Do you own your house? …or does your house OWN you?
NOTE: This book title deals with allergies in the home. I think another book could be written with the same name…but along the lines of my post below.
I was restocking one of my accounts in the Palm Springs/Palm Desert area when one of the techs needed me to move out of the way so they could reach some instrument. I said “how are you doing?” They replied “I’m alive.” I said “That is a good thing!” They said “I guess…” in a less than chipper mood as they left the room.
I assumed somebody was just having a busy day. It wasn’t until I heard the next conversation that I found out why.
I guess it was this persons turn to drive to go pick up lunch, or run other errands for the office. I heard the person quip “I only have 4 dollars in my wallet until I get paid again. I just paid my mortgage and that is all the money I have until payday on Friday.”
I don’t know this person and it wasn’t my business to say anything. I just listened as this all happend about 8-10 feet away from me. Now I know nothing of this persons finances, what their mortgage is, or what they ‘own’…but I do know that the mortgage payment, however big or small it is, is putting some serious stress on this person.
I would assume the property is at least 300k, as that is pretty much a ’starter’ home in the Palm Springs/Palm Desert area. I’m not here to debate this person or their situation…but to ask the question: Does this person own their house, or does their house own them?
I remember just a few years ago that it was OK to move somewhere and rent for a little while before making any decisions. I remember those ‘rent vs. buy’ calculators which have become so ‘outdated’ the past few years as the ONLY option was to buy, buy, buy!
I remember when it didn’t make sense to buy unless you were going to be in the same place for at least 3-5 years. Oh wait, that was before the days when 5-10k per month of appreciation was ‘in the bag’! You see, real estate is generally a long-term investment. It takes time for the real estate to appreciate and for the principal to be paid down. Not to mention the fact that you have 5-7% transaction costs that need to be figured in when buying/selling a piece of property. It wasn’t that uncommon for people to actually RENT for a year or two because there was uncertainty with their job or they were actually going to save money for a downpayment. They didn’t know if they would be moving, getting promoted, or changing jobs. It was the smart financial decision to make because MOST of the time it didn’t make sense to buy a home for a short or uncertain time frame. Not to mention that it is OK to get on your feet, get some money saved, and make an informed decision when the correct time comes.
The problem came the past 5 years when if you waited a year or heaven forbid TWO years, you either lost 100k+ in ‘appreciation’ or became priced out ‘forever’. What most people didn’t realize is that they were competing with the rest of the masses who were also rushing to buy, buy buy…at whatever costs. The lenders were all too willing to ‘help’ people ‘afford’ the ‘American dream’. Don’t make enough…state your income. Don’t have a downpayment, no problem…you don’t need it. Heck, we will even give you 3-25% at closing to help you pay closing costs and even furnish the place. Have a BK, don’t worry…we won’t hold that aginst you. Want lower payments until you get promoted, make more money, or win the lottery…we have I/O and neg-am. You need to buy TODAY because prices are going up…look how rich everybody else is getting.
It is at this point that I loved to ask people: “what happens if property doesn’t continue to keep going up?” You would have thought I just gave the Pope ‘the finger’ the way people would look at me. Heaven forbid this guy actually question the appreciation of housing, but he muttered the ‘R’ word at the same time. What do you mean it can make more sense to RENT than to buy?
For the past few years people quit ‘doing the math’ when making decisions about real estate. Sure, many people made a lot of money, and many more had a lot of ‘equity’ in their property. BUT, we are going to see the other side of a real estate boom starting in 2007. Just like people stood back and wondered why they bought ‘whatever.com’ when it was trading at 180 times future earnings, they will again stand back and wonder whey they paid 2-3 times the cost of ‘renting’ to ‘own’ the same property with creative financing. Just like the stock market, you don’t have the gains until you SELL! Ever wonder why inventories are skyrocketing in many areas across the country??
That gets me back to my original question: Do you own your house, or does your house own you? If you have a fixed rate mortgage that you can afford…and by afford I don’t mean having ‘4 bucks’ in your wallet until payday, then you will probably be OK provided you are not forced to sell due to relocation or other unforseen circumstances. That said, you truly don’t own your house until it is paid off. That is something that I think will become fashionable again some time here in the next decade. I remember when several friends and neighbors made that last payment. They were so excited to be completely DEBT FREE! No mortgage, no car payments, no credit cards…just property taxes and insurance.
