June 2009
In the last month I’ve had to come to terms with the fact that purchasing this house when we did was a huge financial error. It’s been hard, and I’ve engaged in a lot of self-flagellation over the subject.
We closed on this house December 1, 2006. Two and a half years later, we’ve paid down our mortgage principal by $31K. We’ve also put about $19K into major home improvements — like new windows and hardwood floors — which should have increased the value.
Zillow lists our house as worth $26K less than we still owe. My own best estimate, using more intelligently-selected comps, puts us upside-down by about $10K. Which means that we’ve lost at least sixty thousand dollars on this house so far.
By contrast, we could have moved into a comparably-sized rental house for probably a thousand dollars less per month than we’re paying in mortgage. Just sticking that money in the bank would have given us another thirty thousand dollars by now, not counting interest. And we would likely have been in a nicer house and a more convenient neighborhood, as well.
We were urged to buy — sooner than we’d planned, and with less money down — by our real estate agents and mortgage broker. I don’t blame them, though, or think they intentionally misled us. As far as I know, our agents and broker believed that they, and we, were doing the right thing.
The catch-22 has always been that when real estate is climbing steeply — as it frequently tends to do in coastal cities, and had been in Seattle since I moved back here in early 1998 — it’s almost impossible to break in and buy that first house. 20% savings for a down payment becomes an ever-receding goal; by the time you have $60K saved up, that $300K house is now worth $450K and you need $30K more. Incomes don’t rise nearly fast enough to keep up.
In 2006 we saw a rare chance to get our foot in the door, and we took it. To do so we had to compromise in location and quality from what we could have had as renters; the plan was always that this would be temporary — five to seven years, and we would be able to sell this one and buy a nicer one in a more convenient neighborhood.
Hindsight is 20/20, of course, and today the collapse of the housing market is such a foregone conclusion that buying a house in 2006 seems like obvious idiocy. The housing crisis had already begun; why in the world did I jump on that patently rickety bandwagon?
But when I actually went back and looked up what I was reading in the fall of 2006 about Seattle real estate, I began to feel like less of a bonehead. Even as home prices in many areas of the country were starting to nosedive, the prevailing wisdom at the time was still that Seattle would dodge that bullet:
- March 2006, Bankrate, Top 30 Markets to Watch: Seattle ranked high on the ‘housing will continue to appreciate’ list.
- September 2006, Forbes, How Low Will Real Estate Go?: In contrast to most cities, Seattle’s projection shows about three years of very minor appreciation, but values up almost 60% at the end of ten years.
- September 2006, Seattle Times, Home prices’ long rise: Is the end near?: “If history is any indication, King County may escape” the national housing bust. A local economist estimated that “appreciation will slow to 2 to 3 percent a year”, while the chief risk officer for PMI Mortgage Insurance explained why Seattle was relatively unlikely to see prices dip.
Seattle Metropolitan Area*
(Forbes, September 2006)
I thought I was being conservative in my projections; I was prepared for a couple of completely flat years, with a mere two percent annual appreciation otherwise — worse than what anyone was imagining at the time. Instead we’ve had two roughly flat years followed by at least a 10% drop in the third.
It pains me terribly every time I think about how much better off we’d be if we’d continued as renters, but wallowing in regret doesn’t really help anything. So I am trying to focus on the positive: we aren’t in danger of foreclosure; we still have a positive net worth; and we can wait years before selling this house if we need to.
Meanwhile, I have very viscerally learned the investing adage that ‘past performance is no indication of future results’, and it’s left me a much more cautious person.
(Photo by Seven_Null7.)
If tough economic times are causing you stress, you can bet your kids are picking up on the tension as well. Knowing how much to tell them about financial matters can be tricky; you don’t want to overburden and worry them, but neither do you want to leave them surprised and unprepared.
I thought the movie Kit Kittredge: An American Girl made a terrific springboard for discussion with our kids, especially the younger one. Set in the middle of the Great Depression, the movie touches on economic issues — like unemployment, foreclosure, and homelessness — in a way that kids can relate to. The point-of-view character is a spunky ten-year-old girl who learns to cope with various changes that result from financial hardship.
It’s a fun movie, and so doesn’t come off as preachy or boring; the second half is basically a caper mystery, where intrepid children discover the truth that adults can’t see and chase down the bad guys, who are more comical than actually scary. Before the silliness, though, there is a lot of grounding in the Great Depression setting. Despite some grim events — her friend’s family loses their house to foreclosure; her own father loses his business and winds up eating in the soup kitchen — the overall tone of the movie is one of stubborn cheerfulness.
I’d guess ages six to twelve will get the most out of this movie. Our younger daughter was nine, and watching it sparked discussions about things from soup kitchens to the basics of mortgages and foreclosures. Here are a few more ideas for conversations with your kids based on scenarios in Kit Kittredge:
- Kit’s family begins to keep chickens and sell the eggs for extra income. What things might we do to generate extra cash?
- Kit’s mother sews dresses out of feedsack calico to save money. What storebought things can we try making at home more cheaply?
