There’s a difference between reading about the national housing crisis in the newspaper and actually seeing one of your neighbors lose their home. That’s just what occurred two doors down from us.
My neighbor, a hardworking guy with a nice family did what he thought was the right thing at the time. After all it was 2004 and with local real estate prices spiraling upward, it seemed to him that it was now or never to own a piece of California real estate. He plunked down most of his savings for the down payment and fatefully was directed to an “option ARM mortgage” (which as early as 2006, were referred to in Business Week as a “nightmare mortgage“). In addition, he didn’t quite have enough for the down payment and borrowed the remaining amount from a family member.
All was going according to plan. The following year, the home’s value had escalated and he tapped a home equity line to pay back the family member and consolidate a few other bills. But just a few years later, the perfect storm of 2008 arrived.
By the time the dust had settled, not only did they owe more than the home was worth, gone were the low payments which marked the first five years of his “creative” mortgage plan. If he wanted to stay in his home which was still dropping in value precipitously, it was going to cost him another $1000/month. He literally handed the keys back to the bank.
For every disturbing story like this, there are many out there who will vehemently make the case that home ownership has been vital to the growth of their personal net worth. Yet, as I previously suggested in the midst of the stock market meltdown, the best time to study an asset class is when the thrill is gone, or at least on pause.
There have recently been some astute articles which challenge the validity of viewing our homes as long term wealth builders. Notwithstanding that housing prices nationally have reverted to 2002 levels, the question is, should I see my home as an investment or merely a great place to live? Last week Wall Street Journal Columnist, Brett Arends, concluded that, by his calculations, the real return on buying a home is lower than buying government bonds.
Over the years, anxious young homebuyers told me that they were justifying their home purchase because taxes were eating them alive. Homeownership was a wise move because the tax deductibility of their new mortgage interest was going to net their payment to the near equivalent of renting. Their logic was flawed by a significant omission…property taxes. In fact, I have calculated for many, at least in California, that the mortgage interest deduction benefit is just about totally offset by the annual property tax expense.
Sounds like I am anti-homeownership, but the truth is, I own one. But having lived 19 years in the same house (not really the same house, we gutted the place 8 years ago and added a 2nd story), I have learned that, just like stocks, the residential real estate market is cyclical. I’ve just talked myself into not caring. It’s been enough that our house has served as a stable headquarters for the wellbeing of the family. With respect to its monetary value, let the chips will fall where they may, if and when we ever move.
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