Trapped In A House, Bleeding Cash

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Trapped In A House, Bleeding Cash

Sometimes our eyes are bigger than our appetites.

That’s what happened to my friend Sandy when she bit off more than she could chew with her 3,500 sq. ft. townhouse in one of Chicago’s swankiest neighborhoods.

Big Mortgage, Shiney Appliances

When the economy was sky rocketing, Sandy had a couple good years in the financial industry. She parlayed that short-term success into a long-term obligation, a 30 yr. $267,000 mortgage with all the bells and whistles.

Sandy gorged herself on designer appliances like Viking and Sub-Z while the party raged on. Woman and children watched in awe as prices shot higher.

But now, the economy is in the tank, and guess who doesn’t have a job? The place that was supposed to produce big returns is starting to look like a blender.

“Add cash and hit puree.”

Sandy’s townhouse is shredding her bank account.

She has a fat mortgage, expensive taxes and pays monthly dues to the condo association.

So why not just sell the place and downsize into something more affordable? Simple solutions for simple problems, right? 

Wrong!

Sandy is Trapped, She Can’t Move

Let’s back this conversation up for a second.

What kind of a bank lends money to people who don’t have jobs?

None that I know of or I’d have an account there.

Even if she extracts $200,000 of equity from her current place, which would be a windfall for anyone, she would still need a mortgage to cover the difference and get into the next place.

Could she squeeze into something for less than $200,000?

Not a bad question, that option is on the table.

But it requires stepping over a colony of bums drinking busch light at 6 in the morning to get to work, probably not a good fit for someone coming from a half million dollar townhouse in a fancy neighborhood.

In the meantime, Sandy waits, faithfully paying her mortgage and keeping her windows open to save money on electricity.

And her house? Oh ya, it’s worth less than it was 4 weeks ago, no big deal.

The Housing Myth Busted

Sandy bought into the myth that real estate is a silver bullet investment and overextended herself, a very common mistake with all the mania surrounding housing these days. But that is pure fallacy, becuse on a historical basis, housing has not been a great investment, returning only 3% annually, a mere 1% better than inflation.

And housing has been known to go through 20 and 30 year periods of doing absolutely nothing, making the upward action over the last few years an extreme statistical anomaly.  

So before you sink an enormous amount of money into a new place expecting big returns in 3-5 years, here is a good question to ask yourself.  

Would you rather have a big chunk of your money tied up in a massive, ice-berg like asset that is extremely expensive to move, or some stocks and bonds where you can get in and out with the click of a button and make immediate adjustments to underlying economic fundamentals?

When you buy stocks and bonds, you become the house; you get paid to do nothing. If someone is willing to give you that edge, you’d be crazy to not take advantage of it, because as everyone knows, the house always wins.  

Housing Prices Chart

chart provided by Bill Marsh/The New York Times
chart provided by Bill Marsh/The New York Times
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7 thoughts on “Trapped In A House, Bleeding Cash”

  1. Mike,

    Great post. You’re right, housing typically has never been a great investment. When you factor in taxes and upkeep, buying a rental property these days still doesn’t make sense. The fundamentals in housing are still bad. Having a $4000 mortgage and only being able to collect $3300 in rent is negative cash flow. Plus when you throw in taxes, upkeep, and being a landlord– buying stocks and bonds seems a lot better.

  2. Mike,

    I liked the article. As an older citizen, we were programmed to think that buying a house was the single most important investment a person would be making in their lifetime. You saved money to buy a house. When we bought we never looked at it as an investment (although it was), more like buying a home. You bought what you could afford, not really taking into account that the house might be worth more in the future. I think nowadays people buy homes as investments(as demonstrated by your article), and it is too huge an investment to mess with, especially in this market. Who knows what any piece of property is going to be worth in the future. Buy what you can afford, or what you love. Well I’m rambling, your article was good food for thought.

  3. Thanks fo the great chart that tells you how out of control housing got.

    It used to be that the most you should spend on your housing per month was 25% of your income. So let’s say your take home is $4000 a month (solidly middle class.) There aren’t many major metropolitan areas where you can either buy or rent for $1000 a month (excluding Detroit however.) So many people spend way more than the 25%. If they’re doing that, they’re not saving for retirement, their child’s college education, or for a rainy day.

    There was a story recently about an 83 year old man who bought his first house in a Miami suburb last month. It sold for $225,000 at one point but he got it in foreclosure for $73,000. His monthly payment is $550 a month- well within his social security payment and most likely cheaper (and nicer) than renting. Good for him!

    Only when Americans are paying about 20% to 25% of their income on housing will the economy really bounce back. Until then, Americans can’t invest. Without savings and investment, there’s no growth.

    The housing bubble was unproductive. Too much time and effort was wasted on granite counter tops. It’s time to focus on new priorities.

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