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Ending Homeownership - Just Renting

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January 03, 2008 – Comments (8)

This week I have been packing. 

How did I come to this decision as it was a tough one?  I love this home I move out of tomorrow and when I moved in it I thought I would grow old in it.  I love the layout and the location.  I walk down the driveway in our complex and I enter a beautiful park with a lake that takes you a good hour to walk to the other side and back.  I think this is the best place in all of Vancouver to live.

We moved in about 4.5 years ago and I expected the drastic cuts to education to finish being absorbed within about a year.  They have not been absorbed and the teaching shortage they were predicting 10 years ago has yet to materialize.  Indeed, the week before Xmas a new story reported they continue to graduate more teachers than there are jobs.  We had an aggressive plan to get out of debt in 10 years and if things went well, maybe even 8 years.  Well, education remained a disasterous career choice and my husband got hit with a 23% pay cut two years after we moved in.  A ten year plan turned into 15 years.

In Canada you don't lock into a long term interest rate.  You might find something 7 or 10 years, but mortgages renew depending on the term you chose, usually 1 to 5 years.  We had a great 5-year rate and I expected to see an increase, but looking at where the economy was heading last summer that 1-2% expectation turned into 3-4%.  Indeed, right now rates are up 3%.  The other thing is that I think that we've been hit with huge increases in the cost of living in the last 5 years.  They report about 2% "inflation" but I think my groceries are up way more than that.  I know that in 2002 I could get gas for 35-40c per liter and now it is $1-1.30/liter. 

When I did an accounting last summer I was simply shocked at how far the income did not go and where our financial position was in comparison to where I expected it to be, and the difference was simply the cost of living.  The school districts also way over hired on call teachers this September so I was expecting at least another 20% pay cut.  Last time they did that I saw my pay cut by 27%.  I also had no faith that I could do as well on the market this year as I did last year, I am very bearish on the market.  Somehow a 10-year mortgage repayment plan turned into 20 years and 10 years of being able to be aggressive about saving for retirement was gone.

I don't know how comparable this huge growth in costs is in Canada compared to the US.  One thing that I noticed driving through the US last year was that cost were reasonable where there wasn't a housing bubble and they were outrageous in places where the housing bubbles were alive and well (Las Vegas).  Part of me wonders if we get hit harder on consumer goods in Vancouver just because businesses have that much higher rental costs due to the housing bubble.

Seeing a potential pay cut, extra high interest rate reset and the huge increases to the cost of living was enough to say forget it.  Home ownership has been nothing but a struggle that has always sucked up an enormous amount of the household income.  We listed our home at the beginning of September, and I got a job in the North West Territories.  We complete our sale later this week, but tonight is my last night in this home.

So what did I learn?

1) Consider carrying costs.

I'd say the one regret I had fairly quickly was our home was more than we needed and the carrying costs were more than I expected.  You simply can't control those costs.  Our utilities doubled, property tax and maintenance were both significantly higher.  While those costs were manageable when you had two people working, I had concerns about them for retirement.  But I did always look at the extra home as part of a retirement plan.  We could downsize and live on the difference in equity.

2) Consider wants versus needs. 

We fared ok through several strong economic hits against us because we started with a 10-year plan.  This was a move up for us.  If we had moved up into something that would have required a 20-year plan we'd have run into trouble where we would have had difficulty remaining in the driver's seat in our choices.  Certainly when we moved it the place was well within our means.  The first two years before my husband's pay got cut we were making payments 78% greater than we do today.  What I learned from this is to really carefully consider wants with needs.

3) Well thought out plans can go wrong

What can I say, I don't think there was a thing that you could point to and say there was an unreasonable expectation in our original plan.  Few plan on pay cuts, or excessive rate resets, and the increases in consumer prices is crazy.

Don't get me wrong, we did not have to sell, but housing simply takes too much of our household budget.  It has from the day I became a homeowner and I just got tired of it.

Right now the economics of renting are enormously better.  I worked out that the landlord of where we are moving is getting about 2.1% on his equity after maintenance and taxes are paid.

