Tuesday, February 07, 2006

A time to buy, a time to rent...but don't take my word for it

As you know, I'm taking some time this week to discuss the 'buy vs. rent' debate that seems to have taken on a more argumentative tone lately. It hasn't happened much on this blog, but I know that many people are getting anxious and impatient as this 'froth' keeps going...like tapping a keg that just rolled down the stairs. I not here to tell you what to do, I'm just here to help give you information so that you can make the best decision for you and your family. Sometimes renting is the way to go, and sometimes buying is the way to go. The problem for many people is that they are getting pressure from people already 'in' the game. That said, I want you to read about this readers experience. I think it illustrates very well that there is a time to buy and a time to rent, and outside pressure without accompanying data can be devastating. I think this situation is applicable to lots of our California readers. Enjoy....

----The year was 1988. My wife and I, along with our two kids ages 5 & 6, were renting a three bedroom house in Van Nuys for $900 a month and we were happy. The year before, I'd just became a journeyman union plumber and my wife had just became a journeyman union electrician. We were finally making a decent living and did I mention we were happy? Very happy.

Enter my wife's father and her sister (who had just purchased a townhouse in Redondo Beach). "When are you guys going to buy a house?" "If you don't buy now you'll never be able to afford one." My wife and I had never really given it much thought but since these older and wiser people were so adamant and expressed the urgency, we agreed to look at houses for sale.

For the youngsters here, those were the days when lenders wanted 20% down. You could buy a house with 10% down IF you had an extremely high FICO, been at your good paying job for a long time, and had at least 3 months future house payments in the bank (and all that money had better of been there for a while). Since houses were approaching the $200k mark, this would mean at least $25k in the bank. We had about $10,000. We started working all the overtime we could. No vacation that year. No eating out, etc. By May of 1989 we had our $25,000.

The median price was now $210,000. There were bidding wars and camp outs and lotteries all over. With the help of an agent, we found a 1954 tract house in Canoga Park that just went on sale that day for $209,900. We made a full price offer and it was accepted. The school district was horrible but who cared? We were in at 10.75% 30-year fixed and a payment of $2000 a month. Quite a jump from our $900 rental. Also we postponed paying income taxes until August that year since we owed $7000 from claiming 10 dependants all year to save up the $25k.

Shortly after moving in, my wife had an accident at work. The general contractor cut a hole in the 2nd floor and didn't mark or secure the cover. She fell 20 feet and was hospitalized. Even though she was miraculously back 100% in 6 months, the electrical contractor she was working for sued the general contractor in her behalf and she was given $20,000 the next year, 1990.

Since we really hated the schools in Canoga Park and we now had new found money, we wanted to move to a better school district. I checked comps. The house had risen from $210k to $230k. Sweet. It was just like they said. Easy money but not enough to cash out with, yet. So we venture over the hill to Santa Clarita Valley and find a brand new home being built for $187,500. We bought it and rented out the Canoga Park house for $1200 a month. Only an $800 negative but it's going up $1600 a month in value so who cares?

We had to evict the first grandmotherly type old lady for not paying rent and the 2nd tenant caught the house on fire but those are stories for another time.

Fast forward to 1994. The housing market is tanking and interest rates have dropped. My wife and I are killing ourselves making these two payments. Something has to give. I called the lender on the rental. I tell them I want to refinance the $190,000 that I owe them to the current interest rate. They tell me the house is only worth $164,000 and besides that, I have PMI, so no way. We were FB's.

At that point, I said to my wife, "Let's walk away." She said okay and immediately the weight of the world was lifted off our shoulders. I figured we lost around $100,000 between both down payments, negative cash flow on the rental, etc. but we weren't the only ones walking. There were thousands. If we were able to walk with $100k of our money in the game, how many and how fast will the people walk this time with very little in the game?