If you have an I/O mortgage, you are just renting from the bank and your state. You do NOT own your house at this time. Sure, on paper, it is yours…but if you doubt me, stop making your mortgage payment for a few months and then let me know who REALLY owns that house. With an interest only mortgage, your principal balance isn’t changing and you get the added joy of paying property taxes. Sure there is a tax write-off, but in most of the bubble areas that doesn’t make up the difference between ‘owning’ and ‘renting’. That wasn’t a problem when property was increasing in value every month, but treading water financially when prices are flat or falling is NOT a good place to be, especially when facing an ARM that is about to reset to a much higher payment. Making higher payments on a decreasing asset sounds about as much fun…as renting! Ha ha…just kidding. You get the point.
Like I have said countless times before, 2007 is going to be the year of reckoning. We are going to find out who owns their house, and whose house OWNS them. I bet there will be thousands of home ‘owners’ who will wish they could give a landlord 30 days notice and get on with their lives. But instead, they will be trying to sell an ‘asset’ they over-paid for, in a market where every other person getting OWNED by their house is trying to sell as well. The same people competed with each other to buy these properties with creative financing…and when the tide really turns, they will all be scrambling for the door. If you think I’m crazy, then please tell my why less than 1-2% of all loans in 2000-2001 in California were I/O. Then in 2004-2005 you had over 80% using this kind of financing?
Who is getting OWNED…..YOU, or your HOUSE?
I look forward to the comments and feedback…
SoCalMtgGuy
September 12th, 2006 22:21
hello from germany,
the bubble is for sure global. but the pain and damage from these arms and optionsarms is highly concentrated in the us.
every time i hear those stories i try to think if the same could/would happen in germany when the lendingstandarts werde nonexistand. at first i doubt it.
but then i think back to the dot.com bubble and germany was not better then the rest of the world. so i hope thtat our lendingcriteria will be as strikt as today.
http://www.immobilienblasen.blogspot.com/
September 13th, 2006 04:50
People have definately become slaves to their possessions. Our national values are determined on Madison Avenue, and preached from the pulpit of TV.
The only good news about 2007 is that another group of young people might grow up with a little more knowledge, like the depression generation.
We were in the stagflation generation, and rented for a decade to build up as large a downpayment as possible, much of the time in a 400 sf ground floor front apartment overlooking a highway. During most of that decade, we didn’t have a car. We sought to live on as little as we could and still be safe and happy at the outset, and subsequently sought to be “semi-independently wealthy” and able to cover our expenses on one income.
There are many goods and services others with similar backgrounds have purchased that we have not. On the other hand:
We were each able to work part time when the kids were young.
I was able to leave the labor force to run for public office. Neither of us have had our career choices determined by the need to earn the last dollar.
We will be fine if one of us becomes sick or unemployed. No worries.
Once the house was purchased, we started saving for other things. We have been able to save for retirement. We have been able to able to save for our kids’ education. We have been able to give away money to charity.
NONE of this would have been possible if we had run up or credit cards and bought a condo at the peak in 1987, before we has virtually any savings, as EVERYONE advised us to do.
Do I miss anything? Well, living in Brooklyn I have no room for any more goods. With work, family and community committments, I have no time for any more services. And I’m too fat to eat any more food. Is there anything else?
September 13th, 2006 05:40
SoCal, You hit the nail on the head again as to a home purchase being meant as a long term stay. And certainly not to be used as an ATM.
My brother in law just bought a 40k car. He has a non-working wife and two kids to support. He also just invested 15k in a risky startup company.
I wondered how he was able to do it. Come to find out he just uses his Home Equity Line Of Credit to write a check for these things. He has almost zero savings in bank accounts.
During this bubble, his house was valued at over 400k. I hope he does not read this, but you could not give that house to me. Its a dump!
He will never be able to retire early and will probably be working well into his 70s, like it or not. This issue may have ramifications for the rest of the workforce which are not clear to me yet.
http://earlyretirementadvice.blogspot.com/
September 13th, 2006 05:45
Neither, I pay $690 a month rent.
September 13th, 2006 07:19
We have the house paid for, but that surely doesn’t stop it from being a money pit. There are still ongoing expenses - taxes, power, insurance, maintenance (which is special, since it’s both time AND money). We aren’t hurting (two incomes, no debt) but that still doesn’t give us a licence to piss away money.
As far as having enough space to store stuff, that’s not always a good thing. Even with careful purchasing the house gradually fills with items of little or no utility.
Still, its nice to be able to do pretty much what you want to the house. You can do that in an apartment too, but you might not get your deposit back!
September 13th, 2006 07:51
I refi’d money out on interest only and bought other properties in other states. =shrug= They all cash flow. We’re doing ok with the cash flow, plus two incomes. I do have interest only loans, but I do pay principal on them back.
I at least knew it wasn’t a wise idea to borrow money to buy stuff unless it made you more money (such as buying a car).
September 13th, 2006 08:15
“Just like the stock market, you don’t have the gains until you SELL! ”
That was something that never sat right with me during the run-up. Everybody thought their net worth was equal to their equity — but, what if we all tried to sell at once? We can’t ALL recognize that worth. Where would the money come from?!
