Do you own your house? ...or does your house OWN you??
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 I remember those 'rent vs. buy' calculators which have become so 'outdated' the past few years as the ONLY option was to buy, buy, buy!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...