I beg your indulgence as this is a long post.
I've always considered myself a fairly intelligent person. These days I feel a bit foolish.
Our house-buying story begins in 2001, before we got married. I was living in a 2 bedroom upstairs/downstairs apartment with an unattached 2-car garage out front. It was a quiet part of town next to a university. The neighbors were quiet. It was a short walk to tennis courts, and a short bicycle ride to a park. I was paying $700/mo rent. It seems incredible now. We both liked the area so planned to live there after we got married and save money for a down payment on a house.
We had talked about having children, and already knew that there was only a 1% chance that we could have them biologically. We talked about adoption, bedrooms, housing and whether or not owning a house with a yard would have an impact on our status as prospective adoptive parents. We talked about whether or not to pay down credit card debt or buy a house. We looked at houses and found out the prices had increased 15% from the previous year (Thank you domania.com) and thought, "Man! There is no way we can afford this!" We decided to do the responsible thing and pay down debt.
And housing prices continued to go up. With the low interest rates after 9/11, prices skyrocketed.
With help from my DW and the LBYM board, we began paying every extra cent we could toward debt. Within 1 year, we had paid off 2 cards, and only had 1 left with a small balance on it. We took advantage of the low interest rates and re-financed our car. We were feeling really good about ourselves. We continued to look at houses to keep a pulse on the market, and decide which neighborhoods were most to our liking.
And housing prices continued to go up. In the fall of 2003, Southern California experienced wildfires like I'd never heard of before. Over 400 homes were burnt to the ground in our area. We didn't think that much of it, and honestly we were relieved not to own a home and have to worry about every wildfire. We kept on whittling down debt and putting cash away. But I remember commenting that at our current savings rate, we weren't keeping up with the appreciation in housing prices.
The next spring, we began looking in earnest for a starter house. We had been assured by our research that adoption home study workers didn't consider not owning a home a negative, but we were unconvinced. We would be stretched a bit, but we thought it would be better to be established in a home before going through the adoption process. Well, we hadn't looked very much over the winter, and were astonished to discover that the average price for a 3BD 2BA house had increased 40%! I know now that, in addition to the low interest rates spurring demand, it was probably a once-in-a-lifetime anomaly of an immediate decrease in houses available due to the fire. But that, coupled with the almost immediate increase in buyers flush with insurance money competing for every house on the market, and we were suddenly bidding against 7 to 10 other buyers for every house we liked!
We began to get frustrated. It seemed every house we liked would either be sold before our Realtor even inquired about it, or we'd get out-bid by thousands of dollars from multiple bidders! I was ready to give up and be a renter for awhile and would have were it not for one event that had made a lasting impression on me.
In the mid-70s, my family moved from New York to Washington state. My parents both wanted to be nearer to their parents as they increased in age, and my dad got a nice offer on a new job. So, we had driven across country in December (man, I still remember being carried in the middle of the night from our VW pop-top van into a motel in the middle of a blizzard in Iowa. That is some miserable place in winter!) to our temporary house which we rented until our new house got built. I only remember bits and pieces but, in the end, either the new house turned out to be over-ambitious, or inflation had increased the prices of building materials so much that the final price was over $100,000. I just remember being unable to comprehend that amount of money. My dad said he paid something like $15k for the house in New York (albeit smaller and with unfinished basement and a small plot of land).
So, thinking that the inflation of the 70s was coming around again, we kept on looking. We had a meeting with our agent and let her know that we were serious and that we were losing out on deals because she wasn't working fast enough for us. We were actually calling her about properties! From then on we looked daily. We searched the Internet, the real estate magazines, the newspapers, we drove around our favorite neighborhoods looking for for sale-by-owner signs and open-houses.
And prices continued to go up. With the spring-time pick-up and the media running stories of home appreciation, all the "Flip this house" type TV shows, etc... It felt like a contest. And honestly I'd be lying if I said we didn't get caught up in it a bit. Kind of like bidding in your first auction on eBay...
Finally, in the fall of 2004, we found the perfect house. Our Realtor came through for us. One of her co-workers, a new Realtor, had a house she wanted to sell so she could move up to a bigger one. She only showed it to us. There were to be no other bidders! It was in a neighborhood that up ‘til that point we hadn't considered, but it was very quiet and on a cul-de-sac which was great for future kids. The price was non-negotiable, but it was, what we thought was fair given the market conditions. We jumped on it. We had the offer papers signed that very night. Inspection only showed a few minor things which the seller agreed to fix. We decided to go with an 80/20 loan combo to avoid PMI with a 5/1 ARM first since the interest rate was a full point better than that of a 30 yr fixed. I "knew" from what happened in the 70's that inflation was going to continue and that home values would appreciate fast enough that even when the FED raised rates to begin to control inflation again, our house value would simply flatten out. If we needed to move to a bigger house (once those children started coming) we'd still be able to sell for at least as much as we paid for it. We signed closing papers 20+ days later we were owners of our very first house!
Fast forward to the summer of 2005 and prices are still going up! We've finished our training classes. We're feeling pretty good about being home owners as the home study worker is inspecting our house. Everything looks good! Just have to make sure and get locks on those cabinets where we keep the cleaning supplies. Signed the papers and we're licensed as an adoptive home. And the waiting begins.
Fast forward to March of 2006. The phone rings: It's the adoption worker! They want to place a 2 month old boy with us! Holy smoke we're really going to be parents.
Fast forward to October of 2007. Things couldn't be more wonderful with our first and we've decided to adopt a second. The phone rings: a 10 month old little girl needs a new home. We're ecstatic! (this is the short version since this is really about a house not kids...).
