Jimmy Lathrop

Foreclosures Will Moderate as Home Prices Continue to Fall

Speaking in my experience and training as a real estate attorney, Mr. Steinberg's article is the most insightful and accurate piece describing the evolution of the next generation of home building.

The WSJ had an article Friday on the evolution of "cottage" building, with square footage less than 1000 feet selling for $550,000 in small intimate communities close to city centers. This was shown to be the stark contrast to the McMansions of lore.

Speaking from personal experience, a home I am familiar with, a 5 bedroom 4 bathroom 2 living room house in Fairfield County, Connecticut, appraised at 985k in April of 2007, went on the market at 1.2 million in August of 2007. It received two offers for 500,000 from two separate Russian couples and no interest for the rest of the winter. It sold for $685,000 in April of 2008. a decrease of between 50 to 30 percent, depending on how you look at the valuation. We are not talking about Detroit or Bakersfield. We are talking about a town with a median income of $350,000.

In New York City, we have a similar situation with the resale value of condominium units which are given a 15 year tax abatement. I explain to the buyers that purchasing these units is like buying a Hummer which immediately depreciates when you drive it off the lot. Once the 15 year tax abatement ends, the unit is taxed at the same rate as a one family house, without the square footage. This increases the tax bill roughly 90 percent when the abatement ends, sending the resale value sharply downward. So you have a 15 year mortgage for a unit that sold at 950,000 and after making 15 years of payments plus interest and maintenance you have a unit worth 750,000 because of the tax liability. Even if you sell the unit five years after buying it, the new buyer will demand a premium because they face the same dilemma trying to sell it in five years with more difficult returns.


For the past three years, for every prospective home buyer that has come into my office, I have talked at least fifty percent of them from buying their home. How do I do it? The selling pitch of real estate agents and mortgage brokers tend to focus on mortgage payments and what the buyer or buyers can afford on their monthly budget.

I ask the buyer how much the home will cost in home heating oil bills in a month. They usually look at me with a blank expression. I then ask how local tax rate increases will factor into his purchase. In New York City, water rates have gone up 15 percent and will increase another 15 percent in the next two years. Finally, electricity deregulation has led to skyrocketing. At that point, the buyer understands that they are paying more than a mortgage, taxes and insurance.

If the buyer still insists on going through with the deal, they invariably are upset that the lending environment has tightened significantly from the signing of the contract to the completion of the unit to the setting of a closing date. At that point I usually ask how much the mortgage broker is getting from working on the loan and I see that it is three times as much as my fee. In the mind of the buyer, if a broker is receiving a fee three times as much as their attorney, then the broker is three times as trustworthy.

My diligence pays off in the fact that months down the line I am asked to represent the buyers when they are selling their condo when they discover the shoddy construction. I get the calls asking to help negotiate with Loss Mitigation specialists in the banks when the homeowner falls behind because of a loss of work or illness. I also get the calls from people who are recent immigrants to this country who have been burdened with manifestly unfair loans through predatory lending and require mortgage foreclosure defense. Most of these cases involve the larger homes.

Mr. Steinberg is correct - "Size Does Matter."