What happens you buys a $442,000 house with $433,000 in financing? Well, here’s Jim and Vesha. I told you about them a month ago. “Thought your readers might want an update,” Jim wrote me last night. And we do. We love drama.
The kids, who make 130K between them, drank the Kool-Aid and bought a semi in Victoria with 5% down three years ago. After 30 mortgage payments they realized the house was consuming them. “We weren’t saving a dime,” he says. Worse, the place wasn’t rising in value and the mortgage wasn’t being reduced. Real estate prison. So they listed back in February, at $475,000, pissing off the neighbours who found it too cheap.
But buyers found it too dear. Three price cuts later the house was at $449,000. “We are starting to get worried,” they said a month ago, “ some of my friends in similar situations are worried too – but most of the idiots out there still seem to think prices are rising.”
So, here’s the rest of the story:
“After more than 100 days we finally sold, to a 25 year old hottie newbie realtor. Purchase price you ask? $442,500 – the exact same amount we paid for the half-duplex just under 3 years ago. So for the meantime we are taking a step back and moving into a suite in a brand new home our friends own for about half the monthly cost allowing us to put away $1200/mo. On one hand when I click on HGTV it feels rather depressing, but on the other, knowing we can pay cash to go to Maui in November for our one year anniversary while still saving oodles of cash feels pretty good.
“Well lesson learnt, had we taken all the money we kicked into this place over and above rental costs over the last three years I bet we would’ve had at least $70,000 to show for ourselves now. Our exodus from ownership is actually quite liberating, now we can just pick up and do what we want for a bit, wait till things cool down, build up some savings and security and eventually build our own modest shack at reasonable prices with a realistic plan in place for the future.
“The real irony though, well that was the stabbing two doors down on Saturday night, but shhhh don’t tell the buyers!”
This couple that lost three years because of a house. They walk away with far less than they put down, and during the intervening time, occupancy costs far outstripped what they might have paid in rent for the same place. They gambled big – using extreme leverage in the hopes of scoring a capital gain – and were lucky to exit without major losses. Chances are the people just listing their homes now will have less luck.
Buying that semi was not a rational, logical, deliberated decision. Jim and Vesha, like most young house hornies, were egged on by peer pressure, family, media and government. They prove once again that in anything but frothy, bubbly, irrational markets (which never last), home ownership is a losing gig. People who think they are ‘buying’ anything with 5% down have way too many hormones. Instead, it’s a trap. It’s why banks always win.
One theme here over the past three years is the wisdom of investing in liquid assets instead of illiquid houses. Not only would it have taken 15 minutes to sell ETFs, bonds, stocks or preferreds – instead of 100 days – but the returns inside a balanced portfolio are more certain.
Actually, an economist at the US Fed just proved it. His research paper debunked the notion of houses building wealth better than investing, showing that half the time it’s the opposite. Said Jordan Rappaport: “For many households in many years, renting and investing the saved cash flow has built more wealth than homeownership.”
Interesting, stocks have outperformed real estate in the US consistently since 1980 – and that even included the subprime bubble years. As Jim and Vesha just learned (and many more are about to), there’s been no money to be made during Canada’s current bubble when you have a ginormous debt hanging over your head. Five/35 is a cruel hoax.
Of course, this is about to slip from being amusing to abusing. With real estate now entering a decline phase, it means tens of thousands of other young couples will surely come to the same conclusion. Renting wins. All booms end badly. Bubbles burst.
Just to underscore this, I hope you noticed the latest news from the south. American house prices are (on national average) back to 2002 levels. They’ve fallen 33.1% from this time five years ago. Still falling. Homeownership has dropped from 69% to 66% and is expected to hit 63% – where it was fifty years ago.
Here’s the thing: it’s not that Americans can’t afford a house. Hell, they’ve never been cheaper in terms of income. But people don’t want them. Demand has withered. If the object is financial security, then housing can be a death spiral. That’s now obvious.
Jim and Vesha may have lost three years. But millions in America burned a whole decade. Legions here continue.
We are so foolish.