Friday, February 08, 2008

Riding out the storm?

Let's say you bought at the peak of the housing market, and since then home prices have dropped. What should you do? Panic and sell? Keep calm and wait?

I was contemplating today about our purchase of a home at close to the peak of the market. Because we moved cross country our housing purchase and sale was not within the same community. This makes debating whether our move was smart or not a hard decision to evaluate.

However I believe if we had not bought when we did, I don't think we would have bought during our time in MA, because we would not be assured of living there long enough to wait out the housing crisis.

When we purchased in 8/2005 we paid $575k for our home. I believe the peak had already passed in our new market, but was just falling in SD. Our neighbors had bought in 8/2004 for $609k an identical unit. Unfortunately they had lost one job and had to move to get another (personal decision because the woman was still working as an MD, but her husband wanted to move for a better opportunity for him). Because of this, their house was for sale in less than 6 months after they purchased.

They sold their house for $531.5k in 5/2006. Wow, we had just lost $43.5k in 9 months. But the whole numbers game wasn't over. The new owners had to pay $10k for the retaining wall, while ours were covered by our seller so add $10k to their purchase and $10k from ours = $23.5k in 9 months. Still a steep drop of 5% in less than one year. But desperate sellers = rock bottom prices (although our side of the house is nicer because the basement unit takes up less space under us so it's quiet). Ouch it hurt, but then we looked at our old condo in SD.

We had bought in 2002 for $150k, sold in 2005 for $275k, and current prices are $185-195k (this is for 500 sq ft one bd condo). Ouch, prices had tanked even more about 30%. And many people can't give away their condos.

So we were talking about our current home. Should we be worried? What if prices never come back? Are we stuck in a depreciating asset?

It really goes back to do you consider your house an asset? I don't. It's a nice place to live and I enjoy not moving. But any appreciation is gravy. Unfortunately many people bank on their homes to finance their retirement. Which gives the paper illusion of wealth. I'm sure many people never considered a home losing value. But the current situation shows it has.

So what can one do? Ride out the storm. Be prepared to live in your current place longer than you intended. I hope you genuinely love your house because you'll need to stay. Which is why people say don't buy unless you plan on living there at least 5 years and really love it. We actually love our place, intended on living here 6-7 years, and planned it to be large enough for our expanding family. So riding out this storm seems feasible.

I hope others reading this will have faith and keep on holding on. It's not an easy choice, but if you bought a house you liked and could live in, then it's easy. Buying a house solely for profit can lead to further financial pain.

One day when we move I'll write about whether it was a good financial decision. I think we'll be fine, especially because of extenuating circumstances.


Anonymous said...

Kiyosaki (Rich Dad, Poor Dad) says people make a great mistake when they think of a home purchase. They all say a home is the greatest investment you'll ever make. He says it should be looked at as an expense. Investments pay you, expenses take your money away. A home purchase is a perpetual expense.

Even when the mortgage is paid for, there are taxes, insurance and upkeep. Depending on a number of factors, upkeep can at times outstrip the mortgage payment and can be a source of a constant drip of money.

I think we are in for additional turmoil in the housing market. For those who were renters and have a decent down payment, now is a good time to buy. We may not be at the bottom, but homes are now deeply discounted from normal retail.


Living Almost Large said...

Truly an interesting perspective. One reason why I think renting as you age can make a lot of sense. A paid for home is nice, but not so nice to upkeep.

But real estate is very locational. Some people could never understand renting, but it really depends on where you live. How home prices vary from renting.

Doors said...

Riding out the storm
riding out the storm
if you let your payments ride
in time your home will rise
sit tight and ride the storm

There's a vulture lurking near
he is watching for your fear
if you try to sell out now
he'll milk you like a cow
in time you will sell dear