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Posted by on Mar 2, 2012 in Market Conditions | 23 comments | Print Print

“Stay And See What Happens”

From Bloomberg:

Dan Kowalyshyn figures he owes about $200,000 more than what his four-bedroom house is worth today. It faces a cul-de-sac where three of the six homes have been lost to foreclosure since his $570,000 purchase in 2006.

The software developer has decided to keep up on his mortgage payments because he sees signs of improvement outside his window. Trucks drive by to deliver lumber for houses being constructed by PulteGroup Inc., KB Home, and Meritage Homes Corp.

“Either those builders are insane or they’re getting some traction selling new homes,” Kowalyshyn, 40, said in a telephone interview from his house in Eastvale, California, 45 miles (72 kilometers) east of Los Angeles. “I think we’re seeing the beginning of a recovery.”

KB Home has four communities in Eastvale, with prices starting at $272,990, according to its website. The homes are selling at a profit, Reffner said.

“We think Eastvale is a great market,” he said.

Kowalyshyn said he considered alternatives to keeping up payments on his home, including selling at a loss or walking away from his property to let the bank take it back. To buy a house closer to his Los Angeles office — a 100-mile round-trip commute from Eastvale that costs four gallons of gas a day and about $50 a month in tolls — he’d pay more money for less space.

“I’m a numbers guy,” he said. “I’ve done a statistical analysis of all my options. I talked to a lawyer. My conclusion is the best choice, at least short term, is to stay and see what happens.”

After several false starts, housing is flashing the strongest signals yet of a sustainable rebound. While foreclosures continue to depress prices, buyers are wading back into the market, lured by rising employment and record-low mortgage rates. Six years into the biggest real estate collapse since the Great Depression, housing may become a net contributor to the U.S. economy for the first time since 2005.

“There are definitely green shoots in the housing market, no argument about that,” said Peter de Bruin, an economist at ABN Amro Group Economics in Amsterdam. He is the most accurate forecaster of new-home sales, along with his colleague Maritza Cabezas, in the two years ended Feb. 1, according to data compiled by Bloomberg. “Housing will contribute modestly to recovery this year and we will see a sustained recovery in 2013” that probably will continue through 2015, he said.

The rate of price declines is reaching the leveling off point this year, even as the the flow of foreclosed homes to market will probably accelerate following a Feb. 9 settlement between the five largest mortgage servicers and state attorneys general over their methods for repossessing homes, said Paul Dales, an economist with Capital Economics Ltd. in London.

“The bottom is behind us,” said Dales, top ranked for his home-price estimates by Bloomberg. “I don’t think we will return to anything like the exceptional booming market we had five years ago. We will have a very steady, slow recovery but a recovery nonetheless.”


  1. Very refreshing… A quotation about the housing market from someone actaully making their payments!

    Notice how he’s not begging for / demanding a principal writedown and calling himself a victim.

    This is the kind of person you want in your neighborhood. Not the deadbeats.

  2. “… decided to keep up on his mortgage payments because he sees signs of improvement outside his window. Trucks drive by to deliver lumber for houses being constructed…”

    Don’t brand new homes generally sap some demand for homes in older adjacent neighborhoods?

  3. I think the builders are getting smarter. They used to be focused on move up buyers, now they are focused on first timers and investors. These guys are building sub $300K homes that they can sell at a profit to investors and FHA loans. They won’t be >3000SF and they won’t have all the latest and greatest amenities, but they will have things that appeal to the younger families.

  4. “The bottom is behind us”. Not going say if this is right or wrong, but it’s definitely not the case in my neighborhood.

  5. This guy is calling bottom? C’mon JtR I am sure someone on here has called that before.

    Phrase trademark anyone? :)

  6. This guy could be a case study in a psychology class. Great example of the pitfalls of loss aversion and confirmation bias. He’d be better off if he stopped paying, saved his money, and purchased one of the new homes when his current home is finally foreclosed.

