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Subject: Companion Story to Home Ownership-Take the Test

The article Home Ownership is Dead – Take the test, written by my colleague, was really interesting and informative and should be required reading in schools. It is apparent that it is almost impossible to ever own a home free and clear these days. You would have to be able to keep your job, never have children and pay on it until you were a senior citizen. I am talking about the ordinary working person. Do you want to live in the same house all your life? Do you want to have to continually be making the repairs? Yes, we are taught the American Dream is to own your own home. You don’t think about the fact that property taxes could go sky high or there would come a time when you still owed more on your home than it was worth after paying on it for years? Your interest payment could be as much as rent would be. You never get either one back. So that’s a trade off.

I was raised with the mind set, get a home, get it paid for. Never go in debt. Work or you don’t eat. I followed what my parents taught me and I cant say it was the best advice. I stayed the same but the world around me changed. I definitely had the American Dream. I met a man who had the same dream. Yes we had the perfect wedding that we could afford, with only 6 wedding guests. But we did not go in debt. We both had jobs at Boeing. Got married and saved every penny and within a year were able to pay cash for a run down tiny house. We paid $2500 for it. Every night after work we remodeled. Within two years we were able to sell it for $4500. With a thousand dollars added to that we paid cash for the house I still live in. We paid $5,500 for this house that I have lived in for 66 years. Repairs just keep showing up. We built the white picket fence. We had 3 children. I had to quit work but we were never in debt. My husband died of cancer, I went back to work, finished raising the children alone, and am still in my old house. The property has been re-zoned. The assessor has assessed the land at its “best and highest use” which is two 8 unit condos. The property tax now is almost as much each year as I paid for the house. I get a senior citizen discount but cant sell my house as a single family dwelling and no condo’s are being build around me so I have never had a new house and never will.

Looking back at my experience of home ownership I would not change a thing. There was never a time in my life that I had to worry about foreclosure. The best great feature my home had was a Title that said it was mine, free and clear. BUT, I was also chained to it more or less. I could not sell it for enough to upgrade into a newer nicer house without having a house payment to make. Now with my land assessed at an inflated, stupid, arbitrary figure and my home assessed at $1,00(they call it a tear down) I still am sort of stuck here. If I were able to sell for $300,000, I would have to live someplace and houses are that price and more for most places. I am near 90 and I don’t want to move into a nice new place. Young people these days are more interested in big brand new homes, and if they can find a way to squeak into one they don’t think about what a small portion of their house payment actually goes on the principle. They have to have big screen TV’s and new furniture and they are sitting pretty FOR AWHILE. What will happen when you are laid off from your job? What happens when the perfect marriage goes south? You lose everything. In my case I have never had new furniture, never used a credit card, always lived in and old house needing repairs, but knew I would never be homeless. You have to judge which is the best for you. I can’t see how my great grandchildren can ever dream of buying a home. Hope this gives you a comparison with the previous article.

I find it more and more difficult to talk about home ownership with people.  I understand most of their points and counter points, however, discussing it with them often leads to both parties agreeing to dis-agree on the topic.  I certainly don’t believe home ownership is completely dead but the likely hood of you or anyone you know making a positive return is certainly slim to none.  I of course have heard of some people making good money buying low and selling high, however, the stories are maybe one in a thousand if that.  I honestly don’t think people truly understand the financial numbers thus they truly believe (and arguing) they are making money or are going to be making money “in the long run”.

Growing up we hear a lot of the marketing propaganda.  I’m sure you’ve heard of the “American Dream” and the white picket fence of home ownership.  Maybe waiting to fall in love (or are in love) with that “perfect” person who turns out not so “perfect” down the road.  Are you creating the “perfect” wedding?  These are examples of over delivered hype in my opinion.  Sure we want them to be true.  The reality is home ownership is a lot of work that you probably can’t afford.  Relationships take work and it turns out that nobody is perfect.  The “perfect” wedding deep down wasn’t like you imagined it as a little girl and most fail.

Not to get to much off topic but looking back at grade school & middle school – and how we had to stand up each and everyday in the morning to recite the pledge of allegiance to the flag.  You’re trained from an early age to love this country.  No matter how much the government, banks, and companies screw you over on a daily basis – you’ll continue to love and build this “American Dream” in the country you were trained to love.  Being a home owner you support this city.  You provide a large chunk of the taxes (property taxes).  These yearly taxes help fund the schools, emergency, and other services.  Home owners are important and we must have them. We must have home owners who believe in this home ownership American dream to even function as a city financially.

I created this little test to see where you stand with your home.  Before I get to that, however, there are a few exceptions we need to discuss.  First, there was a time when home ownership was good.  If you have an older parent or maybe an older Grandma/Grandpa, they may have purchased a home for example 7K and now it’s worth 300K.  There is a good chance they have refinanced a few times and spent that money anyway.  The comparison between then and now isn’t even a comparison.  From the way banks operate today to the land available compared to now – we are in difference times and those deals are long gone.  The gap of profitability (buying and selling points) has been eaten up by the banks, taxes, interest etc.  today so just letting you know about that before starting the test.

