pacific,

Have you tried refinancing your property? Rates are at historic lows, and should get rid of the arm as soon as you can. If you find that you cannot refinance, it is because the house already has lost value to be regarded as a sound investment by most institutions.

Depending on what you find out, you should consider selling. Just because you made a mistake buying at the peak of the market does not mean you need to make another mistake by not unloading the property to mitigate your losses. Jster points out it is a pain in the butt to move, which is true. However, consider the alternative: how much equity and wealth do you wish to ultimately transfer to your family? Making a bad investment with what is likely your most expensive asset is a sure fire way to destroy your families wealth.

Pacific Ocean, I'd stick to the stock market if you want to do lots of in-and-out trading. Do you really want to put your family through the gigantic pain-in-the-butt of packing and moving, changing schools, leaving your neighbors, etc. based on your hunches about where real estate prices are going? If you sell because you think the market's frothy now, will you then buy in a couple of years if you think things are then cheap, and then sell again a few years after that, when you think prices are high? Not very fun for you, spouse and kids!

Instead of trying to make money buy buying and selling your primary residence, I'd work on saving money and trying to reduce that $1.15M of principal on your loan. Yes, rates are low now, but I guarantee that some time in the remaining 28 years of your loan, they'll be high again. Your monthly payments on over a million dollars of debt when rates inevitably get back to the 7-10% range will not be pretty.

just trying to help the guy, chris. don't be so self righteous, dude.

Hi matthew,

I see from your latest post you do agree with me that wealth creation and incomes drives housing appreciation.

Apparently you are now changing your complaint concerning my original post regarding whether or not a 30% drop in pricing can be recovered long term when you perform an objective ROI. Bear in mind that recovering your money does not mean you get back your purchase price. It means you get back your purchase price + all expenses incurred in servicing the property + appreciation from the opportunity cost of funds.

Actually this is not my conclusion. Many economists espouse this view. For a more complete explanation, please refer to Robert Shiller's "Irrational Exuberance."

After reading the book, I got the impression more due diligence was incurred than simply writing a result in a napkin.

Thank you Jorealtor.
Amazing display of maturity in a public forum. Makes the consumer all warm and fuzzy about our professionalism here.

"If you don't like what is being said, change the conversation..."

This is clearly what you are doing here matthew.

The question simply relates to whether pacific ocean should hold or sell, nothing more.

You apparently agree with me that he should sell.

Since you insist in changing the conversation, I'll indulge you...

It was obvious to whole sectors of the economy that a bubble was forming. As early as '01, the economist published a series of articles that not only was real estate a bubble in the united states, it is the largest bubble in history of any type of financial instrument. See my reference to just one article to this effect. Many investment banks avoided sub-prime paper after '07. Many buyers including myself sat on the sidelines realizing it was insane to purchase housing in the past three years.

You are actually trying to make the argument that housing is somehow NOT tied to affordability and wealth creation. Care to explain how it is possible for housing to LONG TERM outpace the very level of wealth creation that drives it.

To see how non sensical this is just run a simple spreadsheet, Assume housing grows at 8% annually and real income grows 3% annually. See how prices would diverge from people's ability to pay after say 30 years...

Finally, nowhere in my post did I blame realtors for the excesses of this bubble.

Matthew you completely miss the point of my post.

First of all, you also recommended he should sell.

I make no mention of alternate investments.

I simply point out the obvious:

why would you own a house that is declining in value with no visibility to recovery when I can rent the very same house for less than half the price?

Also your last paragraph simply shows your lack of understanding concerning what drives real estate prices:

Simply stated, it is fundamentally impossible for real estate to outpace the level of wealth creation in silicon valley. It is people's ability to pay for homes that drives appreciation. If this outpaces fundamental wealth creation, by definition you have a bubble.

In a declining market, you should ask yourself the following:

Why would you pay $6500 mortgage payment + $1700 tax + maintenance for a place you can rent for $3800 in craigslist?

Historically, if the market falls by more than 30% you never make back your money. It is already down 21%.

Sell.

Right at this moment the Palo Alto market is very active. Many homes under 2 million are getting multiple offers and we may start to see a little appreciation after the 21% drop. I do not know whether this will continue, drop, or stay level but if you have to sell it is not a bad time to do it. If you do not have to sell but are worried about further declines in values, I personally think that the future is not that grim in this price range. I have been tracking inventory and pending sales on my blog since Dec., and we are at the lowest number of active listings and the best active to pending ratio that we have been at since Dec.

