will consider this property.

The owners of today's property purchased the house in January of 2008. They payed the previous owner $296,500 in February 2008, but took out a 332K loan with BB&T. I don't understand why the bank wanted to loan 112% of the property value. Apparently, First Medallion Bank didn't think this was unreasonable and so they allowed the owners to refinance in December 2008, into a $346,800 loan. Then in January 2009, they took out a second mortgage from Kingsford Home Improvements for $21,237. Ahh. Serial refinancing. Did all that extra cash go to good use?

From the picture of the kitchen, it looks like they put in a granite counter top. The cabinets look new, but are ugly. I'm guessing the flat top range was installed as well. I personally dislike the idea of flat-topped ranges. They certainly didn't make the kitchen larger, it looks tiny. Maybe there are other improvements they made to the rest of the house, but then, why aren't they showing them in the pictures (there are only four), or at the very least, including a description of them? Geez, any description at all would be nice.

These owners intended to flip the house. Instead, they're going to get burned.

As good as sold

XXX Canterbury Lane $296/sqft. Asking $999,000.

Todays owners have been in their house since 1991.

In 1991, they bought the house. The county's stamp-tax records are incomplete. They took out a $55K 15-year mortgage with Wachovia

In January 1999, they refinanced with the State Employees Credit Union (SECU) for $75K.

By December 1999, they were ready for a little more of that delicious MEW, so they opened a HELOC with SECU for $100K.

It looks like they tapped $75K of that $100K HELOC since in November 2007, they refinanced with SECU into a $150K mortgage.

So far, they are $150K in the hole for a 3300 sqft house. That's less than $50/sqft + whatever down payment I don't have record of. These owners are expanding their debt through the bubble years, but still not going crazy, at least by Irvine CA standards.

They put their house on the market in March of this year, 118 days ago.

And now, the WFT portion of our story:

In May, they opened a $530K HELOC from Harrington Bank. WTF? The house is already on the market, can't you just wait until it sells to spend that equity? If they tapped that HELOC, then they're $680K in the hole.

I just can't figure out why someone would do that. $530K is not a small amount of money. $530K is the price of another house. Did our current owners pay cash for another house with debt from this house? (Is that really paying cash?). Is it really wise to spend the profits of a home sale before the sale completes?

If they sell at their asking price, they stand to make a fortune. They would get $220K in addition to whatever portion of the $530K HELOC they haven't already spent. But who is going to pay $300/sqft for this house?

Tally: 1 for 5

I've now looked at the debt history for 5 houses, and it's only been the first one that I looked at that showed evidence of mortgage abuse.

XXX Westbury Drive $119/sqft. Asking $400,000

Today's property was purchased in 1992 by its current owners for $235K. At the time it was $70/sqft. It looks like they put 65K down and had a mortgage of ~$175. In 1999, they refinanced to a ~$185K. In 2004, they refinanced again to ~$213K -- and it appears to have been into a fixed-rate mortgage at that! This refinancing does not qualify as serial or abuse.

If these owners have to drop their price by $50K, then they still walk away with an additional $122K in profit (well, $98 after the realtors take their 6% cut) -- that's beyond the $38K they already extracted from their two refinancings. What's funny is that, in spite of having so much of an equity cushion, these owners have not dropped their price to move the house (I don't know how many times they dropped the price, they likely have, all I'm claiming is that they haven't dropped it sufficiently to move it); the house has been on the market for 233 days. Besides that previous bit of snark, all I can say about these owners is that I wish I were in their situation.

...

One thing that's confused the hell out of me as I've been looking at properties around Chapel Hill: there's no clear price per square foot that sellers list for, and there's no clear price per square foot that buyers are willing to pay. Sometimes, it seems like $160/sqft is the average, but then you have places like Sothern Village and Meadomont that are nowhere near the same price. It vaguely looks like many sales are occurring at the $140/sqft range. Today's property is cheaper than that, though. Why hasn't it moved? Certainly it is a big house and I hear it's now in vogue to buy a smaller house, but at it's current price, it's a much better deal than a lot of other properties I've seen on the market. I can't figure out why it would have remained unsold for so long.


Mortgage abuse tally: 1 for 5. 20%.

Instructions for Finding House Debt History

Say I'm interested in looking at the debt history for 123 Hoosuredaddie St in Chapel Hill. Maybe I'm interested in purchasing this house and want to learn what it sold for recently, or maybe I'm curious if it's owners were serial refinancers.

I have to go to two websites:

1) I go to the Address Inquiry page on the Orange County property records website.. There I search for "Hoosuredaddie St" in the street name drop-down menu, and click on the "Display addresses for street" button.

This takes me to a page that lists all the houses on Hoosuredaddie Street; I click on the "PIN" link for 123 Hoosuredadie Street. This takes me to an intermediate page that lists the current owner. On this page is a link for a "Property Summary Page".

I follow this link to an "Orange County Land Records Data" page. At the top of this page there is a row of orange rectangles.

The "Prior owners" link inside the right-most orange rectangle will list the number of tax stamps paid to the county for each transaction. From the tax-stamp count, you can figure out the selling price for the house. This page also has the date of the sale and the name of the owner prior to the sale.

The "Documents" link inside the third-from-the-right-most orange rectangle lists all of the documents relating to this property including all the liens on the property. This list is almost completely useless since all you have is the title of the form; there are no links on this page to the documents themselves. THIS PAGE IS REALLY IMPORTANT. Each document is identified by two numbers: the "book" and the "page". The first column contains this information with a "/"... e.g. "4309/527"

2) If you have the "book" and the "page" numbers, you can then go to the AiLIS Public Inquiry page. On this page click on the "Book & Page" tab. This brings you to a form where you can enter in the book and page for a particular document. This then brings you to a page listing all of the signatories to the document -- each one has a link to the document as a PDF. This is where the gold is.

For example, if you go to book 4309 and page 527 you will see the record of an Orange County resident who, in 2007, paid off his mortgage, 3 years after taking it out. Good for him.

Count your chickens

XXX Perry Creek Drive $142/sqft. Asking $460,000

(This property is not listed for sale on realtor.com. One source tells me it's for sale, but another says it's no longer on the market.)

5/28/2002 -- Bought for $350,000 -- $280,000 ARM Mortgage and a $70,000 downpayment.
9/26/2003 -- Refinanced for $289,000
1/6/2004 -- Took out a second mortgage for $26,600
2/2/2007 -- Opened a HELOC for $99,400
5/17/2007 -- Extended the HELOC to $129,600

Total property debt: $445,200 if you assume they fully tapped their HELOC.

The owners have already spent the money that they will make on the sale of this property. They've counted their chickens before they hatched.

...

I've finally figured out how to look at the debt record for a property. This is the first property I looked at, and it shows the same pattern of mortgage abuse seen and documented in Irvine, California.

I intend to keep a tally that I will update on this blog: the percentage of houses for sale that I investigate which show signs of HELOC abuse. The tally so far is 1 of 1, or 100% of all homes I've looked at.