Finance Globe

U.S. financial and economic topics from several finance writers.
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The Effect of the Housing Bust in My Neighborhood

Unfinished business in the wake of the housing bust
My neighborhood is still under construction. The back of the subdivision has unfinished gravel roads, and some of them are still dirt. Empty, weed-grown lots abound, scattered with a few finished houses on a few paved roads. "Lot available" signs dot the land on what used to be acres and acres of cornfields.

There were supposed to be three phases of construction, but this third phase has made little progress since the sub-prime mortgage fallout came to light. The builder has since dropped their starting prices for homes in this neighborhood by $20,000, but very few new homes are being built on those empty lots. Good thing, because we don't need anymore new homes competing with all the pre-owned homes already on the market.

I bought my house a few years ago during the second phase, at the peak of the real estate boom. I'm glad that I qualified for a low fixed-rate mortgage when I bought it; I wanted the security of always knowing what my mortgage payment would be. My only reason for buying a home here was to provide my family with a nice place to live. It's a safe neighborhood for children to run around in, and we're in a good school district.

I bought during the boom because I was at the point in my life when I wanted to own a house. It wasn't about making an investment that would continue to appreciate at record pace, though I admit that I had hoped it would. I planned on making this place my home for a long while, no matter what the real estate market was doing. But still, it hurts to know that I've paid more than the darn thing is now worth. At least I like the home I bought, because I may be stuck here for quite some time.

House for sale
Thankfully, the builders completed this second phase before the real estate market took a nosedive. There are a good number of pre-owned houses up for sale in this neighborhood, one or two on nearly every street. Some streets have as many as four or five houses up for sale. Most of them seem to be taken care of so far, and few look completely abandoned. On my street, all of the homes are occupied except for the one next door to me. This house has been on the market for about nine months.

The couple that lived in that house were in their early twenties and engaged to be married. This was their first home, and the two of them shared a three bedroom house. His father co-signed on the mortgage, since he didn't have much credit history and she didn't have much income. His dad also brought a mower over every week to mow the grass for the couple, and to do other general home upkeep. I thought it was odd that this healthy, young man would stand there and watch while his father did all the hard work on a house he lived in.

They weren't very sociable with the neighbors, so I didn't know them very well. The only memory I have of them is that they often had parties until the crack of dawn, with the bass booming so loud that I could hear it from my own bedroom, even with all my doors and windows shut. (Small yards separating the houses and obviously poor insulation.) Once I actually crawled out of bed to politely tell them that their music was keeping me up. His response, "But the Colts won." He continued to play his music at that same level until four in the morning.

They couldn't have been there much more than a year when the "For Sale" sign went up in their yard. They broke up; she moved out first and he moved out the minute the house was put on the market. I wonder where they went. Are they paying rent somewhere else while his dad is making mortgage payments on that house? Did they each move back to their parent's houses?

The property sits neglected in the meanwhile. The neighbor on the other side finally got tired of looking at the overgrown yard and mowed it herself. I was glad she did. Half-jokingly, I told her she should send a bill to the owners for the work she did. It wouldn't have been a joke at all under normal circumstances; it shouldn't be the the neighbor's responsibility to maintain the property of those who choose to abandon a home, but I guess it may the only way for homeowners to keep up the image of the neighborhood.

A friend of mine was curious about possibly buying the home, so we walked over and peeked into the windows. The house is completely empty, except for the stains all over the carpet. In a market as bad as this one, I thought they would at least make an effort to sell it by cleaning up their party stains. It looks like they just gave up on it, like they gave up on being respectful, responsible adults.


The rest of us are hanging in there.
I live in Indiana, a state with a high foreclosure rate. I bought my home in Hamilton County, which has been the fastest-growing county in the state for over a decade. Many areas in Hamilton County are out-of-reach for those with limited income, but my house is in one of the most affordable neighborhoods in the county. Affordable enough for many first-time buyers to creatively finance a home, with nearly no down payment and an ARM or interest-only mortgage.

At least, it was affordable at the time. And that is why so many homes in this neighborhood are up for sale. A neighborhood of starter homes bought by first-timers who couldn't really afford their home. And a builder who sold houses with a down payment of one dollar. Really, one dollar down. How could that be? The builder required a $500 deposit to begin building the homes, but refunded $499 to the buyer at closing.

The state of the housing market made me wonder if more of my neighbors would be putting their homes up for sale in this saturated market. So I checked around, but without being too nosey; you can't really just come out and ask people how much money they make or if they can afford to pay their bills. So most of my conclusions are from taking in the scenery or general comments in casual conversation.

So far, it looks like the neighbors on my street are managing. They are all trying to control their credit card and other debt. They all agree that gas and milk prices are outrageous, but that beer is still quite affordable. Many of them had a fixed-rate mortgage to begin with, or have already refinanced.

One couple wanted to sell for personal reasons, but didn't realize that their refinance cost them nearly $7000 in closing costs. That, on top of the decline in home values, makes it impossible for them to sell without taking a significant loss. And a family of five on a single income just can't afford that kind of loss.

Due to the real estate bust, most still have a principal balance that is a good bit higher than the current market value of their homes, even after regular mortgage payments for several years. Those of us who made additional principal payments to our mortgages now owe about what our houses are worth; we didn't get ahead, we just stayed afloat.

The good news is that many of my neighbors are still improving their homes. They're putting up fences, building mini-barns, and planting gardens. Putting all this work into their homes shows they're preparing to be here a while. The reality of being pinned under a mortgage is sinking in, but they're taking it well. Can't sell, but they aren't going to just walk away from a mortgage on a previously over-valued home. It's still their beloved home, even though it may have been one of their worst investments.

That makes me feel better. I may be stuck here for a while, but my good neighbors are stuck here with me. It may be bad out there, and everything seems to be happening at once; the economy, inflation, the job market, and the housing bust. But the sky isn't falling, and we will manage, somehow. At least we can have our affordable beer, while we sit in the homes we paid too much for.

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Wednesday, 21 August 2019

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