  7. Bottoms and tops can only be seen when looking at history. Maybe the bottom is behind us, or maybe not. You can steer your car by looking out the back window as long as the road doesn’t make any abrupt changes in direction. Unfortunately for those trying to use the immediate past as guidance for the immediate future, the market occasionally makes unannounced changes in direction of unpredictable magnitude. Analysis works to a point, but there are still those pesky Black Swans.

    Crystal balls aren’t very reliable, so all one can do is to make a decision and go with it; rent or buy, invest now or not. All the narrative tells you is that people are good at rationalizing their actions. In the end, you pay your nickel and take your chance.

  8. This guy really needs a realtor that can act as an advocate for this poor gentleman and his family.

    The contract is with the bank and a realtor needs to tell him that fact. The banks expect you to walk.

    I am not an expert but the guy is locked in for 15 years and may have to walk anyway if there is a sickness ior emergency that forces him to sell in 5-10 years

  9. BTW: Basho- I like the Daniel Kanneman comment

  10. While I totally respect Jim and his expertise AND this blog check this

    So if this guy bought for $570,000 and the new homes near his are similar and selling at 275,000 he will need 10 consecutive years of 3.5% appreciation plus an additional 8 consecutive years of 5% appreciation to get back to the price he paid for his home.

    In all brutal honesty would he not be better short selling and renting or buying later then waiting an entire lifetime to recoup an honest yet real badly timed purchase?

    The bank would hve BK’d years ago would they not have?

  11. Not to mention the benefits of renting closer to work.

  12. Of course the issue is a house is both a place to live and an investment. If one can afford the mortgage payment, then its no worse than renting, and eventually the house will be paid off. The issue of loosing money on a house is old. My dad lost money when he sold his house in In, in 1962 or so. (I recall it being about a 8-10% loss, the actual dollar amount would be laughable today).
    If one likes the house and the location, then why not stay, and just view it as renting with a little principal reduction each month.

  13. The $275k homes they are building in Eastvale now are about 1/2 the size of the homes they built in 2006 and they are on lots about 1/2 the size too. About $350k is probably what his place is worth based on the average 2006 Eastvale house. If he is a “numbers guy” he sure as heck is not a very good one. A don’t care how green the shoots are, he’s not gonna see $570k again for a very long time. Eastvale is bubble central. The entire town was built during the bubble. It’s short sale central!

  14. I don’t think he’s even considering any “loss” as (with any purchase) he hasn’t realized his loss yet. Why? He hasn’t sold. So, truthfully, his situation hasn’t deteriorated. He has a job. His payment is the same. He apparently likes the house. He’s checked his options (including a visit to his attorney) and decided it’s the best choice for him.

    You don’t know what his payments are or even if he had any equity to lose to begin with. Secondly, his property taxes aren’t squat compared to what he may otherwise have to pay if he purchased and moved closer. There is no reason for him to move from his current Eastvale location to another Eastvale location – purely because it does nothing to improve his commute. Odds are, the $272k houses are much smaller on smaller lots and with fewer amenities.

    His present mortgage might be a refinance. Those loans (unless it’s changed) do not have the same “walk away” provisions as a purchase loan – so there may be some tax consequences associated with that as well.

    So, let’s say…. he walks. He’s hammered his credit. To purchase closer to work (LA) he has to pay double for what he presently has. He has the cost associated with moving to absorb. He would probably have to rent in his new location unless he can pony up the cash to make a down payment on a new place (which he may or may not have). He loses the tax deduction if he chooses to rent. That decision also impacts his other credit costs. If he needs to borrow to buy a car, his cost to borrow increases. He’s seen as a higher risk on his revolving credit. Those costs rise if he’s a nanosecond late on one payment. Utilities want larger deposits from those with “bruised” credit. Landlords may want higher damage deposits and first and last. To someone who doesn’t have any liquid cash… that’s a significant hurdle.

