Saturday, October 18, 2008

Housing And The Mutually Accepted Lie

Before I get into this post too far, I would like to apologize to all my friends that I convinced buying a house was a good idea. So here is goes. John, I am sorry. I am an idiot. There that feels better. At least I don’t have many friends and the few I do have are more sensible then to listen to me. Poor John. Wait till I tell him the truth about getting married. Then there is having a kid.

Now for the rest of you. If you have bought a house, then I am sorry I didn’t get to you sooner. If you have not, you can send me any portion of your windfall I have saved you that you want to help with my monthly sentence.

We have all heard the statement, “buying a home is an investment. It is investing in your future.” People are still saying it today even in the face of the current crisis. Do me a favor. The next time somebody says that in your presence, dope slap them and send them this post.

Here is a story that is actually a combination of stories that could easily been one couple. It will illustrate with real numbers the hazards of believing that lie.

In the late 90’s a young couple had been living in a beautiful apartment overlooking the lake. It had an in-ground swimming pool, workout room, sauna, and free utilities. The whole package cost $550 for the first couple of years, drifted up to $650, and now had they been there 10 years later it would have cost $850 a month. If you averaged the 10 year period it comes out to be around $700 a month.

But did our young couple stay in their cozy apartment? Nooo. They bought into the lie. They went out and bought a cheap house for their area. Out the door after tax and titling they financed $100,000. Luckily for them the “American Dream Act” allowed them to put no money down and get a 6.1% rate. That ends up being a $606 a month mortgage payment. But wait!! There’s more!! This payment estimate doesn’t include property taxes, insurance, and maintenance costs. Remember how I told you that their rent included utilities? These first two, are often rolled into the monthly payment and make it vary from $850 to $950 depending on various confusing banker math calculations. For sake of argument we will say the average was $900 a month total payment. Just in that alone there is a $2,400 savings if they had stayed in their apartment. That alone is a $24,000 over the course of 10 years.

Then there were those “maintenance costs”. Plumbing problems, lawns mowing, leaf blowing, flowerbed planting, snow plowing, and appliance repairing are all part of this category. Over the course of that ten years, the couple spends $30,000 on these things that would have been included in their rent. (Did I mention that apartment overlooked the lake and had a nice place to shore up a 25’ O’Day sailboat with a cabin and nice sails.) This maintenance did include siding. A roofing job is on the horizon for the next 10 years. So 10 years into this they are down $54,000.

But wait there is more. When they moved from that apartment, did they just move in and accept the house the way it was with the furniture they already had? Noooo. They needed to fill the new place up. It needed a refrigerator, washer and dryer, and a couch to fill up the new bigger living room. All the sudden that 19” TV ain’t cuttin’ the mustard either. Since the happy couple spent all of their money just getting into the house, they will have to put all these new “investments” on their 16% APR credit cards. Of course before any of that can be moved in, the carpet had to be replaced, the walls had to be painted, and ceiling need retextured. So go ahead and add another $10,000 to the first 10 year period. The now not so young couple are down $64,000 over where they would have been if they had stayed in the apartment.

So I bet you are saying, but look how much they have paid off towards their future. At the 120 payment mark. You’ll be shocked to know the happy couple still owes $86,134. As a matter of fact, they will not even cross the half way point until the middle of 21st year. Of course that assumes they didn’t take out a second mortgage or refinance. If they put that $64,000 (not including any interest they might have earned) as a down payment only 10 years later, their monthly payments would be $218 plus tax and insurance. Of course I recommend doubling up on payments, raising that total to $306 per month. All tolled a $100,000 loan at a rate of 6.1% for 30 years costs $218,000. oops. Market value of a 60 year old house when it is paid off? $200,000. Provided the area didn’t get worse or the housing market didn’t collapse.

No “investment” should cost you more then double the market price you agreed to pay for it. You shouldn’t have to work your whole life to pay for it. And it should be yours to keep or get rid of at will.

But wait there is more!! There were other things that are not so tangible. Let’s say that shortly after getting this new home one of them lost their job. With the reduction of income, they starts running up credit debt. They fall behind on a payments. The price of the house just rose up. Or, the government taps one of our fine examples to go be employed in a tropical environment. The bad news, the pay is pretty low. The good news, the locality will be at a residence with jumping dolphins in a clear blue ocean creek just beyond the in ground pool. Room and board is covered. The work is fulfilling and outside of work is even more fulfilling. But our couple can’t accept the job because they have that “investment” hanging around their neck. They could not have paid for it with the new arrangements. Yet another scenario might be that the unemployed member gets offered a job 30 miles further away. With gas prices on the rise, it was hardly worth the trip. But, the choices are limited since moving before the house is sold is out of the question. In this market? Good luck.

Through all this stress, as more then 50% of young couples do, they divorce. They sell the place at a loss, and his credit is screwed up for 10 years. They got along great when there weren’t money problems to argue about. Makes one wonder if they would have made it if they had stayed in the apartment.

So how do you feel about “investing” in a home now? Amass a large of a down payment as you can and then never take more then 15 years to pay off the house. Again, I am sorry John. Whatever you do, don’t get your new wife pregnant.

No comments:

Counter text

New counter