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The Politically Correct Congratulations



December 23, 2007 – Comments (8)

I have taken an extensive look at how the price of housing and the low interest rates are creating debt slaves for life and my advice to anyone who would listen who is interested in entering the housing market has been to look for the top and wait 4 to 7 years. 

Housing is the biggest single investment most will make and entering at a top can be financially crippling for life.  In one of my posts I calculated my own entry into Vancouver's housing market near or at a top cost about an extra $65k over if I'd bought the same home about 5 years later, with about a 10% decline in price.  That's a lot of lifestyle I feel like I missed out on.

So, my nieces and nephews talk about wanting their own home in Vancouver's market.  My home that had been down 10% at one time ended up being sold about 13% up after 8 years of ownership.  Take off the realtor fees, etc, and with 8 years of owning that home I was up about 9%, or $30k.  Interesting, four years later, my old home was just sold this fall and it was sold for 88% more than we paid for it brand new, about $308/sq ft.  So in 12 years it went from a market top of about $163/sq ft to a new probably market top of $308/sq ft.  From that low in the middle it is up 110%.

As much as I feel "cheated" from buying at a market top, I also feel lucky in that we had a far better household income in being able to manage this challenge.  We were able to reduce debt, and interest rates could have doubled and we'd have been able to manage because of our aggressive repayment of debt.  We were lucky in that interest rates declined and we were able to increase the repayment of principal through keeping our payments the same, but refinancing to a lower rate and reducing the amount of interest and effectively increasing the aggressiveness of our repayments.

I suppose my nieces and nephews will have that same advantage of being better wage earns, indeed, my nephew has had his own business since he was 16 and I loved our conversations where he'd talk about what he looked for in an employee and how he decided between a minimum wage earner, $8/hour, and his top wage earner, $13/hour.  He truly is one of the most amazing young men I know.

But, it doesn't take away from the fact that they have or are buying at a top or very near to a top, a far more crippling top than I bought at, one where our affordability index for the city was probably around 4 or 4.5, whereas a year ago it was at 7.7 and prices are up since then, our median sale price is now $540k.  Checking the data on individual municipalities I see that prices are up about 15% since that affordibility survey was compiled.  That median sale price is distorted by declining home quality, increasing 1 and 2 bedroom apartments versus less detached homes.  My first home was a 3-bedroom townhouse and theirs is an apartment.  Vancouver wages have been so incredibly flat and there is no question the buying power of households has declined to the point that many households can no longer figure out where to cut in their budgets.

By historical standards, interest rates are low.  There will not be a refinance at a lower rate advantage and there is far more likely to be a refinance at a higher rate disadvantage. 

If an affordability index of around 4.5 can result in price decreases of around 10%, what kind of decline can a 7.7 affordibility index result in?

So, one has bought and I hear the other is buying and it is normal and expected to congratulate someone on a home purchase, but I feel so little congratulations in my heart.

8 Comments – Post Your Own

#1) On December 23, 2007 at 12:18 PM, cabuilderboy (80.04) wrote:

Maybe, just maybe, your nieces and nephew retain a little remembrance of some other intrinsic values of homeownership, that you may have long since forgetten, as you have matured and have been jaded while analyzing the house solely as an investment decision. Not that you are wrong in doing so, but your younger family members may still see their first home as an accomplishment well beyond that of just a simple return on asset. A sense of acheivement, a place to meet with and raise a family, or a sense of community or belonging, These or any of 100 other reasons, which many of us seasoned veterans may no longer remember, could be reason enough to dive into home ownership for the young. It's the Holiday season, give them credit for having the youthful exuberance to remember why a house is more than just asset in our investment portfolio.

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#2) On December 23, 2007 at 1:22 PM, dwot (29.11) wrote:

Some of my reading this morning... - Appraised $210k sold for $165k in LV.  My comment - He is optimistic with his recovery expectations.  When there is a cycle of losses in home purchases people shy away from the market for years.  Vancouver's 81 top didn't find a bottom until 86 and our 93-95 top didn't find a bottom until 2001-2002.  I suspect the greater the top, the longer the time before a bottom is found.  Look at Japan's massive top in 89, it only found a bottom a couple years ago, about 15 years later.  The fraud in the housing bubble is amazing...



