What I Learned From My Housing-Bubble Screwup

In August 2003, my wife and I were finally returning to the United States, after living in London for six years. We had been back in the country less than 24 hours, when I made the dumbest financial mistake of my life.

In an utterly irrational moment of impulsiveness, I lost $16,500 in a failed real estate transaction. I was unemployed at the time, too, so it was a huge loss for me. For many months afterward, the loss was unbearable. With the passage of time, however, I've been able to learn several invaluable financial lessons from the debacle.

This time is different
The housing market in the Washington, D.C., area was on fire in the summer of 2003. Home prices had been increasing around 16% per year in real terms during the prior four years, and many middle-class families could no longer afford to buy a home in the region. Nationally, of course, housing prices had already begun their steep upward trajectory by 2003, as the following chart from Zillow indicates.


Chart provided by Zillow.com.

In retrospect, the overheated market should have made us pause. In reality, it had the opposite effect. Houses back then didn't stay on the market very long. If you wanted one, you needed to act quickly. The real estate market in 2003 was no place for deliberating.

We had had some experience with the housing market in the months prior to our move to Washington. We had actually made a couple of unsuccessful offers on homes in the D.C. area, while still residing in London. Our big takeaway from those initial forays was that we'd need to be quicker than the competition in the future, and might have to pay a premium for something we really liked.

The lost weekend
The first 72 hours back in the U.S. were somewhat of a blur. We landed at Dulles Airport on a Friday afternoon. On Saturday morning, we saw a beautiful home in Cabin John, Md. Despite not having an agent representing us, we made an offer that afternoon, and it was accepted later that evening. On Sunday, we filled out some paperwork and handed over a $20,000 check for the earnest money deposit to the seller's agent. On Monday, we met with a mortgage broker to figure out how we were going to pay for our dream house.

Yes, I realize there are a few absurd errors of judgment mentioned in the above paragraph. First of all, we should have had our own agent. Second, we should have met with our mortgage broker before we actually made an offer and handed over the earnest deposit. Finally, we should have taken a couple of days to think about whether we were ready for such a big financial commitment especially since neither one of us had landed a job yet.

Looking back 10 years later, I still can't comprehend our stupidity. Sadly, I can't even plead ignorance. I was surprisingly aware of what we were doing at the time.

I majored in economics as an undergrad, and was very familiar with the basic principles of finance. I knew all about the dangers of debt and variable interest rates and the possibility of a fall in housing prices. I was particularly aware, in fact, that our financial situation was not quite yet strong enough to afford the home we were considering. Despite all of that, we went ahead and bought it anyway.

As you might expect, the meeting with the mortgage broker was a rude awakening. He told us that we likely wouldn't qualify for our desired 30-year, fixed-rate loan. But he consoled us by saying he was sure he could get us a variable-rate loan. In time, we'd probably want to refinance, but for now, he was pretty sure he could get us some sort of mortgage.

At some point during the meeting, the grim reality of our situation finally dawned on me. I knew we couldn't afford the house, and I was certain we didn't want an adjustable-rate loan. Finally, I didn't want to purchase a property until at least one of us had a stable job (gee, you think?).

After a sleepless night, we both decided to stop the madness. We called the seller's agent and told her we had made a horrible mistake. We apologized profusely, and asked if the buyer could possibly forgive our recklessness, and return the deposit, since it really was sort of a no-harm, no-foul situation. The seller said no. If we wanted to walk away, we would have to forfeit the entire $20,000. Eventually, they softened a bit, and gave us back $3,500. The bottom line was a $16,500 loss along with a couple of sleepless nights. And no dream house.

What is the price of experience?
Perhaps the only good thing that came out of the fiasco is that it taught me a lot about myself and investing. Here are three lessons.

1. If it's broken, you need to fix it
Clearly, my wife and I had done something extremely dumb, and we needed to make sure it didn't happen again. Ever since that disastrous episode, we've taken more time with our financial decisions and have subjected them to greater scrutiny.

In Thinking, Fast and Slow, Nobel laureate Daniel Kahneman talks of System 1 thinking and System 2 thinking. System 1 is the quick, automatic thinking that we were using that day to purchase that house in Cabin John, Md. We knew we wanted something special, and knew we'd have to act fast. What we needed more of, however, was System 2 thinking, which requires concentration, reason, and deliberation.

In recent years, my wife and I have worked on becoming more deliberative and thoughtful with our financial decision-making process. And just four years after our mistake, we were able to buy a nice home in Washington, D.C., with a very reasonable 30-year, fixed-rate mortgage.

2. Emotions play a huge role in financial decision-making
In our marriage, my wife tends to be the risk taker, while I'm usually the prudent one. Alas, that particular weekend my conservative financial outlook abandoned me temporarily. For those 72 hours, my emotions took over, and it resulted in a very poor decision.

