Editor's note: This blog post was originally part of The Baglady, but was taken down from the main blog and resurrected at this page because my mom actively harassed me about it. It also has been edited slightly according to my parents' wishes so that they are now comfortable with the information disclosed in this story. The edits were very small and the post has always been anonymous. Comments are welcome on any other part of this blog.
So yesterday I wrote about saving for retirement and saving for a house and my entire point was that a house shouldn’t substitute for your retirement fund and holding off on contributing to a retirement fund would set your nest egg back. Last night I got a call from my mom with comments on my article. She said, “renting and having a mortgage is different! I can show you my spreadsheets!! It really isn’t that bad to buy!!! ” So I said, “um, the article wasn’t comparing renting and buying at all. It was about how saving for a house first would set you back on saving for retirement. I understand that buying a home does make sense sometimes” So, her little attempt at educating me inspired me to write this article about my parents’ two home purchases. One home was purchased before the housing bubble, and one home was purchased at the peak. Lets see the difference between the two houses.
The first home was a single family 3 bedroom 2 baths house measuring 1380 square foot purchased near North Berkeley in 1999 for 292,500. My parents made the full 20% downpayment and got a loan that they believed to be a fixed rate 30 year loan at 7%. This time my mom trusted the loan dealer and didn’t read through the documents entirely. Only after the documents were signed did she realize that it was a 5 year ARM. My mom was fuming about it for months because she wanted a fixed rate loan. Fortunately, this turned out fine because in a few years they refinanced to a 15 year fixed loan at 5.25%. However, to this day she still tells me that loan dealers are evil and to read through the documents very careful when I buy. My parents were first time buyers and they were quite excited to own their home. I was in high school and I really loved the house too. It was a five minute walk from my school and it is a pretty unique architect designed home. My parents still live in this home because it is in a high density area and there are a lot of shops and public transportation available. They both take bus and BART to work and the house is within walking distance to the transit stops. I don’t really remember my parents’ incomes in 1999, but I’m pretty sure their combined incomes were lower than $100,000 back then. However, their initial mortgage at the 7% rate was only $1556 a month. Now after the refinance the mortgage rate is about the same, but they have a lot less time left on the loan and they always pay a little over the mortgage balance . In the beginning the tax benefits basically canceled out the property tax. We used to rent a two bedroom apartment about half the size for $750 a month before we moved into that house so buying the house was definitely a sound decision because my parents were building up equity as they paid their mortgage. My parents definitely ran the numbers and it made sense to buy then.
During the bubble years of 2002 to 2006 a lot of neighbors sold their homes and left to go to other states. Our next door neighbor moved to Oregon and sold his family home for $665,000. This was a house that was smaller and older than our home. The other next door neighbor sold for $580,000 and moved to either Washington or Colorado. This was a home that was designed by the same architect as our house but is also significantly smaller in lot size and living space. Many houses within a one block radius sold for higher and higher prices and some reached record prices of $700k to $800k. Granted, a lot of these homes are in a very good public school district, but they are tiny wooden pre-war homes that are not special in any way. Our home was built in 1967 and it is the newest house on the block. At this point my parents were definitely applauding themselves because they put all they had into buying the house in 1999 and avoided the temptations of the stock market. If they had put their downpayment money into stocks then they would have lost it all. As we all know now, 1997 to 1999 was the build up of the stock market bubble and my dad was more into trading stocks. My parents definitely dodged that bullet by buying their first home.
My parents’ incomes rose a lot between 1999 to 2005 and as they watched home prices around them accelerate into incredulity they started going to more open houses. Most of the homes they looked into were new developments in the northeast Bay Area. I remember I went to a Toll Brothers development with them in Point Richmond and the home cost around 800k to 1 million. They decided that it was too expensive, and thank goodness they did not buy that. Anyway, to make a long story short, one day I got a call from them saying that they bought another house! This was in June 2005 and practically the peak of the housing bubble. It was pretty perplexing because they bought the home in a retirement community that required at least one adult be 55 years old. In 2005 my parents were only 50 so they couldn’t live there yet. The house is a 2 bedroom 2 bath measuring about 1400 sqft and had a price tag of $437,500 because it was located on a brand new golf course. It is located about an one hour drive from North Berkeley. This time they put 50% down and secured a fixed rate 15 year loan of 5.87%. For the first year they owned it they rented it out for about 1000 a month, and that definitely does not cover the mortgage of $1830 plus $120 or so in HOA fees. As of last year they no longer received the mortgage interest rate tax break because they were subject to the Alternative Minimum Tax. Also, the renter asked for a rent reduction last year and then moved out. So now my parents just go to the house on the weekends. It seems to be a very pricey weekend home at the price of over $2000 a month. Additionally, this year the real estate prices in Solano county really crashed so I found some similar homes in the same community selling for much less. Some examples are here, and here. Both of these example homes are bigger than the home my parents bought and located very close to their property. They are both listing at a huge discount to their original sale price. If my parents tried to sell this house now they would lose at least $100000.
My analysis of the situation is that my parents did not need to buy that retirement home in 2005 because they didn’t plan to retire anytime soon, and even if they wanted to retire they already had a perfectly good home to live in. They really bought it because they were caught up in the real estate mania and wanted to own more real estate. It was also sort of an impulse buy because my parents said they really loved the community and the quaint little town next to the Sacramento river. Fortunately they are able to make the payments and they will not lose any of the homes. However, I truly believe they delayed their own retirement by taking on that second mortgage. If they had kept the $200000 they paid as a downpayment in the mutual funds they had they would have had a conservative return of 20 to 30% in these two years. All the mortgage payments they have made could have also been saved and they probably could have bought a home in Solano County with 100% cash now. This is really another example of putting a house before retirement. If they just saved the money and waited for the housing market to cool down they could have bought a retirement home for a reasonable place in the same place. The good thing is that they did not buy these homes with the intention to flip, but they intend to keep them for a long time so eventually the value of these homes will go back up just because of the forces of inflation. However, I expect that they would have to wait a very long time for the second home to appreciate. I guess you win some, and you lose some.
So even though I post some dismal anti-homebuying articles from time to time. I understand that once upon a time housing prices were reasonable here and hopefully it will be affordable once again. I absolutely love my family’s first home and I am really glad that my parents purchased it. If I see something like that again at a price that is in line with inflation in a neighborhood I want to live in I would buy it. The price I have in mind for a comparable home is around $380,000 right now and maybe $425,000 in 3 to 4 years. Unfortunately, comparable homes these days are all 30 to 100% over the reasonable price I have calculated. It still makes sense to buy in some parts of the country, but I don’t live in those places, so I can only write about the situation around me. What I learned from my family’s story is that I should stay out of things that are extremely popular and bubble-like. Just because everyone is doing something or buying something doesn’t mean that I should follow. When it comes to buying things I really try to see if I need it or not. Also, I always research any big decision in depth before I do it. Taking a careful and calculated approach to everything is how we can protect ourselves and others we care about.
