Wednesday, July 16, 2008

Housing Downturn--Choices Made

My sister-in-law Theresa has been visiting us this past week from Hollywood, FL, one of the counties that is the bright red in yesterday’s blog. She and I have some great discussions. She is slightly left of Karl Marx and considers me to be to the right of Attila the Hun. Obviously we don’t have a lot of things that we agree on. However, this weekend we found one subject that we both were in total agreement.

Theresa and her partner bought their 1,110 sf (2 bed—1 bath) house in a blue-collar part of town in May, 1995 for $80,000. They borrowed $40,000 on a variable rate 30-year note at 7.75%, converting it to a fixed rate at 4.75% for 15 years when rates fell below 5%. They’ve continued to pay down the loan and now have a balance of less than $22,000 for a home that the website calculates at a value of $262,000. The high value for this house was $303,000 so it has fallen about 15% in value.

Across the street, the Smiths (not their real name) bought a slightly smaller house (no pool and not a corner lot) at around the same time for $65,000. They also borrowed around $40,000 for their house. However, when housing prices started to climb, the Smiths began refinancing their home, always increasing the amount of the loan for various other purchases. Today they owe $186,000 with a $1,300 house payment on a home that values at $197,000. My sister-in-law is convinced that they are on the verge of foreclosure, hoping that they can figure something out to avoid it.

Choices…We make them and sometimes have to live with them. And, sometimes the government will bail us out on those choices. Which do you prefer?

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