I can’t really say how much “fake wealth” was generated. They say that 1 trillion dollars worth of ARMs/IOLs are to reset next year, so I’d figure that there was at least that in fake wealth. How much of that was borrowed against and is now becoming an unsecured loan? It’s scary to dwell on.
September 13th, 2006 08:19
Again, all of these loans have a place and can be used as a tool by responsible people. I know there are situations where a neg-am makes sense for the person…but that is not how the masses are using these loans. The masses don’t have much cash flow to manage…they just want the lowest payment.
When I would ask the brokers, what goals do the borrower have? what do they want? What I heard 9 times out of 10 was “lowest payment possible”.
There are a million different scenarios out there. I’m sure most people get the ‘point’ of this post.
Thanks
SoCalMtgGuy
September 13th, 2006 08:35
When I bought my first house about a year ago (yes, the timing sucked–but me were finally in a place where we knew we’d be for a while, had a down payment saved up, and our first kid was on the way), I was a neverending source of dropped jaws for my mortgage broker.
Q: What type of ARM do you want?
A: What’s the spread between a 30-, 20- and 15-year fixed?
Q: What? Why would you get a fixed? Don’t you plan on selling your condo in five years or less?
A: It’s not a condo. It’s a single family home. Ten minutes from downtown Chicago in a safe–but decidedly nontrendy–neighborhood. And we’ll stay there for at least five years. Probably more.
Q: OK, OK. How much do you want back at closing?
A: Nothing. I want to pay 20% down. Plus closing costs. I spent three years saving this down payment up. I’d like to minimize my outstanding loan.
Q: But… but… but…. Why would you do that? Can’t you find a better use for that money?
Anyway, long story short, the market has probably dropped 10% in the neighborhood, but I’m still firmly in the black. Plus, my mortgage payment ($1700/month) is pretty doable for the foreseeable future, even if something happens.
September 13th, 2006 08:39
Paid off our California house last year and sold a lot next door I had bought about 9 years ago for 5 times what I had paid .
Turned around and bought 18 times the land for 1/4 of the price in another state .
Eventually we’ll retire there .
It sure is nice to be mortgage free .
We’ve always lived below our means and will continue to do so .
No granite countertops here .
Formica works just fine .
September 13th, 2006 09:57
Great post.
“You would have thought I just gave the Pope ‘the finger’ the way people would look at me”
Funny and very true.
I paid off my house 7 years ago when it was not fashionable to do so. I had been looking to move-up to a better neighborhood and school district for the past few years but the prices kept going up and up. Even after rolling in the proceeds from our house (which, by the way appreciated to 3 times as our original purchase price!), we would have ended up with a mortgage that is 3 times as our original mortgage and property taxes that would have been 4 times as much. It did not make much financial sense and we decided to sell our house and move into a bigger rental house in a good neighborhood with excellent schools. We sold our house in one week and invested the proceeds in a money market account. The interest from the proceeds pretty much covers our rent and we don’t even need to send our kids to private schools! We are going to stay put for a few years for the dust to settle down before we buy a house. When the cost to “own” is more than two times it costs to rent, it does not make any sense to “own”. When I bought my house 12 years ago, the cost to rent would have been slightly more than the cost to own with the caveat that ownership required a 20% down payment. With the introduction of creative financing coupled with lax lending standards, saving for downpayment became out of fashion and assuming greater debt took its place as the “in-thing”.
I must say that living in your own “paid-off” house without having to write monthly mortgage checks is “priceless”.
September 13th, 2006 10:01
Don’t own a house, am not owned by one. As long as I haven’t drunk coffee too late in the day, I sleep easily at night.
I was with some fairly well-off homeowners this weekend and definitely felt like the untouchable renter. I cannot wait until I buy a house just like theirs for 30% less or even more (less) in the next 2-5 years.
Cannot. Wait.
September 13th, 2006 10:27
The game is just starting for most folks. I may be of a few or even handful of brokers that run through the pros/cons of loan scenarios so the client can make an informed choice.
I’ve gotten calls from potential clients that are WILLINGLY looking at the OptionArm for a buy, those I turn away, don’t need the headache and crying I’ll get a year to two years when they can no longer afford their payments. I might not grow my business as quickly, but at least I know the clients I do retain are going to be around for the long haul.
September 13th, 2006 10:41
Pasadena broker…
Good for you! I know it is hard when clients would TELL you that wanted an option-arm at such and such a rate…and if you didn’t give it to them, then they would find somebody who would.
I’m sure you can testify to the fact that many of these borrowers know exactly what they are doing, and how to ‘play’ the game.
