bostonbubble.com

[samz]

Hello all,

There has been a lot of talk on these forums about the macro-economics of the housing market, but I'm interested to see if the micro-economics -- the situation of an individual house -- might help sharpen our predictions.

I chose this house because I think it might be emblematic of the current problems:

Address: 14 Leighton St, Medford, MA
Stats: 3 bed 1.5 bath, 1800 sq ft, built in 1970.
Asking price: $408K
MLS: 70739905
On market: 22 days

Take a look at the pictures -- it's not bad, but nothing has been updated. The kitchen has new appliances, but the cabinets and floors look like the original horrible 70's decor. Yuck.

This part is tricky: using a mortgage calculator, I figured that a first-time home buyer would probably pay around $2600/month in total housing costs. Clearly, there are a lot of factors that could influence this number, but I chose something in the middle (if you can put down 20%, the cost is $2300/mo; but if you can only put down 10%, the cost is $2800/mo). Following the 29% rule, I figure that the new buyer needs to make over $100K per year.

OK, so personally, I would never pay anything near $400K for a house like this. It's ugly and old, and desperately needs a new kitchen. Plus it's in Medford -- not that there's anything wrong with that; I live in Medford now. But let's be perfectly frank here: no one making $100K per year wants to live in that house in that neighborhood (I suspect the current median income is around $50K)

Digging a little deeper, I looked up the house on masslandrecords. The owners bought the house in 1992 with a mortgage in the low $100's (!!). They refinanced $135K in 2003. Here's the problem: in 2006 they pulled $250K out of the house in the form of a home equity line of credit. From the looks of the house they didn't put any of that money into remodeling or updating. I'm assuming they now owe $385K on the house.

If they hadn't taken all that money out, there would be plenty of room for the price to go down, while still giving them a generous profit on the sale. For example, if the house sold for $300K, they would still make $165K profit. But now, assuming they spent the money, there's not a lot of room for negotiation.

So, now what? Who's going to buy this house? Will the sellers be willing to "give back" some of the profits they took? Do they even have the money anymore?

I suspect that this ugly scenario is playing out all over the Boston area, and that the outcome of the dilemma will dictate where the market goes.

[StallionMang]

They are asking $221/SF. According to Redfin, similar places have gone for 164, which puts it at $303.7K, so they're ~35% above market. Although 1970 construction is actually pretty good for Boston

There is a foreclosure a couple streets away at http://www.redfin.com/MA/MEDFORD/50-BELLE-AVE-02155/home/12475718.

Given the HELOC, bet the bank will never accept a short sale...

[JCK]

It's tough to know what's going on there. IF they got a $250k HELOC and pullout it all out, then all I can say is yikes. But you can open a HELOC and pull out less than the line allows.