Time for the home ownership test to see how you are doing. Are you throwing money into the fire or are you doing ok?

1)  Take your buying price and subtract any down payment.  Banks usually require 20% or may have paid more or less but figure out that down payment number.

Example: Home purchased for 240K my down payment was 20% so $48,000 is the magic number invested.

2)  Initially you may have had some closing costs, appraisals, purchased extra points.  Some banks bundle this together into the loan, however, you probably paid for some of them upfront.

Example:  $300 appraisal fee and $2000 points buy down so I’m at $50,300.

3) Add up your interest to date.

Example:  Three years (36 months) is approx. $39,000 in just interest so I add that to my previous figure amount which means I’m at $89,300.

4) Add up your property taxes.

Example:  $3000 per year for 3 years of home ownership is $9,000. dded to the above figure is now:  $98,300.

5)  Add in your Insurance.  If you’re lucky you don’t have PMI insurance being added to your payment each month.

Example:  $600 per year for 3 years costs me $1,800.  Added to previous figure is approx $100,100. for 3 years of ownership.

6) Optional:  Add in your renovations/upgrades to date.

Example:  $6000 added for new carpets and smaller kitchen updates to date.  Added into my above figure I am at:  $106,100.

7) Optional:  Homes are bigger than rentals usually so if you want to add in the extra cost like gas, water, sewer, electric, garbage – you can add those on now.

8) Optional:  HOA (Association fees) add those in if you have them.

9) Final question is to take what you owe to date (your current principal) and add the figure you calculated above.

Example:  My principal is $195,000 currently and adding the figure above my final number is:  $195,000 + $106,100 = $301,100.

So now you know what you need to break even on your home.  Well… not quite…. when you sell your home you’re going to pay about 6% in fees to the agents involved and also escrow & titles & other misc. fees.  So for the sake of keeping this simple lets just forget those fees.  Forget i mentioned that.

You should have our magic number now.  So for the example home above purchased for $240K it will need to be sold for at least $300K just to break even with no profit. Here is the fun part…. jump over to http://www.zillow.com and see what your home is approx. worth.    If you’re still with me at this point you’re probably heart broken or really happy.  Some will argue that Zillow is not the “end all be all” source of accuracy.  There is some truth to that i guess but in today’s society it is the number one source for buyers and agents.

If you’re happy with those numbers then you’re doing great and you won the test.  For everyone else, think about this.  What could you buy with your break even figure money – think like a new home buyer for a second.  Every year homes continue to get bigger and bigger and are costing less.  Communities of homes are being built around your home. These homes have brand new everything inside with big kitchens and master bathrooms.  What makes a family looking for a new home want your old overpriced home for?  They don’t want to live in your filth.  They don’t want to have to put a new roof on your home.  My point is chances are your break even number doesn’t even compare to what I can get brand new – and cheaper.

Here are the popular arguments why home ownership is so great.

Retirement:  First problem is that you’re assuming you’re going to live to retirement age.  Think about your close family members and how many have died before retirement whether its cancer, heart attacks, or whatever A LOT of people die early or just a few years after retirement.  Second, you’re paying 3 times the value of your home over 30 years and that makes it a horrible retirement investment.  You’re paying $500K for a $200K home.  If you’re bad at saving more and not dedicated to put money away for retirement then maybe that is an argument.  A better method would be to rent and put aside the extra $750 per month for retirement.  You’ll have way more in the long term.  OR you can give me $1400 per month for 30 years ($504K) and when you turn 65 I will give you $200K back (if you have good credit and equity).  Now that sounds like a good investment.

You can write off the Interest:  Yes, you do get to write off the overpriced interest you’re paying over the 30 years.  Interest is a loss, however, just like taxes.   Your theory is you’re saving money by “writing it off” and that is just silly. It’s not money you get back…ever.  It doesn’t go to your principal amount so it’s a total loss and goes into the banks pocket.  Just like taxes the theory of writing if off isn’t always a good thing.  If I got $100 dollars in my pocket and I have to give uncle sam $30 percent that means I still got $70 bucks in my pocket.  Your theory is to give it all to uncle sam and now you have nothing.

Renting is a total loss:  I heard this one a few times before.  Lets say for example a mortgage payment is $1400.  If I was to rent an apartment for $800 i would pocket $600 per month.  At the end of the year I would have $6,000 extra.  At the end of 5 years i would have $30,000 saved.  If you make your mortgage payment of $1400 per month (assuming you’ll be able to afford that) you’ll lose at least $1200 of that to interest the first 5 years.  That means you “kinda saved” $10,000.  (edit: actually assuming basic property taxes of 3K per year – you would be in the hole 5K… sorry) However, i can spend my money now and you’ll have to get approved and hope you can get your “kinda saved” money later.

Who makes money with real estate?

Investors or individuals who can pay cash for the house.  Investigate a property before hand and buy it at a courthouse auction. Most can’t and most never pay their mortgage off.  If you’re a house flipper, have cash to buy house, and can do the construction needed to flip it successfully there certainly is a lot of money to be made.

So… there you have it folks – lets hear how good or bad you’re doing and also your test results.