Eight years later, 2002. My wife and I put $8000 down on a $275,000 house in Portola Hills. 2 years and 10 months later we sold it (Feb. 2005) for $500,000. Finally in the black again on real estate. People at work puzzled as to why we sold. What are we thinking? Don't you know real estate only goes up? Yeah, right.----

As you can see, the "If you don't buy now you'll never be able to afford one" line was used 18 years ago. It wasn't true then, and it won't be true this time around. It took years for things to shake out last time, and that was in a decreasing rate environment where 30yr fixed loans and 20% down payments were the norm. What do you think it is going to look like this time around with 100% financing, stated income, interest-only, neg-am, and a rising rate environment?

Some of you might have read this story already in the forums. I think this is the type of 'real world' story from the last 'Southern California Property is Invincible' real estate boom that needs to be heard by more people today. Just remember, there is a reason that interest-only loans were very popular during the 1920's...just as there is a reason they were not widely used for the 70 years afterwards.

Stay tuned for more 'math' behind the buy vs. rent equation. Keep the comments and feeback coming...not only on the posts, but on the site, the forums, and the consuling page as well.

I am going to keep making my posts over here, but I am going to shut down the comments soon. Go to

www.housingbubblecasualty.com
or
www.anotherf@ckedborrower.com


If you would like to make a comment. Don't forgot to check out the FORUMS...lots of good activity going on over there already.

SoCalMtgGuy

5 Comments:

Blogger Cannon Fodder said...

Nice post!

My family lives in a nice 4-plex (3 br./2ba/garage/wash&dry hookups) for $900.00 a month. The median houseprice in our neighborhood (according to MLS listings) is around $365,000. As a teacher (my wife is a marketing director at a law firm), I will never be able to afford a house in the Twin Cities area.

So the adavantages? We have zero credit card debt. We have 6-months "life happens" fund in savings. We are slowly savings towards 20% downpayment when the market corrects itself.

Life does happen. I was 33 when I was disagnosed with a rare form of intestinal cancer. I have been in the clear for two years now. The problem is we moved so I could goto grad school, so only my wife and daughter had medical insurance. I had VA (I'm a veteran) medical insurance until I got a job. Life happens, and now I can never get covered again. I have to use the VA the rest of my life. They do provide wonderful services, but I am losing my focus.....The point I am trying to make is LIFE DOES HAPPEN. Trying to live paycheck to paycheck to make a mortgage payment is always based on a best-case scenario. Life is never that way.

2/07/2006 10:20 AM  
Anonymous Anonymous said...

So true cannon fodder,

Life happens.

A wise person realizes that you need to have some money put aside for those "happens".

No matter how little money I have made, I always managed to put money away.
I value a tummy with food more than a fancy dress.
I value health care more than a nice hair do.
I value peace of mind (dollar in the bank) more than a huge mortgage.
I value my inner peace more than how others judge me by material standards.

If more people were on those lines, I think a lot of problems would not exist.

Northerngirl

2/07/2006 11:28 AM  
Anonymous Anonymous said...

I rent one side of a duplex. rent is abut $1350 a month, but to buy a house 3-4 bedroom at today's nosebleed prices would cost about
$500-$700k. Tell me prices are not out of wack?

2/07/2006 1:48 PM  
Blogger S Crow said...

Loan officer woes:

A client of ours...the last deal he closed was November 05'. Getting very freaked out and indicated that he's considering working for a title company. My wife, to his dismay, informed the him that she heard the title company just laid off a couple sales reps.

These folks LIVED LARGE over the last year or so. VERY large. Vacations, new boat, local Casino's, Vegas twice. We always cautioned them....save for a rainy day.

Now,instead of a rainy day, perhaps it's going to be a Hurricane. Their financial situation is like being in a Hurricane with no shelter, food or emergency PLAN.

As much as I want to help them out, I've got my own family to worry about. It sucks. Boy oh boy.

2/07/2006 5:07 PM  
Blogger SoCalMtgGuy said...

s crow,

Maybe you could contribuute to the the 'title/escrow' forum that I started at the end of last week.

Getting a pretty good amount of traffic over there in just a few days.

Thanks for the post and for reading my blog.

SoCalMtgGuy

Another F@CKED Borrower

FB FORUMS

2/07/2006 5:21 PM  

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