Detroit housing from slapdasher on the FOOL
I just got a call from my brother in Howell, MI. In conversation, he mentioned about how much debt he has, now $15k on credit cards. He said he's increasing it, actually. I asked him why, and he said that part of it is improvements on the house to increase its value. Specifically, hardwood floors to the kitchen and dining room and hallway. The next project is tiling for the bathroom, which will cost more. He wants it all done by the end of April.
He said that he has two loans. The main loan is fixed for 5 years at 4.75%, then it goes ARM. The other second loan is based on the prime rate, and that "second mortgage" is the equivalent of PMI. The second mortgage is for $30k charging 9% interest. (He said it was 7% when he locked it in last April, but rates have gone up.)
At the end of April, he will get the house reappraised and get a fixed rate mortgage. He paid $216k for the house, and believes it should have appreciated by 15% to around $250k because "it's been a year and 15% is what houses are going up in this area." At $250k, that should give him about 20% equity. If the house hasn't appreciated quite enough - let's say it's $5k short - he can either throw in $5k cash or he can have a second mortgage for the difference. (His current second mortage is $30k, so even if it were down to $5k it wouldn't be a big deal.) If all goes as he plans, he will end up with just one mortage: a 30 year fixed paying just $100 more per month than his current two mortgages.
Earlier today, I verified with a real estate agent that the condex house on his street (and looks identical, with identical specs) sold in January 2005 for $194,900. The agent also told me that there is a large amount of construction going on in Howell, increasing supply.
My brother also mentioned how Michigan's employment picture is bleak and getting worse, with the autos doing horribly. I would think, in that kind of environment, you would want to have no credit card debt and a nice cash cushion. But I guess if your house goes up 15% every year "just because," there isn't a need for a cushion - or even a job. You can just pull out $40k every year from your house's appreciation in value.
BTW, I also spoke with my mother who lives just outside Novi, MI. She got an appraisal from the county the other day, and was angry that her tax bill went up by over $1,180 despite the property value going down. The appraised value used by the county for tax purposes - supposedly 50% of the real fair market value - is now $71,540, down from $94,490 last year. So, if the county is right, the home price has dropped nearly 25% in one year. |