- Some of Kit’s classmates make fun of other kids for egg-selling and homemade dresses. Have you ever been teased or embarrassed about not having much money? What’s a good way to react?
- Kit’s father has to go to another city in search of a job, while her mother rents out rooms in their large house to make ends meet. What lifestyle changes might be in store for our family? How will we adapt to these changes?
When we bought our house in December 2006, there was a surprise in the garage: the former owners had left us a huge old chest freezer.
Now, Jak and I had a chest freezer already, a smaller model we’d bought at Costco about five years earlier. So this one was a bit superfluous, more than our family of two-and-sometimes-four needed. In the course of the move, however, it was convenient to move our frozen food into the windfall freezer temporarily while our original freezer was in transit.
‘Temporarily’ lasted, as it so often does, almost two and a half years. Last month we finally got around to rearranging the garage and transferring everything to the smaller freezer. I assumed that doing so would save us money — older & bigger versus newer & smaller seemed a no-brainer — but had no actual evidence.
With the model numbers of the two freezers and the kWh cost of local electricity from our bill, today I was able to use the government’s EnergyStar calculator to determine the exact difference:
- 1988 Kenmore 15.8cf freezer: $59.10 per year
- 2001 GE 7.2cf freezer: $24.55 per year
Savings: $34.55 per year, or about $2.88 a month.
(We have some of the country’s cheapest electricity here in Seattle; if we lived in New York, where it’s most expensive, the annual cost difference would be about $80.) I prefer to think of this as $34 we’re going to save every year from now on, rather than $86 we spent needlessly by procrastinating this task since moving in. Ahem.
There’s one more factor, though, that’s not as easy to calculate: with twice the freezer room my tendency was to buy extra food to fill it, which I then often lost in the depths, buried under piles of other food, until it was freezer-burned beyond all palatability. Or I would buy a ginormous bag of frozen peas at Costco, only to excavate a prior unopened bag from the bottom. (I use fresh produce as much as possible, so it can take us half a year to go through a single large bag of frozen vegetables. Having two such bags is just a waste.)
In the month since making the switch, I’ve already seen improvements in frozen-food turnover efficiency. I still think I need a better record-keeping system for both fridge and freezer though; I’ll work on that!
The EnergyStar calculator also tells you how much you’d save in electricity by buying a new freezer that meets current EnergyStar specs. In our case, this is a mere $7 per year — not a patch on the cost of a replacement, not that we were considering one anyway.
I am going to resell the windfall freezer, once I have an afternoon to spend cleaning it out. For someone with no second freezer at all, it could be a real bargain — especially if they have a large family or are carnivores!
(Photos by jonner and Squiggle.)
When is a CD not a CD? When it’s a savings account in disguise.
Traditionally, certificates of deposit have offered a trade-off: in return for the bank’s guarantee of a fixed interest rate, you promise to leave your money with the bank for a specific term. If you renege and withdraw your funds early, you pay the bank a fee equivalent to some portion of the interest you would have earned. In some cases this can result in a net loss: take the case of a six-month CD with a three-month interest penalty; if you withdraw your money after just one or two months, you’ll have less than you started with.
Ally Bank, which up until last month was GMAC, offers a ‘no-penalty’ 9-month CD. Just like any other CD, it has a guaranteed interest yield. Unlike any other CD (or, um, other common 9-month investments), you pay no penalty for early withdrawal. The result is that it functions almost exactly like a long-term savings account with a nine-month guaranteed interest rate. There are just two minor differences:
- you cannot withdraw your money within the first six days after opening the account, and
- you cannot withdraw only part of the CD amount; rather it must be treated as a lump sum.
I spent a fair bit of time looking for the catch here, and couldn’t find one. This appears to be a genuine no-lose situation for customers. If interest rates continue to decline, you’ve got yours locked in. If they rise, you just take your money out and put it somewhere else — even another no-penalty CD. Ally compounds interest daily, so you will always receive the full amount earned through the date of your withdrawal.
The current rate on this 9-month CD is 2.30% APY. I checked Bankrate to compare against all savings account rates as well as CD rates for terms up through one year; the only current product that beats the no-penalty CD is Ally’s own one-year traditional CD, at 2.35%.
Ally’s current Bankrate rating is 3 stars, or ‘performing’, with a predictive indicator to ‘improve’. (I note that no banks currently have a 5-star rating, the highest right now is 4, ‘strong’.) Despite pressure from the FDIC to lower their rates, Ally still consistently appears in the top five spots on Bankrate for both savings accounts and short-term CDs.
I opened my first savings account with them in May of last year, when they were still GMAC, due to their top rates. I also took out a 6-month CD with them this winter.
One of the reasons I’ve shied away from CDs in the past is the hoops that some banks make you jump through to stop the balance from rolling over into a new CD when your current one matures — often written notice is required. Ally executes these instructions easily over the phone. (I happened to call about my CD on the first day after the name change, which had to be a time of maximum stress for their customer service people, yet the fellow I spoke to was both friendly and efficient.)