    Rents have increased. People in the Bay Area are reporting 40% increases for one bedroom apartments in East Bay – to $1,700 a month – as of yesterday. Anecdotal? Yes. But indicative of the current reality. The “hot” construction market is multiple family. The apartment my daughter moved out of (2 bedroom – 900 square feet) in East Bay is now renting for over $2,100 plus utilities (water/trash/heat/light). Her house (that is larger, nicer, quieter, and of significantly increased comfort) nets out at $1,100 (with tax benefits) and, as an added bonus, her car doesn’t get broken into/hit on a monthly basis. Her car insurance costs dropped as a result.

    As another said, he can rationalize that continuing to pay on his present home (which is never an “investment” unless you’re going to rent it – it’s a place to live) is just a form of rent with the potential of receiving a rent “rebate” when you sell in the event you have some equity. The good news is that the rent will not increase but for taxes – and those are probably declining rather than increasing – which may not be the case with an annual lease. He can walk at any time – his only loss being his monthly “rent” to the bank – which he has to pay to someone anyway, regardless of location, unless he wants to live in his car.

    So maybe he’s more of a “numbers guy” than you.

    Homes are lousy investments. They’re not liquid. They’re usually highly leveraged. They deteriorate. They require maintenance/repair. Many of those who presently see a house as an “investment” had parents that grew up after the depression and lived during the past 30 years of debt fueled “prosperity”. Those of us whose parents grew up in the 30’s and 40’s know the benefit of buying, paying it off, and not using it as an ATM to fund a lifestyle that is beyond the reach of current income and requires borrowing to maintain.

    Home ownership is a lifestyle choice – not an investment.

    No one can time the exact top or bottom of any market. Anyone who says they can is a fool. Anyone who believes them is a bigger fool.

  15. @ el katz

    Of course they can, they just cant time it deliberatly, only by accident.

  16. ““I’m a numbers guy,” he said. “I’ve done a statistical analysis of all my options. I talked to a lawyer. My conclusion is the best choice, at least short term, is to stay and see what happens.”

    If your esteemed statistical analysis drew you to the conclusion that 2006 was a great time to buy a home, why would you have any respect for your conclusions now?

    Statistically, you would be financially better off doing the exact opposite of what your statistical analysis compels you to conclude.

    Hope this helps.

  17. We got AT LEAST another 10-15% drop in prices to go. Hold on to your hats people. At least 25% of homes are underwater which will flood the market with homes for sale.

  18. No one can time the exact top or bottom of any market

    Don’t need to hit the “exact” bottom, because typical housing prices bottoms are long and easy to hit. Prices are among the last things to rise after an economy has turned strongly upward.

    CR has documented this in spades.

  19. Wow, regardless of all the analysis, I would bail to reclaim the 6 hours a day the guy spends commuting.

    Eastvale to downtown LA: the guy is more likely to have a heart attack driving than to pay off that house.

  20. 25% of houses are underwater or 25% of those with mortgages? If it’s the latter, it’s 25% of @ 68% so nearer 17% than 25%. Still no small number, but it’s 33% less than the shock value of that statement.

    @ daytrip

    “If your esteemed statistical analysis drew you to the conclusion that 2006 was a great time to buy a home, why would you have any respect for your conclusions now?”

    Even Las Vegas – presently one of the most depressed markets in the country – prices were flat to +18% in 2006.

    2007 is when the wheels flew off the cart.

  21. You’ve got to love boneheads like El Katz. For him, saving $200,000 qualifies as “no reason”.

    “There is no reason for him to move from his current Eastvale location to another Eastvale location – purely because it does nothing to improve his commute”

  22. We purchased our new KB Home after the housing bubble. We thought we got a pretty good deal but it was unfortunately not worth it. What we ended up getting was what has basically been a fixer upper and it’s been a nightmare.

  23. Eastvale is a nice area but the taxes are to high.

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