Saturday, February 4, 2012

Housing Update & The Hard Truth

I realize that my posts about our housing situation may be the equivalent of DREAM SQUASHING. It is exciting to finally to dig in and start seriously looking for a home. After being students for so long (or what you feel is so long) you rightfully want to have a place of your own.  If I do nothing else, my purpose in starting this blog was to share some of the roadblocks we have faced so that you might be better prepared for making your own decisions and mistakes. Or at the very least aware of the possibilities and pitfalls. I know that my situation and circumstances aren't exactly like yours. BUT I have heard from enough residents who are in similar situations to know that this isn't the exception to the rule. It may be the new rule.

When we bought our house 6 years ago the long standing assumption was that buying a home was the practical and responsible thing to do. Doing anything else didn't make financial sense. Home ownership was a virtue that every married couple with children should strive for. For heavens sakes DrH was 33 and I was 31 and we would be spending 6 years in this community. Side note: I know of many residents who 1) are unhappy with their programs and leave or 2) have their programs shut down and need to find a new place - something to think about.  At this point in our lives didn't we deserve to be home owners? If you use the word "deserve" in any sentence to explain why you want to do something you can almost be assured it is the wrong thing to do - it is one of my life truisms.

Up until about 2008 or 2009 there was virtually no way that anyone who bought a house would lose money when it came time to sell.  It was a forgone conclusion that you could buy a house and sell it for a profit. Property values continued to rise all over the country (some more quickly than others) and while it seemed naive to think it would continue forever, who would have thought it would stop abruptly and change course? We had moved from a large metropolis in the west that had seen crazy increases in home prices and were just beginning to level off. The smaller rural Midwest town we moved to seemed to be insulated from the speculation and we just assumed this is what normal was. Little did we know that national and global changes would affect a place so "stable" a year or two after the rest of the country.

Prior to the housing crisis (that I contend we are still in - I am having my own personal one right now), even if you sold your home for what you paid for it you were essentially guaranteed to profit from having paid your mortgage balance down even after paying realtor fees and closing costs. In 6 years we should have about $20+ in equity. That equity when we sold would have been used to pay the realtor, closing costs, taxes, etc and should have given us enough to move on with our lives. But equity is only equity if your house value maintains or increases (that used to be my definition of equity). Now equity is your loan balance minus your homes current value (not what you paid for it), and in fact the term negative equity has now entered our lexicon.

Dear friends, times have changed. Today we received our realtor's market comparison analysis. It was bitter sweet. Our realtor suggests pricing our home $10,000 less than we paid for it 6 years ago. And she thinks that is probably on the high side but a good starting point. It is ironic that the number is exactly the same number that I calculated we needed to sell at to walk away from the closing table with $0 proceeds, and $0 out of pocket. But, who actually pays the listing price? Nobody. So we can count on at least 3% less than our listing price which means we will pay. What we don't know at the moment is exactly how much.

I have had enough time to think about this and to come to terms with it. It is what it is. I wish it were different, but for me and many others it isn't. I will say it again: even if we are fortunate enough to close without having to provide cash at closing we still have lost all of our equity plus $17,000 that we spent in making our home something we would be proud to own (i.e. roof, driveway, appliances, etc). That doesn't include all the little things, just the BIG ones. That's a grand total of $37,000 (equity and improvements) that just disappeared.

At the time we spent that money it was widely assumed that improvements made to a property would be returned when the time came to sell. That cannot be held up as truth. The shows on HGTV that I had been addicted to, I refuse to watch any longer. Yes, fix up your home if it is your HOME and you will be living there forever. That is money well spent. There is value added in that type of improvement/investment. Spending money to fix up a home that you will own on a temporary (yes, 6 years is temporary now) basis cannot be guaranteed to be returned.

I know this is hard to hear. I wouldn't want to hear it either. But IF I had and IF I had listened, I may have lost the equity in our home (renting), but I would have $17,000 in my pocket - or rather I would probably be driving a newer van, or I might have taken a great family vacation, or a hundred other things that would have made the last 6 years... different and perhaps more bearable. Think about it. With that money we could have paid a babysitter once a week for a date night. We could have taken little weekend trips. We could have put the kids in ballet/tap/gymnastics/swim/karate. We could have bought each other gifts. We could have done all the little things that contribute to having a quality of life that we only wished we could have afforded.  We would be looking forward to moving to a new city and finding a new home to rent instead of stressing about how to sell this one and save for closing costs while also saving money to move. I am aware that our situation could be much worse.

Renting has been branded as throwing your money away, or a less desirable option. I hope that perception is changing. In today's housing market renting may be the most responsible thing to do, and possibly the one way to avoid throwing money away. The tables have turned. What used to be is no longer.

I don't have a crystal ball that will tell me (and you) what will happen to the housing market in the future. That is precisely what makes buying a home a risk for short term buyers like residents. It wasn't ever called a risk before, so this is new vocabulary too. There are a number of factors that impact home values, one being interest. Right now interest rates are really low, maybe too low. Low interest rates make it easier to get into a home that you wouldn't be able to afford in any other situation. When those rates rise, you (and people who make the same amount of money as you) can no longer afford to purchase that same house. You may get a great deal now but home values may drop a little more, and interest rates may be much higher when you go to sell.

Example: If you bought a $150,000 house today at 4% interest your payment (principle/interest) would be about $715. To borrow that same amount at 7% interest your payment (principle/interest) would be $997. (There was a time not that long ago, when 7% was considered a low interest rate... just saying). Your $715 at 7% would get you into a house at $108,000. That's a big difference. Buying power decreases as interest rates rise.

OK, enough with the lessons today. As we get closer to match day think hard about buying vs. renting. Remember this is only a temporary home, you will not be living in the same house when residency is over. You can pick an unknown outcome: buying. Or you can pick a known outcome: renting. The choice is up to you, but I hope you will consider what I have put forth. No sense in everyone making the same mistake if it can be avoided.

One last thing. I remember at the time we bought our house thinking that we'd have a job secured with a signing bonus before it was time to sell. I was thinking like I had lots of money to spend (in the future). Little did I know that my husband would decide to do a fellowship changing the dynamics of our financial situation. Something else to think about. Nothing is certain until it is certain.

1 comment:

  1. I hope everything works out for you. As much as your situation is so hard and so frustrating, I'm really, really glad you're sharing it.


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