Fast forward to May of 2008: the 5/1 ARM is going to reset next year... Sheesh that was fast. Should we refinance now while rates are around 5.75% or take a chance on rates in a year? Housing looks like it has topped out and even seems to be dropping a bit. There are rumors of some problems in the mortgage industry. ... Is the FED about to raise interest rates more? The price of oil is going through the roof. Inflation is sure to follow. The FED has to react. Should we look for a bigger house now since we think we want to adopt a third? Should we try and sell and rent until we are approved for a third? (not a chance says DW. That's too much moving for us). OK we'd better see about refinancing because we don't want to be stuck with a 5/1 ARM with rising interest rates. I'm sure that Greenspan is going to have to raise rates just like Volcker did in the 80's. OOPS! Rates just jumped to 6.75%! I missed that window of opportunity. ARRGGH. Why didn't I just get a 30 yr fixed in the first place?! (Because we thought we'd move within 5 years, because we saved the difference in interest for just this scenario. OK If I had to do it over again I'd probably do the same thing...).
August 2008: Talked to our Realtor today to ask about looking for a bigger place. It would be better to have one more bedroom if we want another child. She brought neighborhood comps showing some good values and at least one foreclosure just across the street. That's going to hurt our value. Her analysis: "It's just not a good time to sell. You'll end up paying all your gains in commissions." OK, better check into refinancing again.
September 2008. Rates just dropped below 6% again! Yippee! I just locked in at 5.5%. We're going to be able to refinance if we can get the appraisal to come in at least higher than what we owe... Wow. It's only worth that much? OK, well, I guess we're going to be paying PMI. I don't want to have two mortgages again. At least we don't have to come out of pocket too much. It looks like we're going to be living here awhile. Not that we don't like this house. It's a great little house. I'm glad we got one we liked and didn't just settle for the first thing that came along.
December 2008. Today I heard a story about someone at work getting their mortgage modified. Their payment is going from $2200/mo to $1400/mo for 40 years! (Wow. I just wouldn't want a 40 year mortgage. That would be like making the minimum payment on a credit card. It would feel like forever before you made a dent in the principal). They said they had been talking with some other friends who had just had their house foreclosed. They had been considering just walking away, too, since they couldn't afford the payment. But then they heard about the loan modification program and went ahead with it. They're glad to still have a house. Good thing we refinanced when we did. We're not going to walk away.
January 2009. Boy there are some great deals on foreclosures over in our old neighborhood... We could have a bigger house for less of a payment than we have now. No, we're not going to walk away.
February 2009. I just survived a round of layoffs at work. One of my office-mates is no longer here. That's a bit sobering. I wonder if I'll be in the next round. Will there be another round? Will the current cuts be enough to get us into the black? I think we can survive on one income all right. Wow! 30 year fixed rates are at 4.75%. Surely didn't see that one coming. Should have waited I guess. That's what I get for trying to be responsible. Should have just let it ride. How's a guy supposed to get ahead when the government seems to keep on changing the rules? I was sure the FED would have to raise interest rates. This financial meltdown is unprecedented. I didn't look back far enough in housing history!
March 2009. Our house is worth 23% less than when we bought it and 36% less than its high last year on zillow.com. No, we're not walking away.
April 2009. Boy there are some great deals on foreclosures over in our old neighborhood... The local campus of the state university has classes on how to make money on foreclosures. Is this the bottom? No, we're not walking away. Although I must admit that the sonnypage "One Short Sale too many" thread has solidified the decision...
Like I said in the beginning of this post, I've always considered myself fairly intelligent. Throughout this home buying/owning process I believe I've done my due diligence. We didn't rush into it (probably would be better off if we had). I researched all the different kinds of loans out there. I researched the housing market history. I researched the 30 year fixed rate history. We made the best decision we could with the information we had. I don't feel like we over-extended ourselves. Nonetheless, here we are $50K in the hole on the biggest purchase we've ever made. Who could help but feel a little bit foolish? In hindsight, we obviously should have RENTED a house instead of buying one. I mean I did check that the rental prices for a 3BD/2BA house were less than what we would be paying on our mortgage. But, the belief that housing prices would continue inflating due to interest rates being low kept me from considering that as an option. That would be like throwing money away if we could buy it for the same payment as renting it. So it was either "keep renting our apartment or buy a house." With the information I had, and in our situation, I don't think we'd change anything if we were to replay the buying process. As for refinancing, the belief that inflation had to be fought with higher interest rates compelled me to go ahead with the refi. Next time I simply wouldn't try to guess (guessing's really what it is you know) what was going to happen in the economy/country/world. I'd just do what felt right and leave out the agonizing.
So what in the world to do from here? I'm sure I don't know. It seems like just about everyone here on METAR expects it to get worse when the option ARMs and the ALT-A adjustments hit. But what if the FED keeps interest rates low? "They" (the politicians) may swear up and down that they need a strong dollar, but with 13 Trillion in new debt as the elephant in the room, a strong dollar is the last thing "they" need. This could seriously be the bottom. Shoot, I might have been better off keeping that silly 5/1 ARM!!! Right now could be the best time to buy houses and rent them out. I've heard there are 3-5 bidders for each property at auction (I've witnessed it on REDC auction.com)... Anyone with cash to put 20% down is able to rent out properties for positive cash flow. I've heard that house rental prices are going through the roof.
To all of you here on METAR, Thank you all for being here.
I beg your indulgence as this is a long post.