You will get repeat business if you keep on the path that you are on.
Best of luck to you, and thanks for reading my blog!
SoCalMtgGuy
September 13th, 2006 11:00
In a title-theory state a mortgage is considered to a be deed, one that gives conditional title to the bank. If it were not for the statutes obliging certain precedures for foreclosures all a bank would have to is to prove that the condition precedent (default) for the deed has been met, and that would be it.
You really do not won a house as long as that mortgage is on there.
September 13th, 2006 11:14
We recently moved into a new house outside of Seattle and were able to pay it off within the first year due to the appreciation of our previous home and the ability to cash in some stock options. We find that we lie about owning our home to our neighbors because they are all in over their heads, struggling to pay their mortgages and would think we are ‘rich’ when we are simply fiscally conservative and have ALWAYS lived within our means. So while I can say, we own our home, I say it with a whisper!
September 13th, 2006 11:45
My ‘house’ is neither an investment nor a savings account. It is a roof over my families heads plain and simple. My mortgage payment is about $70 more then rents in my area.I receive tax breaks that renters wouldn’t get but I also pay property taxes. I cannot be concerned about housing prices in my area…my ‘house’ is a ‘home’.
September 13th, 2006 12:02
Own, shmown…
You own nothing as long as you have to pay property taxes. I know people in OC that kave a 12k property tax on their 700k home. $1000 / month before taxes just for priovilege to have a local authority to take care of your needs. Try not to pay your taxes and see what happens. Housing is a bottomless money pit…Try to go by Home Depot or watch at the check out counters… Everybody is paying their dues. Weekends are like work as you need to “schedule” yard maintenance, repairs.
September 13th, 2006 12:02
Good post SoCaMtgGuy . I enjoy your writing style/humor .
September 13th, 2006 12:18
Years ago, long before the bubble, I came across some in-house bank documents which kept referring to mortgage holders as “tenant-owners”. I was shocked to realize that, from the bank’s perspective, owners were just tenants. It was a real eye-opening moment for me, and I’ve never thought about owning a home the same way since.
September 13th, 2006 12:35
That’s very sad. I feel very sorry for all of the people that will lose everything, have to try and start over from scratch and live God knows where while they’re doing it.
September 13th, 2006 13:03
As long as I continue to make my mortgage, property tax and insurance payments I get to enjoy some aspects of home ownership such as painting the walls any color I choose, and planting tulips wherever I please. I also have an enormous amount of responsibility to keep the plumbing working, the roof intact and the furnace going (just to name a few). It is NOT a means of funding my retirement or HELOC’ing my way to a big screen TV. I’ll never truely “own” my home unless one day they do away with property taxes and I’m pretty sure that will never happen!
Let’s hope the pain we are about to go through as a nation will result in a return to fashion of such things as saving for the future instead of pissing it away.
September 13th, 2006 13:42
yo, socal,
did you catch the tidbits over the past few days on what the banking commissioner is doing to us in massachusetts. they shut down 11 firms on friday and read the riot act to the brokers on monday. there was alot of shredding going on this week, as apparently they sent in auditors that found the original stubs and w-2s on these “stated income” borrowers in the files. shut em down, cease and desist, put your hands on the desk. some serious sh@t going down.
September 13th, 2006 15:56
Great post! The only point I would argue is whether not owning any money on your home is the best use of that equity. I’ll probably get attacked here, but assume you owned outright a $600,000 home after 30 years. No mortgage owed! Awesome!
However, suppose you took out a HELOC, and pulled 15% out ($90,000). If you bought (like I have) three $100,000 properties in Buffalo, financing them with a 20% down, 30 year fixed mortgage ($60K), each with 3% closing costs ($9K), and with the total of them throwing off positive cashflow (before taxes) in the amount of $24K per year, then you’d be making better use of your equity. If older, you could use this money as income. Otherwise, apply it all towards the principal, and own the properties outright in around 8-9 years (yes, it’s true…do the math).
It’s not bad to have debt…as long as it’s working debt.
September 13th, 2006 17:45
Shotgun Ed - I’m the same way - with coffee and renting. It’s starting, my friend (saw 7 for sale signs on one street today).
September 13th, 2006 18:08
Seattle Eric,
Like I have said before, there are times when using equity can be a good thing…making more money is a good thing.
Don’t forget that I am relating to this BUBBLE!
I don’t know for sure, but I would be willing to bet that there are more people in 600k houses WITH mortgage, than people that own them free and clear.
Sure, taking out a small HELOC to get property that is cash-flow POSITIVE off the bat is a good thing.
The problem is that people were taking HELOCs out to 100% to put enough money down to get a neg-am on another property.
