Monday, February 02, 2009

Falling housing prices and bankruptcies

We are entering an era in which we may see a lot of personal bankruptcies because people owe more for their homes than they could sell them for.

Someone that bought a house in Victoria in mid 2007 for $575 000 with 20% down and a 25 year mortgage will now owe about $450 000 on this house. Let us say you sell that house for $500 000, a reasonable amount in the current market. The cost of selling the house will take about $30 000 out of your pocket leaving you with $470 000 to pay off the $450 000 mortgage.

Anyone that bought a house or condo in the last three years with much less than 25% down is now realistically looking at a house that is less than their mortgage. This means a large number of people.

Let us say you bought the same house above but only had 10%, you would still be owing about $520 000 on a house you could only net $470 000 on. If you have to sell, you will be left owing $50 000 to the bank. Realistically you will be forced into bankruptcy.

If you got into a condo in the summer of 2006 for $250 000 with 5% as a first time buyer, you are really screwed. Odds are your unit will now only sell for $220 000 netting you about $205 000. You will still owe about $27 000. Many condo buyers had low equity mortgages because they were first time buyers.

The market is going to see houses coming onto the market that are bankruptcy sales. These sales will dampen the rest of the market if they become commonplace. Condo bankruptcies will be the biggest tranche.
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