With hindsight, it's somewhat more understandable to me. Three years prior to returning to America, my mom had passed away, and my sisters and I had to sell our family home in central Massachusetts. After the sale, while living in London, I had felt rootless, and noticed a strong desire to purchase a home for my new family. Once we arrived in D.C., my determination to buy a home was so intense and all-consuming that all other considerations seemed unimportant -- at least for a while. By the time I came to my senses, it was too late.

The lesson here is that emotions can be extremely powerful, and each of us needs to be more aware of how they might be affecting our financial decisions. Everyone knows very smart people who do very stupid things with money. Many times it's because we think we deserve the Ivy League education regardless of its costs, or we just know the IPO shares will ultimately provide us with the financial security we've been longing for.

It's not rational, of course, to feel this way. That's what makes it so dangerous to our finances. As Helaine Olen, author of Pound Foolish, points out, "when it comes to money, the vast majority of us are nuts."

3. There will always be regrets
The final lesson might be the most meaningful one for me. Having regrets about losses is a big part of investing, and investors need to embrace their regrets rather than trying desperately to avoid them. If you cannot bear to have anything go wrong, then you should definitely steer clear of investing.

In an inspirational TED talk, writer Kathryn Schulz talks about the idea of regret, and how central it is to our lives. Unlike Lady Macbeth, who consoles herself by saying, "What's done is done," we should attempt to better understand our regrets, so we have a better sense of what went wrong. Schulz concludes her wonderful video by saying, "Regret doesn't remind us that we did badly. It shows we can do better."

That's exactly how I choose to remember the biggest financial mistake of my life. I had an understandable desire for a new home, and then had a momentary lapse in good sense, which resulted in a very painful loss. Overall, I'd say my wife and I learned some valuable lessons from the ordeal, while also learning to live with the loss in the end. It still stings, of course, every time I drive through Cabin John, Md., but fortunately, it stings less with each passing year.

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Read/Post Comments (20) | Recommend This Article (41)

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  • Report this Comment On May 01, 2013, at 3:03 PM, ShrikeTheFoolish wrote:

    John,

    Just stopped by to say thank you for sharing this personal story. Keep up the good work.

    Jason

  • Report this Comment On May 01, 2013, at 6:16 PM, hockey33 wrote:

    Maybe I'm missing the moral of the story about making sound financial decisions. but you passed on a house in 2003, lost $16K.. that house probably went up $50K in the next 4 years. Then in 2007 you bought at the high of the market and are probably under water? Seems like the $16K error was the smallest of all.

  • Report this Comment On May 01, 2013, at 6:31 PM, TMFBane wrote:

    @hockey33,

    Fair question, but your assumptions are incorrect.

    The problem in 2003 was bigger than you suggest. Without jobs, there was a lot of risk that something could happen where we wouldn't be able to meet our monthly payment. It wasn't a risk we wished to take in the end.

    As for our new home, well...At risk of oversharing, we put down a good down payment, and have a very reasonable mortgage. And our home has actually gone up in value since 2007. So all around, it's worked out fine after all.

    Anyway, this article for me was about how we dealt with a poor financial decision, and how investors can learn from mistakes.

    @Jason,

    Thanks for your comment! Much appreciated.

    Best,

    John Reeves

  • Report this Comment On May 01, 2013, at 9:25 PM, watson14 wrote:

    Hey, thanks for sharing and many of could have been in your shoes. I've done ok in real estate but the 2008 collapse was tough on my portfolio - I made a decision to sell when I should have just sat tight.

  • Report this Comment On May 01, 2013, at 10:43 PM, SkepikI wrote:

    Among the most beneficial experiences I had in real estate was having to sell my first house at a loss in 1987 in order to escape a stubborn depression in Oregon and move into the teeth of an expensive rising market in S. California. It saved me no end of foolishness 3 years later moving to the DC area. I had one agent tell me in 1989 as we were looking that I should buy a house I didn't like "because real estate never goes down in DC and you can rent it out and make a bundle" I said- "look lady, don't tell me real estate never goes down, Ive lost money on houses in better places than this!" We bought another place we liked and then lost money on it in 1992 selling to move again. This last time I SHORTED the market by renting for a year in 2005 to find a bargain before the last big run up, and sold a vacation home in 2007 because the market run up scared the bejabbers outa me...for good reason in hindsight. Getting a dose of harsh reality young is a good thing.

  • Report this Comment On May 02, 2013, at 8:09 AM, TMFBane wrote:

    "Look lady, don't tell me real estate never goes down. I've lost money on houses in better places than this!"

    I love that quote! I will remember that in the future.

  • Report this Comment On May 02, 2013, at 8:29 AM, trdhrdr007 wrote:

    Hindsight is 20/20 but......having a clause in the contract stating the offer was contingent upon purchaser obtaining financing under acceptable terms would have saved you $16,500. In fact, in my area the contract that is required to be used by anyone associated with the local MLS has a paragraph in it complete with fill in the blank spaces to spell out exactly what % of the purchase price is to be financed along with terms.