See the post on the right hand side under “POPULAR POSTS” that deals with “STOCK BUBBLE vs. RE BUBBLE”…it is all about leverage.
Thanks to everybody for the great posts!
SoCalMtgGuy
September 13th, 2006 23:49
As a fellow ‘mortgage renter’, I have to say I AM CONCERNED. Even with my lucky position of having bought pre-bubble with a fixed rate below 6. YOu see, I see this as a once in a lifetime opp to make a HUGE amount of cash in one swoop by selling a home bought pre-bubble. IT could set me and my family up in a better position in the future. But alas, I fear I have ‘missed the boat’ of selling here in SoCal. When my neighbors (non-informed, non-blog readers) put their homes on the market, I knew I was too late. Panic has set in. Their homes hav sat for 5 months. I now will be leaving thousands on the table. Only consolation I have is my payment is below what my house would rent for (1400). I have no debt besides the mortgage. That 3ook would have been friken sweet.
September 14th, 2006 09:52
SmugBatard06: That was my fundamental dilemma. I didn’t want to sell my house, but yet there was $250k worth of equity in there that just couldn’t be touched unless I sold it or refi’d. So I did refi the money out and invested in other non-SoCal properties around the country. Of course it is a lot of work, research, running around, and I’ve made mistakes, but it’s a good move overall. Just make sure to read as many books about real estate investing and go to workshops. If you can invest the equity in cash flow properties, then it’ll be better used than just sitting in your house as unused equity.
September 14th, 2006 17:55
From USATODAY:
More fall behind on mortgages
http://www.usatoday.com/money/perfi/housing/2006-09-14-delinquency-usat_x.htm?csp=N009
…More homeowners with shaky credit are falling behind on their mortgage payments, especially in such states as Ohio, Alabama, Tennessee, Michigan and West Virginia, where job losses have struck the local economies, the Mortgage Bankers Association said Wednesday.
The problem is the worst for those with subprime credit who pay higher-than-usual interest rates and who have adjustable loans that have been resetting to higher rates. About 12.2% of such borrowers were late paying their loans in April through June, the highest level since the end of 2003.
About 25% of all mortgages carry adjustable rates, and more than half of those loans are to subprime borrowers. As a result, delinquencies are expected to rise through next year as more adjustable-rate mortgages reset to higher rates, sending ripples through family finances and housing markets…
September 14th, 2006 21:57
Baltimark
The Federal Reserve gives you just the information you are looking for in their z1 (flow of funds) relase published quarterly. The end pages have household, corporate and other types of balance sheets compiled on a national level.
From 1999-2005 household real estate assets have risen from $11.5 trillion to $21.6 trillion (some of that is the funny money you refer to replacement cost is about 12-13 trillion, but it lagged home prices even in 1999).
Including HELOC mortgage debt has risen during that period as well. From about 4.4 trillion to about 8.6 trillion. Even if home prices crash to 1999 levels or replacement cost, the overall national real estate balance sheet doesn’t look too bad, there is still about $2-3 trillion in equity (and substantial non-real estate net worth). However, the federal reserve doesn’t measure how that $21 trillion is distributed (nor the $8.6 trillion in debt). I believe something like 30-40% of homes are owned outright which leaves a substantial portion of the remainder at much higher leverage ratios.
Far more concerning to me would be the psycological impacts of a house price crash. The main reason home debt is so cheap is that banks believe that people would rather cut all spending but food to keep their home, in a weaker market, the size of a change in that preference could have substantial impacts on the market.
Secondary concern is that flight of the remaining $40 trillion in non real estate net worth (mostly equities and finanacial assets) should a crash occur that shakes American perceptions, some of that capital will flee the country, if enough does, there will be very serious reprocussions.
September 15th, 2006 11:39
“just sitting in your house as unused equity”
My goal is to keep my balance low and pay down the loan or pay it off. Not to refinance and rack up a new loan amount I know I cant afford. Plus why would I want to buy other properties with my equity now? Too damn risky. Are you new to this blog? SoCal can you please ‘edjumucate’ Surveyor.
thanks
September 15th, 2006 12:24
“NONE of this would have been possible if we had run up or credit cards and bought a condo at the peak in 1987, before we has virtually any savings, as EVERYONE advised us to do.”
I bought a small condo (Anaheim, CA) in 1988. $90,000. There was a no-grwoth initiative on the ballot and prices were going up a couple percent a WEEK.
When I was forced to sell in 1997 (Homeowners’ Association power struggle that got VERY nasty), I was lucky to get $60,000 — 1/3 price drop after that RE bubble popped in the Nineties. Fortunately (refi from 30-yr FHA Variable to 15-year fixed plus principal buydown the whole way), I owed only $50,000 and was able to roll what I could clear over into a down on a repo townhouse.
