Extra Point

September 2007

by Jack Tenney, Publisher

Flip This House

Human-scale credit crunches are easier to understand than the effect of the international unraveling of carry-trades on sub-prime credit “derivities,” I think.

There was a neighborhood of 72 condominium units, built and sold in 1993, at prices ranging from $140,000 to $160,000, generally dependent on extras and when built — first built were priced lower chiefly because of supply and demand and the promise of noise while all the following units were built.

The price hung around $150,000 for the balance of the century with relatively light turnover, perhaps 10 of the 72. Then the prices started to climb on very light turnover until there were no trades reported in 2003, and the last sale in “oh-two” was just north of $200,000. Then, in 2004, four units hit the market at the same time, and two sold for around $250,000 and one went for the towering price of $306,000.

The prices then proceeded to go nuts, topping out in April 2005 at $500,000. From then to now, the prices have backed down to around $350,000, but none of the five units now offered for sale are attracting many lookers.

So — if had you bought in 1994 for around $150,000, putting down $30,000, your mortgage at the end of 2005 would have been $100,000, and you could have secured a no-fee home-equity line of credit of $300,000 or simply refinanced, and either way pulled a ton of cash out. Had you then inconveniently blown through the long green and went back to the mortgage-broker guy to get some more, you would find out one of three things: The mortgage-broker guy was now selling fish; you would need to complete a 400-page application; or you would be told you no longer had a creditworthy equity interest in your unit.

However, if you did none of the above except buy the joint in 1993, you’re now getting tons of mailings and robo-calls from people who want to simply lend you all that money you didn’t borrow and blow before. As to the nice couple down the street who bought at the top with no money down (or even cash-back at the closing) with a desire to flip it — they flopped.

It’s a law of nature or something, sooner or later, flippers flop.