Marcy

There are more options than just selling or keeping the home. For sure dealing with the impending finance issue is key and may be the best solution - especially if you are financially secure and like the home and neighborhood. An ARM loan may or may not be detrimental once the 3 year fixed rate unlocks. This depends on the margin and rate in 2010. Some owners have actually had their payments drop because interest rates are low now. Check the rate and margin now and see what that looks like. Probably interest rates 6 months from now will not be any different.
If the new payment is more painful than your current one try a loan modification or a "short refinance" depending on the equity you have in the home. Again, this fixing of the financing will keep you in the home.
The current "market is improving" real estate news is bunk. Statistics are in the eye of the beholder. What I see is our asset managers at banks piling up inventory and about to release them after mid September. This wave will continue for the next 1-2 years. So, improvement in pricing is unlikely. But don't make real estate moves based on short term (1-2 years) fluctuations. Very hard to time that and the in and out costs are high too.
The prospect of renting in south Palo Alto is not cheap either.
Big questions and hopefully this answer adds some perspective.
Best of luck

I agree with James. If you can afford to stay and you like your home, just relax and enjoy your it.

Too many home owners in the past decade have focused on the appreciation part of ownership. That's the last part in home ownership. The first part is finding a home that you enjoy. A home to raise your family and become part of the American dream.

The second part is enjoying a nice tax deduction while you own the property. The 3rd part is the equity. Homes never make money or lose money until there sold. It may go up, or down, but until it's actually sold and there is a transfer of ownership, it's just paper gains or losses.


Cheers,

Tap
Realtor
Cashin Company http://www.DavidTapper.com
650-403-6252

Is there anything forcing you to sell? Do you need to move?

If that is not the case and you are just worried about the investment performance of your own home then I would recommend holding on and riding out the wave. It may take a few years for you to completely recover from this downturn but it will eventually happen.

Homes are a long term investment. They always go up and down over the short term, but in the long run you will definately realize a profit and benefit from the tax deductions.

Don't let the doomers and gloomers scare you into selling!

Dear Home Owner,
Read Mr. Sorensen's remarks very carefully, there is quite a bit of wisdom in his response....
And I do agree with his thoughts and assessments, not knowing all your financial sides of that decision making process!

I think there are a few major thoughts that could heavily impact your decision....
Your income security, which of course we do not know but whether employed or self-employed you are depending just like most of us on the economy and where it is going during the next few years.

So if like Mr. Sorensen said YOU can afford your mortgage and the maintenance of the home, and your interest rate potentially will go down? and you consider your income safe for now and the next few years, then keeping your property will be ok..... If on the other hand income may become an issue, then you may want to seriously crunch numbers and then decide for not only the best solution for your pocket book, but also for your and your family's peace of mind...

I feel bad that you even have to think about this situation but you are not alone - believe me!
Hope you connected with Mr. Sorensen and figured out your next step and how to proceed.
Best of luck and if you ever know of anyone moving to the Chicagoland Area or anywhere in Northern Illinois, please make sure to refer them to me
Edith Karoline YourRealtor4Life
Working always in the very BEST interest of her clients!
EdithSellsHomes@gmail.com YourChicagoConnection

Yours is an all too familiar tale. In order for one to answer this question accurately, it would be great to know what your actual income is. With this I could look at your front end ratio and at least know whether or not you can easily afford the home.
Based on your loan amount and the time you took out your loan, it sounds to me like you obtained a stated income, 3/1 intermediate arm, based on the treasury index, or the 6 month LIBOR (London Inter Bank Offering Rate), both of which are under 1%. Assuming a margin of 2.75% above the index and you would have a fully indexed rate (FIR) of 3.75% or actually under, if your loan adjusted today. This equates to a payment of $5,649.52 factoring a 27 year amortization schedule.
I believe that rates, much to the long term detriment of the economy, will be kept artificially low by Bernanke, who is an expert on the Great Depression and very concerned about the country going into one while under his watch. Based on this, it is this experts opinion, that you will have a payment very similar to what you have grown accostomed to for the next four to six years.
If you are asking if you should keep the home due to its loss in value and potential continued loss in value, which, based on the fact that we are more than likely going to have an additional wave of defaults to contend with over the next two years, the answer is, I don't know! If you can afford it, yes, keep your home. If you flat cannot based on a drop in income or, as some did, you actually "overstated" your income (Not accusing), then your choices may be more limited.
Unemployment always lags in a recovery, coupled with the fact that there are not going to be any stated income loans available to create another false buyers market for a long time to come, and it may be seven to ten years before we see appreciation sufficient to make you 100% whole.
With all that said, my humble opinion is that we must decide between moral decisions and business decisions and not attempt to justify that which we know is wrong simply based on what the mob mentality is. Please read my post from a week ago.
http://www.trulia.com/blog/chris_sorensen/2009/08/return_of_…
I teach this for a living. Feel free to contact me at http://www.freehomeownershiphelp.org We are a non-profit and here to answer your difficult questions. Click on the; "I Need Help Button" and it will go directly to my e-mail. This way you can provide me with more details and I can do my best to advise you.