Again, through refi (30 to 15) and principal buydown, I now owe only $45,000 out of the original $100,000. (Current bubble comps are over four times that.) I expect to pay off the balance entirely within 18 months. Debt free before 2008.
And if I want to move up, there should be some really good repos & foreclosures coming on the market by then. Even if I’m forced to sell again, the bubble would have to pop by 75-80% before I lose money.
P.S. I’ve always lived BELOW my means.
September 15th, 2006 12:52
I watch the TV show “House Hunters” on HGTV and I notice most of the houses bought are in Southern California, which as we all know is a major housing bubble area. I did not understand how these people were able to afford $700,000 house with so little income. TO buy a house that expensive, you should be making atleast $200K/year and some of these people did not look like they made that much.
September 15th, 2006 13:51
I couldn’t have said it any better. There is a large real estate office closing in the Long Beach California area. That is the sign of downsizing. Agents, Escrow, Insurance, Termite, construction and mortgage workers aren’t making what they used to make and they were the first ones to buy or lease larger than life homes and cars.
I started a blog to discuss the middle class getting poorer. Between a flat tax, property tax, bubble bust and imminent war with Iran. We have the signs of a very hard landing. Fed. Interest rates will keep going up and It could be messy. You will see so many more houses on the market. People could lose their shirts.
September 15th, 2006 15:49
As someone who just bought I have to admit to having second thoughts but, after a bit of math, I think buying made a lot of financial sense compared to renting.
We had been looking for the past year to buy as our personal circumstances, first child and rent (3500) make it seem like the right thing to do. After a lot of looking around we found a house in immaculate move in condition that my wife loved. Original asking was 699K and after some back and forth we got the house for 640K. We put 20% down with a 30 fixed.
Our gross income is 260K, so our mortgage of 512K is less than half our income; we can easily make our payments/taxes (9500 annual).
Expect to be in the house for 10 years. Also the new location reduces my commute by about 30 minutes each way.
I think buying was a good choice for us, The simple reason is that buying is basically a forced savings program, subsidized in the form of interest payments being tax-deductible. In my case, after taxes, and deductible interest - the rest is principal, which I basically pay to myself, in the form of equity.
This compares quite favorably to the almost $3500 I used to pay in rent (for a smaller and much shittier apartment), even if 10 years later(which is how long we plan on staying) I sold our house at the very same price I had bought it. This is precisely why rising rents matter a lot in the equation.
For me, the worst case scenario, would be if some unforseen circumstance forced us to sell prematurely, in that case I may well have to eat a 20% loss. But absent that unforeseen circumstance buying was the right choice for us.
I guess I have to balance this potential worst case scenario against the savings I will get from not paying 3500 in rent and no landlord who keeps rising my rent every year. Yes, I could put the $500/month that I am paying extra over renting into the stock market, but the stock market is much more volatile than the housing market, and I am already tied to the whims of the stock market thanks to my 401k, so investing in my own house has another big advantage: diversification and spreading my risk.
Just my 2cents about my take on our situation.
September 15th, 2006 19:45
I would like to respond to the following quote: “However, suppose you took out a HELOC, and pulled 15% out ($90,000). If you bought (like I have) three $100,000 properties in Buffalo, financing them with a 20% down, 30 year fixed mortgage ($60K), each with 3% closing costs ($9K), and with the total of them throwing off positive cashflow (before taxes) in the amount of $24K per year, then you’d be making better use of your equity. If older, you could use this money as income. Otherwise, apply it all towards the principal, and own the properties outright in around 8-9 years (yes, it’s true…do the math).”
If you had excercised this strategy in Reno, you would be bankrupt. You are one of the few who reaped a reward, however, who knows what will happen if the whole country falls into a recession and you cannot get your rent. What if a lot of foreclosures happen in Buffalo and there are too many rentals? I am not saying that will happen, and you seem to have made wise investments. However, things could turn. I would never put my eggs in just one basket.
September 15th, 2006 19:49
The $64,000 question?
ARE THERE ENOUGH FB’s OUT THERE TO CRASH THIS BUBBLE?
i.e., how many of the “for sale” signs out there are really desperate sellers as opposed to legitimate homeowners trying to “cash-in” before it is too late?
Excerpt from the testimony of Mr. Richard Brown statement, Chief Economist, Federal Deposit Insurance Corporation.
…
What is yet to be determined is the effect that recent changes in the mortgage lending business may have on the ability of homeowners to meet their monthly obligations under adverse housing market conditions. While adjustable-rate mortgages are not new in the marketplace, many of the newly popular interest-only and payment option structures may lead to a significant increase in monthly payments due to higher short-term interest rates or simply the expiration of low introductory interest rates. It remains uncertain how much the “payment shock” associated with these structures may contribute to selling pressure in local housing markets on the part of distressed homeowners or lenders looking to sell foreclosed properties.
