House poor: when the house fails as an investment
Paying too much for a house can leave the family with too little disposable income to satisfy other desires or meet important family obligations.
Buying a home is always an emotional decision. When people fall in love with a property, if either spouse bothers do perform a financial analysis, it’s generally biased toward the answer they want to hear. Rather than an objective look at the costs and benefits, the analysis becomes a flimsy justification for an emotional decision already made.
Sometimes, that leads to costly mistakes.
“I wanted to have my own house. It was part of the American dream, having my house.” Azula–Altucher found a house she loved, but it was a stretch financially, and it turned out to be a bit of a money pit.
As soon as she bought it, she said, “every penny I made went into the house so I had no money to eat, just money to go to work, eat whatever I cooked, and then every weekend I was in my house fixing things.”
Even as she became adept at home repair, Azula–Altucher was racking up debt, and soon she had no financial wiggle room. Then, in 2009, she lost her job. With five months’ severance and ongoing mortgage and car payments, Azula–Altucher was in trouble. …
First time homebuyers like Azula–Altucher are often surprised by the true costs of home ownership, from necessary repairs to ongoing maintenance.
One of the main reasons I put the detailed cost of ownership for every for-sale property on this site is to avoid this problem. I even published a detailed guide on home ownership costs.
Azula–Altucher and her husband have no plans to buy a home, however. “I don’t want to buy a house,” she said. “I want to rent because I realize maintenance is a lot of work, there are hidden fees, taxes can go up and I’d rather spend all that energy writing and using my talent rather than worrying about a house.”
My loanowner inspiration
Prior to my writing publicly about housing, my wife was close friends with a woman who lived in the Cottage neighborhoods in Woodbridge. This family bought their house for about $400,000 in 2001, and by 2006, it was worth about $725,000. When I told them houses can’t possibly appreciate that quickly and sustain the gains, they told me I didn’t understand California real estate. The woman’s mother was a real estate agent, and she knew this market better than I ever could — or so I was told.
Despite my long conversations with them on the subject, I could not convince them there was a housing bubble. These conversations provided much of the early energy to write. Maybe I couldn’t save them, but I could try to save everyone else.
The family who was my inspiration decided to execute a move-up in November of 2007. They only had $100,000 because the breadwinner borrowed the rest of their equity to start a successful business (the only use of HELOCs I can understand and endorse).
They took their $100,000, borrowed $1,000,000 in a first mortgage, borrowed $100,000 in a HELOC second mortgage (maximized their tax write offs), and bought a $1,200,000 trophy home in Woodbridge. After launching their new business, they quickly took on an $8,000 per month mortgage payment on a property they could have rented for $4,000 a month.
They struggled with this payment for over six years. Finally, in May of 2013, values had come back to where they could sell the house, pay the commission and get out with a small profit. The traded down to a cottage home very similar to the one they left six years earlier. It couldn’t have been an easy decision.
They had to pay $40,000 more than they sold their cottage for back in 2007, and they put about $100,000 down, so the last six years had no net loss, but no gain either. Their new mortgage payment is at least 60% less than their previous one.
My wife asked me if perhaps they did it right. They got to live in that beautiful house for six years and feel like they owned it. They got to impress their family, friends, and neighbors and live the good life — at least that’s what was seen from the outside. I pointed out to my wife what you didn’t see was the emotional cost the breadwinner of the family endured trying to make that $8,000 per month payment.
Since they could have rented the house for $4,000 per month and since they ended up with no additional equity, the extra $4,000 per month they were spending was “throwing their money away on mortgage interest.”
That $4,000 could have funded many family trips and vacations, possessions for their teenage daughters, savings for their retirement, savings for their children’s education, and a plethora of other benefits they gave up to “own” that house.
Even after the tax breaks, this family flushed $200,000+ down the mortgage toilet.
I give this family credit for finally making the right financial decision when they sold the big house. The discussions about selling their dream home to take a step down the property ladder could not have been easy, but it was clearly the right choice. They cut their housing costs by 60%, and now they will have the extra money to do all the things they gave up to own that huge
Don’t be these people