Wednesday, July 1, 2009

So you bought a what?

Back in the early years of owning Pegasus Books, when we were merely struggling to expand and survive, but hadn't racked up the big debts, Linda used to mention trying to buy a house.

We had friends or knew of people who had managed to buy houses with FHA loans which weren't all that much more than our rent.

But....the houses weren't much, in my opinion. Starter houses, to be sure.

I always resisted this notion because, 1) I suspected our situation was different, and that we wouldn't have qualified, and 2.) We were already struggling to come up with enough money to pay for our business, and 3.) I didn't want to be house poor.

There was a big difference, I figured, between being barely able to make the payments and actually being able to take care of the house.

Our recent run-in with the sewer line reminded me of this. It cost us nearly 5000.00 to fix. What if our credit had been maxed out? What if we hadn't had the resources to pay for it?

I'm looking at a roof that has maybe one or two years left in it's usefulness. Our lawns need to be replaced. Our downstairs bathroom has discoloration on the floor where the toilet leaked. Things like that.

I can see that as long as we own a house, these issues are going to constantly arise.

But we bought a home that wasn't overly large -- just about the right size for a couple.

It's been manageable.

So, anyway, I wonder about all the people who bought at the upper limits of their qualifying, when times were flush, but who are now struggling just to make the basic payments. I'm assuming that repairs are being delayed or neglected. Which only makes their situation worse, and makes the house worth less, and so on.

Seems to me to be an aspect of home ownership that not many people are talking about.

Being House Poor can't be fun.


jared said...

Good post Dunc. Makes you wonder how many people are one major repair away from wallowing in some serious red ink. Just another tipping point for those thinking of walking away.

RDC said...

All it takes is a walk through a number of foreclosed homes to see how badly some of these houses deteriorated from neglect in a relatively short time. This was not damage done by disgruntled homeowners, though I have seen plenty of that (mostly items being removed). It was just plain neglect. Minor leaks ignored. Carpets and floors not cleaned. Heating and air conditioning filters not replaced.

A part of that was people buying houses and just did not understand what is involved in taking care of a house.

The house that you live in is not an investment, it is an expense. However, it is an expense that might pay you a rebate someday.

blackdog said...

And most of the homes built during the boom were made of cardboard held together with Elmer's Glue. There's a good reason Homer on BB2 calls them "crapshacks." They'll be falling apart in five or six years.

blackdog said...

"The house that you live in is not an investment, it is an expense."

It can be an investment; I bought a house in the Bay Area for $100,000 and sold it seven years later for $184,000. 84 percent is a pretty good return by any reasonable standard. Of course you have to buy and sell at the right time in the right place. I didn't buy the home as an investment, but as a place to live. I was just lucky in the timing.

RDC said...

Here is the reason why it is not an "investment". An investment you can sell without having to replace. Unless you intend to become homeless if you sell your house you have to live somewhere so you need to replace that expense with another. So how much of your return on that sale went into your replacement housing?

Also if you total up all costs over time for maintenance, insurance, taxes, etc. How much lower is your net positive.

In most periods houses appreciate just slightly over the inflation rate. So once you add in costs and adjust for inflation the returns are not there. The size of peoples returns are due to a rebate of a portion of money paid over time showing up as one lump sum at time of sale.

Needless to say one can maximize the size of their rebate by making smart decisions. But a house is still an expense, just as renting is an expense. The difference is that you don't have the potential for a rebate at some future date.

As such one should purchase a house based upon what they need and not to over buy because they think that they can maximize a return by leveraging into the maximum amount of home that they can find.

RDC said...

As far as your exact numbers considering the Bay area is a restricted market (unlike someplace like Dallas the amount of buildable land is limited)

So lets see not knowing which year your are talking about lets use standard inflation rate, assume 6.5% mortgage rate with 20% down, a 2.75% tax rate, and $400 per year insurance rate (2,800).

Assuming a 25% tax bracket you would have paid approximately $30,000 in interest (after adjusting for tax impact), 19,250 in property taxes, your cost of sales at the end would have been $12,880, $22987.4 of the increase in the value was due to inflation so lets make the adjustment for inflation. In look at this, not including maintenance and netting out the loan principal you invested approximately $64,930 and adjusting for inflation it looks like that you got a rebate that pretty much returned your expenses once you add maintenance in and other misc. expenses (note we did not talke about utilities for the period). So the rebate basically reduced your housing expenses to near zero.

jared said...

"As such one should purchase a house based upon what they need..."

Yeah, being a debt slave never sounded that fun to me.