It is important to note that the overall prevalence of nontraditional mortgage structures remains fairly limited. While total ARMs originated in 2004 and 2005 are estimated to represent approximately 22 percent of all U.S. mortgage loans, it is likely that just under half that amount is comprised of interest-only and payment option structures9. Borrowers who took on nontraditional loans as a means to afford a more expensive home may be particularly vulnerable to adverse housing market conditions. However, other borrowers who have used these structures to help manage their wealth or compensate for irregular income streams will be less severely affected…
September 15th, 2006 21:48
Neal,
Like I have said many times before…you meet the criteria of somebody that can ‘afford’ to buy in this market.
You had money to put down, you got a fixed rate mortgage you can afford, you plan on staying 10+ years, and you understand that values might go down in the meantime.
You bought a home that is about 2.5 times your income. Hopefully this has been consistent income, and looks that way for the future. If that is true, then you should be fine.
Best of luck to you, and enjoy your new home!!
SoCalMtgGuy
September 15th, 2006 22:24
Regarding unused equity: If you had $100k, would you put it in a CD, stocks, or under the mattress? Yes, it’s a matter of risk. You can choose to keep the equity in your house. Certainly the house will be paid off in time. I had enough equity to purchase several other properties, and my finances were able to support that decision. Risky? Sure. But the properties I bought cash flowed even when accounting for the extra debt burden. That is intelligent use of debt and it’s my equity/money working for me instead of me working for money. I think mr. SoCalMtgGuy approves of the intelligent use of debt and infomed decisions using debt. I’m already diversified in the stock market, have a good amount of savings, and now all my money is working to make more money.
Yeah, it’s arguably a lousy time to buy now, but that’s here in SoCal. There are other places in the country that weren’t as affected. Also, I believe the bubble affected residential, single family homes and condos. As long as the math works and the property cash flows before taxes, it’s at least a good property to consider.
Neal: You made a good decision. In ten years it’ll be worth $800k. Hopefully. As long as you take care of the family first, you’ll do just fine.
September 15th, 2006 22:29
neal,
i am fascinated by your situation. it certainly does seem that your decision was not only reasonable but wise, even if the market craters, since you will still be able to make your payments. the reason i’m fasicnated is because of the numbers you give. what part of the country do you live in? i am in west l.a., where to rent a 3br 2ba 1800 or so square foot house on my block is $3500 to $4000, close to what you say you were paying for rent. but to BUY that equivalent home on my block is about $1.3 million. (peaked at about $1.4 a year ago.) so for the same rent you were paying, an equivalent home is HALF the price where you are.
September 16th, 2006 08:19
I am listening to the real estate show on WLS:
http://www.wlsam.com/programming.asp
The hosts are pure cheerleaders for real estate wheeling and dealing. I get the feeling that nobody in real estate will say that there are times to abstain and put your money in bonds, stocks, CDs. The show sounds like an info-mercial for get-rich types.
September 16th, 2006 09:05
One other thing, has anyone asked sellers of these overpriced houses where they expect buyers to come from? I’d love to put my monthly rent proceeds into a mortgage that develops equity and some better-than-break-even reimbursement prospects years from now. The rub is, even if I could afford the payments, what guarantee from a seller do I get that I will not lose money on the purchase of their house? And if I end up breaking even on the home purchase, how many years will it take vs. just renting now and waiting for price declines to occur? I am not against sellers having capital gain, I am looking for affordability, common sense and sound investment practices. On the way up, I do not think greater fools thought out that most of the buyers would eventually be tapped out and a dry spell would occur.
September 18th, 2006 12:10
Pasadena Broker,
Maybe we should talk at some point. I’m looking at buying in about two years in Pasadena. We cruise the neighborhoods for open houses, mostly for kicks. You would enjoy the converstaion I had recently with a Pasadena Realtor.
September 19th, 2006 08:34
“Sure there is a tax write-off, but in most of the bubble areas that doesn’t make up the difference between ‘owning’ and ‘renting’.”
I’m so glad you brought up this point. My firends who own say I’m making such a big mistake because I’m missing the tax write off. They make it sound like they’re printing money in their basement because of the write off!
September 19th, 2006 14:47
ken i’m with you all the way on this. most people will tell you that “you need the tax break” but they don’t even understand what the tax break is. in fact, the second i point out that you’re only getting back in the area of a third of what you’re paying in interest they’re stunned. it’s like they think the tax break is worth double their monthly payment or something. plus, you have to have income to get an income tax break. if you lose your job, that tax break is GONE and suddenly you’re paying a third more for your housing. i think it comes down to this: some people like to own, some people like to rent, and some people are only renting until they can own. but EVERYONE feels like they need to make sure they made the right decision and confirm their choice, thus our friends keep asking us, the renters, “don’t you need the tax break?”
