This is me in this morning’s Arizona Republic (permanent link).
Recent refinancing can make selling a house costly
A buyer e-mailed me a question about a house she might be interested in.
At first glance, it looked promising: A newer west-side home in good condition. The price wasn’t awful, maybe $10,000 over what it should be, and it was well within what she could afford to pay.
The house has been on the market for more than two months. The seller was transferred and has moved out. These are harbingers of a motivated seller. The listing even says so: “Motivated seller.”
This is the prologue to a story that should have a happy ending, right?
Probably not.
The seller should have had plenty of equity in the home, which from our point of view means plenty of wiggle room on price. We know going in that homes like this are selling now for about the same prices we would have seen in June or July 2005.
Regardless of what the seller might want, the price the home will sell for will be set by the prevailing market — a buyer’s market.
So what’s the problem?
The seller refinanced the home in August 2005, taking out most or all of the accrued equity.
In principle, there’s nothing wrong with this. Homeowners can convert high-interest debt on taxed income into low-interest, tax-deductible debt.
But if the homeowner has to sell soon thereafter, particularly in a down market, we can hit an iceberg.
The seller borrowed $235,000 in the refinancing. That will have to be paid, along with the marketing costs of the home, plus closing costs. The absolute minimum the seller can accept for the house, without bringing his own money to the closing table, is at least $5,000 more than the home is worth.
In this circumstance, sellers are apt to say, “But where’s my equity?” The answer: You already spent it.
We may pursue this house anyway, but if we do, it will have to be as a “short sale,” with the seller paying the shortfall between the purchase price and what is owed on the home.
Technorati Tags: arizona, arizona real estate, phoenix, phoenix real estate, real estate, real estate marketing
NYCJoe says:
Unfortunately, this trend is probably going to get worse before it gets better, and realtors and buyers should prepare for this situation now.
Mortgage Equity Withdrawal (MEW) has played a very significant role in the US economy over the past several years, and now that rates have risen and the market has slowed/dropped, there are a lot of people out there who have taken these kinds of loans that now need a certain price in order to be made whole again.
Take a look at this chart (source: Goldman Sachs) to see how important MEW was for the overall GDP growth the last decade.
It will be interesting to see how this situation resolves itself (both in the aggregate as well as this particular homeowner).
January 27, 2007 — 2:18 pm