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#3) On December 23, 2007 at 1:46 PM, dwot (29.11) wrote:

So, those reading this who are currently under water in a home investment, I'd like to hear how you view your overprice purchase as an accomplishment and the degree to which it is ok with you that you are under water because any of these 100 reasons.

Cabuilderboy there is no question that I agree with you that a home is more than just an investment and that it is where you put down your roots and where you build your life, but at these prices they tear apart your life.

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#4) On December 23, 2007 at 2:15 PM, dwot (29.11) wrote:

And I am jade alright...  When I took my insurance money from my mom's death and bought property, unfortunately coming of age at another top, and I got two older and wiser season veterns to approve the purchase I was praised for not taking the money and buying depreciating assets like a car and things like that.

When that property went down in value I took more crap from people about how stupid I was, the same people who has praised me earlier.  Nothing jades you more than people rewriting history around you and digging the nail around your greatest loss in deeper.

Screw youthful exuberance, everyone will have known better after the fact. 

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#5) On December 23, 2007 at 4:33 PM, StockSpreadsheet (66.34) wrote:

I bought at a market top in '91 and was underwater for 10 years.  It bummed me out to know that I could have gotten the same townhouse for 30% less if I had bought it a year later.  (It was even more disappointing to me when I saw a couple of places sold for 1/3 of what I paid the year before.)  I had maxed myself out to get into the place, so I was definately cash poor for the next couple of years.  The way I looked at it though is that I had a home that would not increase my rent each year, so I knew what my monthly payment was going to be each month.  Also, when I bought, interest rates were at 9%, so I was able to refinance after a few years and lower my monthly payment, so that helped a lot.  A couple of years later, I refinanced and paid off all my non-home debt.  (A lot of people would say this is dumb, I know, refinancing short-term debt over 30 years.  But for me, it made sense in my mind as I could deduct the interest on my mortgage but not on my credit cards and it lowered my monthly bills by several hundred dollars, which I then used to pay off my car and to invest in the market, (both through increased payroll deductions into my 401k and into a standard brokerage account).  Therefore, this refinancing let me get my financial house in order, buy some new furniture, (or at least new to me, and in better shape than what I got rid of), and left me some extra money at the end of each month from my paycheck due to my lower bills. It also taught me a lesson, so now I have no debt on my credit cards and plan on keeping them that way.)

So was I wrong to buy when I did?  Yes and no.  I stabilized my monthly housing payment, (though at a higher rate than what I was paying in rent, but my townhouse is twice the size of the apartment I was renting), I got into an asset that over the last few years has greatly increased in value, and it allowed me, (through the refinancing), to get totally out of debt, (except for my mortgage), and I am in a location that I like.  All of these are good things.  On the downside, I was unable to move for 10 years because I was underwater.  Increased traffic congestion increased my commute time to work, (from 20 minutes to 45 minutes usually, though it could be over an hour on a bad day).  I was house-poor for years and bummed that people got houses cheaper than me, (a lot cheaper), in the years that I was underwater.  So all in all, I don't regret my decision to buy too much.  In hindsight, I wish I had waited another year, but I didn't know the economy was going to tank in the year after I bought, so it wasn't something I could have forseen.  Other than that, I am not too bummed.  Housing prices in San Diego are now beyond my reach, so if I hadn't had bought before, I would never be able to afford to do so now.  (Average home price > $500k.  Most townhouses > $350k.  My townhouse, in a lower-price part of town ~ $250k last time I had it appraised.)  Without the equity I have built up in my home, I would be in a world of hurt right now and would not be able to afford to buy a house.  (Of course, the current housing correction might change that in a few years.   We'll have to wait and see on that.)  

One voice heard from.


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#6) On December 23, 2007 at 6:41 PM, DemonDoug (30.94) wrote:

"your nieces and nephew retain a little remembrance of some other intrinsic values of homeownership"

maybe, just maybe, instead of buying that dodge minivan, you could fit into a viper, there is a rememberence and intrinsic value to a fast sports car, and the benefits it can bring to you, nurturing you as your life goes on.