  • Report this Comment On May 02, 2013, at 11:59 AM, Louis2003b wrote:

    Hey John

    I wanted to thank you for sharing your experience. I'm sorry to hear what happened. My gf and I will be moving to D.C in August. We are purchasing our first house after we get to know the area. I never realized how expensive it is to live in DC. It seems like they are in a nice bubble right now and we may try to wait it out.

    Louis

  • Report this Comment On May 02, 2013, at 12:14 PM, TMFBane wrote:

    @Louis2003b,

    Thanks for your comment!

    In light of my experience, I may not be the best guy to weigh in on the state of the DC real estate market. I can say, though, that we didn't experience the decline that much of the country did after 2008. My neighborhood saw a slight dip in 2008, and then continued the upward trajectory. So yeah, it's expensive here.

    I'll also add that it's a beautiful city with lots of opportunities. Best of luck to you! And i think it's probably best to take your time when deciding on a house.

    Best,

    John

  • Report this Comment On May 02, 2013, at 2:19 PM, LouisFBrooks wrote:

    I think our worst RE mistake was trying to sell our townhouse without an agent because we didn't want to pay the 5%. The deal ended up falling apart when the buyer walked out on the day of closing. That was in August of 2007. Now, any time I deal with RE, I use an agent who I trust and I am happy to pay their fee.

    --louis

  • Report this Comment On May 03, 2013, at 10:20 AM, turningpoint84 wrote:

    You're biggest mistake was quitting as early as you did....you delay the loan. Self home inspect the property and list every damn little thing wrong wit the place, and demand they fix it or you want out of the contract. If they say hell no we're not fixing everything boom, you're out of the contract scott free and earnest money is your back in full.

  • Report this Comment On May 03, 2013, at 10:22 AM, turningpoint84 wrote:

    Louis, why did the back out?

    I'm sorry but you're doing the samething as the guy that wrote the acticle.

    Let's say you sell your condo for $300K, you're giving the agent $15K.....Sorry but if i go into closing selling the home myself and the buyer has a complaint, i'd think 100% of the time the buyer isn't going to have an issue that's going to cost you $15K...not to mention the buyer had to have had an earnest money check themselves that should have become yours for them backing out last minute.

  • Report this Comment On May 03, 2013, at 12:57 PM, drgroup wrote:

    Your biggest "screwup" was leaving London.

  • Report this Comment On May 03, 2013, at 1:25 PM, Johny205 wrote:

    If you would have used a Realtor they would have made the earnest money contingent upon financing, and you would have got your deposit back. Being that buying agents don't charge a fee, because the seller pays for both sides of the transaction. Whether it be a layer or Realtor, if you don't know what you are doing you should seek a professionals opinion. I'm guessing you learned that, after this lesson.

  • Report this Comment On May 03, 2013, at 5:06 PM, kahunacfa wrote:

    Housing is two things:1. A consumption expenditure and decision as well as 2. An investment decision. Never, ever confuse the two roles for housing...

    Kahuna, CFA

  • Report this Comment On May 03, 2013, at 5:48 PM, NozRydr wrote:

    Thankful in our case for finding an agent who's skilled in embedding contingencies in offers that allow an escape (or renegotiate) and refund of earnest money.

  • Report this Comment On May 03, 2013, at 7:35 PM, maniladad wrote:

    John, Good points and I'd like to add one more. Don't make critical decisions when you're tired or under stress. You mentioned that you had just returned from the UK, and the "days were a blur." You were not in any condition to be making a major investment. I don't have any stories with quite the impact of yours but I've made lots of judgement errors just because I was tired and I'll bet that most of us have. When we're tired we tend to lose some of our logical faculties and are more prone to the effects of emotion and of self-defeating unconscious tendencies.(Most, if not all, of us have them; they're the answer to the perennial question, "How could I have been so stupid!?) In some situations we may be forced to make immediate decisions but I'm pretty sure that had you been more rested you would have realized that the urgency you felt to buy immediately was not rational. As I have to remind myself repeatedly.

  • Report this Comment On May 03, 2013, at 9:33 PM, Estrogen wrote:

    John,

    Thanks for sharing. Money mistakes make you human. A couple weeks ago I sold 350 shares of Apple stock at $400/share. I was angry and stressed over something going on in my life and broke my own rule (learned from MF) of buying or selling without first thinking clearly of my reasons and writing them down. Cost about $17k.

    Estrogen

  • Report this Comment On May 03, 2013, at 10:42 PM, vgaymer wrote:

    Perhaps the only good thing that came out of the fiasco is that it taught me a lot about myself and investing.

    Well...no you avoided a variable rate loan for a fixed fee of $16500

  • Report this Comment On May 04, 2013, at 7:02 PM, TMFBane wrote:

    Just wanted to say thank you for all of the comments! There is a lot of great advice within this comments section. Where were you when I needed you? :)

    Thanks again!

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