pocketmint

To buy or to rent: failing to predict the future of housing

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.)

Put that money where it belongs, dammit

Here’s yet another reason why checking online account information regularly is a good idea:

My regular monthly electronic payment on our second mortgage went out to Bank of America on June 3. On June 4 I manually sent an extra $2000 against the principal.

On June 7 I checked our mortgage accounts online. Turns out that they split the $2000 and used part to make July’s payment a whole month early, leaving only about $1240 toward principal.

Grrrr. Sneaky bastards.

I was able to call this morning and get this corrected with minimal hassle. However, if I hadn’t checked the allocations, they would have just applied July’s payment against August, and so on, and we’d never have gotten the interest reduction from prepayment.

That $750 paid against principal today saves us over $6100 in interest over the life of the loan (2.5 years into a 30-year amortization). Of course the bank would rather have that $6K in interest and a month’s cushion against late payment, but I’m not going to give it to them.

The giant sucking sound at the bottom of the global pool

If you’re not a regular listener of This American Life, you may have missed the May episode entitled “The Giant Pool of Money”. It explains why what we have now isn’t just a ‘sub-prime mortgage lending crisis’ but a ‘worldwide credit crisis.’ It’s masterfully written, taking all the jargon and translating it into plain, often witty English:

Alan Greenspan: The FOMC stands prepared to maintain a highly accommodative stance of policy for as long as needed to promote satisfactory economic performance.

Adam Davidson: You might not believe me, but that little statement: that is Central Banker-speak for “Hey, global pool of money — screw you.”

Alex Blumberg: Come on, that’s not what he said.

Adam Davidson: It is! I speak Central Banker and that’s what he’s saying.

Anyone interested enough in the economy to be reading a personal finance blog — this means you! — absolutely should not miss this episode. Clear an hour to listen to the show, or you can read the transcript instead.

(Photo by Jeff Belmonte.)