Maybe, instead of the beans and rice, you understand intrinsic values of the filet mignon.

Maybe it's just all the bad media that has buyers on the sidelines, and it's all the media's fault.

"Not that you are wrong in doing so, but your younger family members may still see their first home as an accomplishment well beyond that of just a simple return on asset. A sense of acheivement, a place to meet with and raise a family, or a sense of community or belonging,"

Yes, and if you don't own a car you are not a good american, and if you rent you can't possibly happy, especially you can't be happy if you are renting a 2000 sq ft. house for less than half of what it would cost to buy it.

And I guess the push for "real estate as investment" by the Realtors over the past 30 years has nothing to do with the bubble, nothing to do with influencing young kids who see donald trump and a whole host of fraudulent real estate "gurus" ostensibly living rich?

These kids are going to get burned, it's time to end the shilling and the non fundamental arguments.  A year ago most realtors and real estate industry people were saying there was no bubble.  Meanwhile, the rest of us who are living on Earth in a place called "realityville" had recognized there was a bubble and it was bursting.

And those of us in realityville still see it bursting, while there are others tied to the industry that get defensive and rationalize why people should be buying, when buying right now for the vast majority of people is a big, big mistake.

Think of all the people that got subprime loans from AHM or NEW in january, february, and march of this year.  Can you really defend them, honestly?  Not in any good conscience, imo. 

dwot, when someone makes a life decision like that that you sit there and shake your head at (like marrying someone who is crappy), someone advised me to say this:  "God bless you and good luck."

keeps it neutral hehe 

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#7) On December 23, 2007 at 9:04 PM, dwot (29.11) wrote:

Craig, there is a difference between the top we bought in and the one young people are buying in now.  I am sure if you got in for that 1/3rd less you mention you'd have enjoyed a lot more lifestyle, or perhaps could have gotten out of debt by now, or something.  But, it was still manageable even though it was hard, and you had more space then if you'd been renting an apartment.

Our market is so high young people are buying 700 sq ft apartments as a couple that are making them house poor, and with low interest rates they will not have that opportunity to be helped out with refinancing at lower rates.  

DemonDoug, I talked to them a few times about housing bubbles.  I think our housing bubble might last a bit longer because we have the 2010 Olympics and after we had Expo our housing market tripled over the next 7-8 years.  So people around here think the Olympics are going to push it even higher.  But, when we had Expo our housing market was at a bottom, it was 5 years after the last top.  And in looking back, it was a doozie of a bottom.  You could get a 3 bedroom townhouse for about 160-200% of a starting salary out of university.  I had a friend whose husband was an engineer and he'd only been out of school about 3 years and they bought their first house, not a townhouse, at 130% of his annual salary.  His annual income was about the price of a modest 3 bedroom townhouse.  

Today's $540k median price is 12 times the starting salary of a teacher and about 8x what teachers make at the top of the pay scale after teaching 11 years.  Our affordability index after Expo's triple over the 7 years boom was about 60-65% of what it is today.

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#8) On December 23, 2007 at 9:18 PM, abitare (30.11) wrote:

I am renting my current apartment, I have the money to buy. If had bought it last year, I would have lost at least $40 - 60K. But I expect US real estate to fall 30-50% from the peak.The discount to rent here in DC is 30 - 50% over buying. Anyone stupid enough to buy when the discount to rent is so significant will likely pay the high price for their wanting to have "intrinsic values of homeownership" aka to be "house poor" or “upside down”. Anyone, who bought a house in the last three years in the US needs to calculate the cost to walk away. I think many in CA and FL will realize it makes sense to walk. As the recession increases unemployment and the consumer cuts back the down trend in housing will pick up speed and size. The last two apartments I bought at auction 2001-02. I paid 50-60% less then the previous owner, who had bought at the peak in 1989. The next time I buy, I will expect to have about the same discount.

With the money I save renting, I will travel and hopefully buy a Cessna (which typically appreciate, if maintained).

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