I have in fact thus far had impeccable customer service from GMAC/Ally at every turn. Their web site is easy to use. Phone support is now available 24/7 and seems to be US-based. Their new branding campaign suggests they’re aiming for the same niche in which ING Direct operates, but with consistently better interest rates than ING offers. The good customer service gives me hope that it’s not merely a marketing ploy, but an actual commitment to customer experience.
(Photo by bettina n.)
Last September, I proudly blogged about my bargain-hunting skills in purchasing two sets of dinnerware online.
The Corelle worked brilliantly for everyday dishes, so much so that I went back and bought 4 more each of the plates and bowls, even though the price by that time was slightly higher. They’re lightweight, virtually indestructible, and stack efficiently in the cabinet, freeing up more much-needed space.
The Pfaltzgraff I bought was a disaster. They just didn’t look anything like I expected based on the online photos. The color actually clashed with our dining table. In short, I hated them. They were worse for my purposes than the gift set of stoneware we already had.
Jak and I repacked the four large boxes and hauled them off to the post office, only to discover that return shipping would run over a hundred dollars. I estimated I might get $20 back of my original $134. Ouch!
So, never mind that — I was certain I could resell them for more than $20! We lugged (okay, mostly Jak lugged) the boxes back home and into our garage. Where they sat for several months …
Last weekend I finally got around to creating a Craigslist ad. I spent around an hour and a half on it, including price research and calculations, copywriting, and combining/resizing product photos to fit Craigslist requirements.
I gave as much detail about the dishes as possible, including an explanation of how I’d screwed up by buying them sight unseen in the first place. The one thing I didn’t reveal in the ad was that I’d only paid $134 (including tax and shipping) for the set originally. Instead listed the original retail price ($540) and best currently available online price ($400) for the entire 41 pieces, and set an asking price of $200.
The Seattle area Craigslist gets over 1000 posts per day in the ‘for sale – household’ category alone. I figured I had little chance of interesting an impulse buyer; no one who wasn’t specifically searching for dinnerware would ever see the ad. So I was prepared to repost for weeks or even months, until the right person saw my offer.
I got lucky, and 24 hours after I’d posted the ad we had reduced our garage clutter by four large boxes and increased our cash by two hundred dollars.
So I actually netted a $66 profit on the ill-considered purchase; even considering the hours lost at the post office and creating the ad, we did okay. I do not recommend that anyone go specifically looking for clearance items that they can resell locally as a money-earning proposition. The risks of not finding a buyer at the price you need are too high.
But as disaster-recovery goes, it wasn’t bad at all. I’ve definitely learned to consider weight and return shipping cost when ordering items online. Fortunately my bargain-hunting and ad-writing skills helped compensate for my online-shopping audacity!
Chuffed with my recent success, I’ve compiled some suggestions for creating successful online ads in places like Craigslist and Ebay.
Nine Tips for Creating Online Classifieds
- Time your ad for seasonal demand. If you aren’t forced to sell something immediately, consider whether demand might be higher in a different month. For example, we have a child’s desk that both our kids have outgrown. Rather than posting in June, I’m going to wait until mid-August, when people are starting to prepare for the new school year. Clothing types are obviously seasonal, and certain items (like toys) may sell better in the month or so before Christmas.
- Always include photos. For brand new items, manufacturer photos are fine. For used items, always take your own — using a generic photo of a new item to sell a used item is misleading and may backfire. If there are any blemishes on the item, take a close-up photo — don’t hide it!
- Edit and resize your own photos. On Craigslist, any photo larger than 300px on a side will be reduced on upload to 300px. If you can use a photo editor like Photoshop, it’s best to resize the photos beforehand, so that you can control the sharpness and detail quality of the end result.
- Give as many details as possible. Dimensions are often important, whether you’re talking about the diameter of a plate or the width of a couch. Fiber content, construction, history of use … one of the best things about online classifieds is the lack of space limits!
- Explain why you’re selling the item. If you don’t include this information, many people will worry there’s some flaw in the product that will make them regret the purchase later. Knowing the reason someone is selling makes people more comfortable with buying it.
- Mention any defects. If the item has a chip, scratch, stain, rip, or hole, do not omit this information. You want a buyer who genuinely wants the item you have, flaws and all. Implying a nonexistent perfection will waste your time and antagonize potential buyers when they discover the truth.
- Illustrate the relative value of your asking price. Always include the retail price and/or price paid in your ad. If shipping is significant, as with furniture or (ahem) heavy stoneware, factor that in as well. Make the case that your asking price is a good deal compared to what’s available elsewhere.
- Include all relevant search words. Use both ‘dishes’ and ‘dinnerware’ in your text, or ’sofa’ and ‘couch’. Focus on nouns first, but don’t forget adjectives — when a search for ‘chair’ returns a thousand results, buyers will start adding parameters like ‘blue’ or ‘oak’ or ‘queen anne’.
- Format your ad for easy scanning. Don’t be afraid of white space. If bold text is available, use it (sparingly!). Bulleted lists are great for item details; if true lists aren’t available, fake them with line breaks, spaces, and asterisks. Limit use of all-caps to one word, such as ‘NEW’ — long strings of capital letters are harder to read.
(Photo by acloudman.)