September 19th, 2006 15:06
“My firends who own say I’m making such a big mistake because I’m missing the tax write off. They make it sound like they’re printing money in their basement because of the write off!”
Other Ken:
I never could understand it either. In my tax bracket, I’m paying around $3 in mortgage interest for every $1 its write-off saves me in taxes. Yet everybody — from family to co-workers — keeps telling me “Why do you want to pay off your mortgage? You’ll lose the tax writeoff!”
I tell them for every $1 i’m saving from that tax writeoff, I’m paying $3 in interest. Their response?
“Why do you want to pay off your mortgage? You’ll lose the tax writeoff!”
September 19th, 2006 21:42
Other Ken:
I wish it weren’t the case, but people are stupid.
By the way, do you mind if I name by newborn son “Other Ken” — I love that name!
September 19th, 2006 21:52
SoCal-
that is hands down the BEST thing you’ve written here. It just makes so much SENSE!
I’d like to see that little essay printed in every newspaper in the US.
September 19th, 2006 22:12
Seattle Eric-
your plan sounded okay until I got to this part: “positive cash flow (before taxes)”….
For cash flow to be calculated, you NEED to figure in taxes- duh! This is a FIXED expense- fixed in the sense that it will “always be there”, NOT fixed in the sense that taxes have a way of only going in one direction- UP! Especially in a state like NY.
Serious flaw in your plan to not include taxes.
Hope the rent will cover.
September 20th, 2006 04:52
So Eric’s going to make money out of Section 8 rentals in Buffalo, while he himself lives in Seattle.
Hoo boy!!!
If this comes off he’s going to deserve his ROI, ‘cos he’s way, way braver than I am.
September 20th, 2006 21:07
AJH-
Your post brought up an interesting point.
Eric didn’t say his properties were section 8 so I’m assuming that you interpreted a 100k building to be a “dump”.
But we’re talking Buffalo here, so when I saw 100K, I was picturing mini McMansions, pretty nice properties.
If those properties are sub par, he’s buying at bubble prices.
Yes Virginia, a 100K property can be a bubble price, depending where you buy. Upstate NY is one of those places.
This is something people really don’t get when they compare to “what that house would cost in _____ (insert higher-priced city name).
September 21st, 2006 12:21
AJH -
In Dayton, Ohio, just perusing loopnet, a 15 unit apartment costs $350k, but cash flows $2k per month.
$350k here in San Diego buys you a cup of coffee… (hello i’m exagerrating!).
September 22nd, 2006 06:47
I should have pointed out previously that Eric has mentioned on another blog his just-purchased Buffalo properties are Section 8 rentals.
September 22nd, 2006 06:59
Surveyor,
Are those numbers you quote for an individual apartment (seems startlingly high), or for the whole block of 15 (seems equally startlingly low)?
September 22nd, 2006 09:07
ajh
The 15 unit is one entire building. Believe it. $350k buys the whole burrito.
September 22nd, 2006 10:32
I had a similar experience to a previous poster when I bought a house in the Seattle area two years ago. When we went to see the mortgage person she started talking about ARM’s, etc. I told her “no, I want a fixed rate”. She stared at me for a moment and then said “Okay, a 30-year fixed rate”. “No”, I corrected her, “I want a 15-year fixed rate mortgage”. She was completely dumbfounded that anyone would want to minimize both the total length of their mortgage and the total amount of interest they would pay on the loan.
September 22nd, 2006 11:04
I think the other flaw in Seattle Eric’s Buffalo Plan is that he is probably seriously underestimating maintenance costs on those rental costs. I’m guessing if they are Section 8 rentals that he won’t be getting nice-family-looking-for-good-schools tenants. He will be getting guy-who-works-at-video-store-likes-to-party type tenants. Those houses are going to get trashed.
September 23rd, 2006 00:09
Surveyor,
I am still trying to get my brain around $350K for a 15-unit block unless it’s literally falling apart, but I suppose that’s partly because the term “apartment” has a different meaning in the US than where I live (Australia).
Anyway, I still wouldn’t want that block just for the current rents. It’s 175 x monthly, and I would expect a higher than normal ratio of running costs.
September 24th, 2006 22:03
Surveyor,
You may very well be right about multi-units, but I have my doubts about commercial properties in general. The right commercial property in the right place will always be a good deal, but a lot of dumb money has moved into that sector recently. For example, several Australian REIT’s have expanded into the US commercial sector without IMO doing enough homework.
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