I will be moved into my Vancouver home next time I get online and I head back to the North West Territories on Saturday. 

8 Comments – Post Your Own

#1) On January 03, 2008 at 8:43 AM, floridabuilder2 (99.25) wrote:

A friend of mine makes over a million a year and is an executive for a homebuilder in Florida.. he has a large family... and he rents... enough said.

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#2) On January 03, 2008 at 1:15 PM, Capsperson wrote:

So sorry to hear your story but I know many people have similar stories.  Many people are chosing to rent and I can certainly understand why.  Good luck to you.

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#3) On January 03, 2008 at 8:14 PM, dog1350 (74.45) wrote:

Opportunities arise as much as shortfalls.You are in the top one percent of caps.Don't you see what a great gift you have for picking and forecasting markets.

You probably have not shorted any stocks in real life but if I had your mind I'd be wealthy.......Maybe money is not your goal. So only short enough to make a living.If you start with a small sum...small sums compound just as well as large sums.You do the math.

I have enjoyed reading your posts and will continue to do so.

Wish you would moderate your views.Good Luck in all of your endevaurs...D

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#4) On January 03, 2008 at 10:02 PM, abitare (92.20) wrote:

dwot,

Say a little pray and pass your problems on to God. It works for me... although I still have the flu which I have not been able to pray away. 

If you are awake, Asian market is getting slammed. Check out www.bloomberg.com

FYI - I rent, I expect to rent for sometime although I could buy.

 

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#5) On January 03, 2008 at 10:08 PM, camistocks (< 20) wrote:

Very sorry to hear that... It is very easy to give "advice" that people who can not afford a house should better rent. However life can be very mean, as you certainly did not expect all those wage cuts and inflation.

But on the other side, change means opportunity. Some people say that things happen for a reason, maybe you just had to go out there to the North, we will find out later why...

Peter 

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#6) On January 04, 2008 at 1:27 AM, dwot (68.95) wrote:

Floridabuilder, that most certainly suggests he still thinks the market is over valued.  But, in Florida with home ownership the insurance kills you as well.  I've heard people saying insurance was $1k per month and that's for a modest home.

Capsperson, I am exhausted, everything is in boxes, but I wouldn't feel sorry for us.  We could have stayed, I just wasn't seeing any hope of having lifestyle by staying.  From the day we became homeowners housing has eaten a huge amount of our income, a lot of the reason being because we've always been aggressive about trying to pay down debt and because housing was so expensive when we first became homeowners.

Here's the thing, and when I think about it I find it shocking really.  We had about 75% equity in our home.  We've got a housing bubble here.  If our house remained the price we had bought it at, we'd have about 60% equity.  I guess another way of looking at it is if our home had not gone up, our mortgage would have be 40% of the price we paid.  Because it went up, it ended up being 25% of the price we sold at.

What is shocking to me is how paying for only 25% of the home was looking like it was going to take another 15 years.  We had a lot of equity.  Our household income was still above average.  This is why I see so many people struggling to make ends meet here in Vancouver, and even small disasters being complete set backs. One of my movers said he has moved 2 times in 6 months because he can't afford the rent and he's working two jobs.  I gave them each a $40 tip and I could tell that tipping in the moving industry isn't that common.  They were very surprised and were highly grateful. 

Out of all the people that you use services for moving I think movers do the most for you, but they seem to be at the bottom of the income ladder.  Realtors took 11 times what the movers took, tip included.

This is also the bigger picture as to why I am so bearish on the market.  If the economy had been dependent on our spending it would have shriveled up and died a long time ago, but most people weren't as aggressive about debt.  Well, people have gotten themselves into so much debt they will be spending as much of their income on debt as we did, only they won't be getting head and piling up equity like we did. The economy has no place to go but to be really sluggish for years as the masses get their debt under control, and lots are going to be chasing declining equity.  We did for our first 7 or so years of homeownership, with it bottoming about 10% less than we paid, before it really took off again.

