patrick.net

Crunching numbers while watching the world series.

"Hypothetical" Math Question
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Q:
Lets say you are are in your late 20's or early 30's. You bought your first house, a starter home, for $200,000 back in January of 2002. You put 5% down ($10,000), and have a 30 year fixed mortgage at 6%. Now that the government is (in all likelihood) expanding the tax credit, you want to trade up. You have you eye on a few of the new $400,000 colonials that just got put in down the street from you, but you'd prefer to only spend about $380,000. The question is, can you afford to trade up?

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A:
Assuming nomral amortization, with no refinancing, your loan balance in May of 2010 will be just under $158,000. You can now sell your house for $300,000; after factoring in a 6% commision ($18k), you are left with $300k-18k-158k+6.5 = $124,000. You plan to use this money as the down payment for your next home.

Despite the fact that your income is more than it was in 2002, property taxes have gone up significantly, and a larger house means more property tax, not to mention more maintenance. Your old mortgage (EXCLUDING taxes) was almost $1140/month. After much number crunching, you feel you can afford a new mortgage payment of $1300, again, excluding taxes. You are able to get a new 30 year fixed loan at 5%. Assuming you put all your proceeds from the sale into your next home, how much more home can you buy?

Neglecting the tax credit, $366,200.

Certainly this is more than the $300,000 you are selling your current "starter" home for, but not nearly enough to get you into the $400k "trade-up" that you had wanted to purchase.

However, if you get an advance on the "new" tax credit ($6500) and add that to your down payment money, then you could now afford $372,700. Trading up may in fact be feasible, but you'd have to find an anxious seller to meet your price point, based on what you want.

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The point of this fictitious scenario is that I think there is a whole generation of people, most of whom are in their late 20's or early (maybe even mid) 30's that are now effectively, trapped. Even with the generous assumptions, plus the help of the government, their ability to trade up is limited. Certainly you can afford more than you could 7 years ago, but not enough to make trading up attractive enough to jump back into the market.

With no incentive to trade up, things will get worse before they get better, as short sales and/or foreclosures will continue to make disproportionally large percentage of the market.

Just my two cents.
Comments welcome, particularly from "trade-up" types.

#housing