dog1350, you are correct that in real life I have not shorted a single stock and I only started the market in the summer of 06.  My first year return was 177%.  If I had figured out how good my mind was for this years ago I have no doubt I would be very wealthy. I figured 3-4 more doubles and I'd be set for life.  However, right now I am out of the market because I don't trust it.  I fully expect to see some brokers go under and I don't expect the so called insurance they have to be enough for the losses.  It is made up on the same kinds of models the now deliquent mortgage insurance was designed under.  There is $681 trillion in derivatives out there and if you happen to have your money in a brokerage that has one of these things unravel, well, you could be in line hoping to get your money back.  I have some trust that if I am in something government insured they will at least print money for me if these idiots screw up badly.

abitarecatania, like I said above, I could have stayed, but I've had 14 years of housing eating way too much of household income, and I did not relish another 15 years of it and having to look at what to cut and be mindful of costs all the time.  There was some room to cut, but I want lifestyle.  We had a very nice home, and when we moved in I expected it to be paid for by age 50 and that we'd be able to concentrate on retirement, seeing how most of our working lives was not for companies the provided pensions.

And now that I've looked much deeper into the whole pension issue, well, we will be so much better off because people in my age group aren't getting even half the pension they think they are getting and they have not prepared for providing themselves with any income.  I calculated that in Canada if you lived until your mid 80s and qualified for the max Canada Pension, Old Age Security and Guaranteed Income Supplement you would collect about a half million dollars.  It is so grossly unsustainable it is a joke.  And a lot of private plans promise 70% of your 5 highest years of income.  Paying 7.5% of your income, matched by the employer, for 35 years can pay 70% indexed for 20 years?  It is so absurd, yet people believe it and will be quite indignant when they find out it is a lie, and they will somehow think they were cheated..

 camistocks, when I was growing up I was told that if I went to university I would be set for life.  The truth is that Vancouver has a lot of displaced university educated people.  The mover I mentioned that has moved twice and is working two jobs is a trained engineer.  From what I saw he was very hard working.

When I looked at what precipitated the harder times for Vancouver, well, I think the US has gotten itself into that kind of mess so I think a lot more people are going to be seeing wage cuts, under employment, and mis-matched employment (engineers moving people). 

I am not so sure I believe that change means opportunity.  Certainly what I have on the surface with this change is enormously better for our finances.  But I've seen so many things turn very different than what you'd expect, I no longer trust that what is today will be there tomorrow.

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#7) On January 05, 2008 at 2:44 AM, dwot (68.95) wrote:

Something else I learned is that today most traffic through your home from selling makes contact through the internet. 

We used 1% Realty and the drive for people viewing came from the internet.  Our Realtor was the best I've ever had.  He had profession surround picture taken by a professional photograph.  With competition for selling, having high quality pictures of your home on the internet helps, well, if you have a nice looking home it helps.

What was really interesting to me was all of the 3 Realtors that put in offers from buyers put in a clause to jack up their take.  I am not sure how the buyers thought that would increasing their bargaining position.   

 

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#8) On January 05, 2008 at 11:06 AM, dwot (68.95) wrote:

Sigh, I guess this is it...  It was just a place, but it was a very nice home...  I don't think I will regret this decision in the long run, but I am feeling it today.  We close on Monday, but I get back on a plane today.  It is the opposite direction of the airport but I'm feeling like I want to walk through it one more time.

Life is more than just paying for a home.  I know this is from entering the housing market when prices were about 4 times median income.  Right now in the US average home prices are 3.7 times median income.  I have a feeling a lot more people are going to be feeling very tired of paying for home.

I just don't see how wages continue up, and that was probably also a part of the pay, pay, pay issue.  The debt never became more manageable as promised ("it is only hard the first few years, then your wages go up and it is a smaller percent of your income").

Canada got itself in trouble with government debt and that is why our economy has had declining real wages since the 80s.  The US has more government debt issues than Canada ever had and now there is also extreme personal debt issues.  

Vancouver has a strong division of wealth and lifestyle basically determined by when you entered the housing market.  If you were in before the 90s you won the approximately $250k home equity lottery.  If not, you were paying that from wages.  The difference in lifestyle because of housing has been enormous.  It has gotten far worse.

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