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Thursday, March 16, 2006

Boilerplate House Poor Advice

In a column in yesterday's Olympian, an investment advisor gave some advice that I suspect is followed by very few people in the Seattle area: Avoid being 'house poor' due to high payments

While there are some rules of thumb by which lenders gauge the reasonableness of your housing costs, the valuation of your property and the size of your mortgage payment are only parts of the picture.

You're considered house poor if your housing costs prevent you from:
  • Saving the equivalent of 3 to 6 months income in an emergency cash reserve account.
  • Setting money aside for your retirement.
  • Accumulating a diversified investment portfolio.
  • Budgeting for other life events, such as paying for your child's education
  • Buying the furniture you need for your new home, or eating anywhere other than in your new kitchen.
Do you know anyone with the equivalent of 3 to 6 months income tucked away? I don't think I do. Maybe my parents, but that's pretty much it. Also, most people's idea of a "diversified investment portfolio" is a small contribution to the company 401(k) plan and their house. And as far as junior's schooling, hey that's what federal student loans are for, right? It's one thing if you don't make very much money and you really can't afford these financial luxuries. It's another thing entirely when you can't afford them because you willingly threw yourself into a money pit of a house.

I especially had a good chuckle about this bit of advice:
Be very cautious about using creative financing arrangements, such as interest-only mortgages or optional ARMs, to buy more house than you can otherwise afford. If home valuation increases cool off and interest rates heat up, you could find yourself caught between the rock of making the mortgage payment each month and the hard place of not being able to sell the house for enough to cover repaying the loan that secures it. You don't want to lose your home to foreclosure because you bit off more than you can chew later.
"Creative financing arrangements" are about the only way first-time buyers could ever hope to afford something around here. I'm not sure what "be very cautious" means, but I would venture to guess that signing your life away on an interest-only, no down payment, adjustable-rate mortgage doesn't quite fit the bill.

(Patricia Bliss, The Olympian, 03.15.2006)


Anonymous said...

Almost everyone I know that is house poor is relying on their relatives for financial backing.

The worst case is one girl who's house payment is more than 90% of her paycheck. This has been going on for several years and with the help of her parents it has paid off very well. Her house "earns" close to double her sallary.

For the last few years, being house poor hasn't been much of a liability and it's actually saved alot of people that would otherwise have a negative net worth.

Anonymous said...

If you want to build up cash, you need to cut back on "necessities" such as cable, lattes, eating out, gym memberships,etc. I hear this whining from folks about how hard it is to save but to be honest I am not too sympathetic when it comes from a person who may be spending hundreds of dollars on superflous things.

Setup an automatic savings withdrawal to high yield account such as ingdirect or emigrantdirect. Cancel the cable, cancel the gym and hit the track around Greenlake or your local high school, stopping buying books and use your library, discover the joy of cooking at home, shop at thrift stores for clothes ( I've picked up tailored, french cuff shirts for $4 with a not thing wrong with them) etc , etc ,etc.

It takes discipline but you have to keep your eye on the ball.

Anonymous said...

I just signed a lease of a place in Ballard, zillow say's its going for 550K, I'm paying $1300 in rent.... er... what's that saving me in cash a month for buying an equivalent property? I'm building equity straight to liquid cash, that's CASH folks!

House-poor's a ridiculous notion, houses don't 'earn' anything, they don't make anything, they're mere assets... buy gold instead, much more stable and at least you can melt it down into jewelry that'll be worth more in a 1000 yrs than your delapidated central district fixer-upper....

I'll make sure to send the debtors a postcard from Bora Bora

Anonymous said...

Is there any data on what's happening to rent prices in Seattle? I'm comfortable renting now (similar deal to the person above) but do worry if house prices start sliding, then more people will need to rent, which will drive up prices.

(Also, it does seem like there are many more price reductions out there lately. I don't know if that means prices are going down or sellers are just getting greedier and greedier.)

usedtoloveRE said...

Wow, what a responsible article for a newspaper to print. Too bad they're probably a couple years too late for some people. But could save a few who were panicking to get in this year before "prices go even higher and interest rates rise".

Anon 3:24-

It seems that 1) prices are going down and 2) sellers are getting greedier and greedier.

The market is really whacky right now with prices all over the map because both of the above are occurring simutaneously.

Anonymous said...

1st Anon :

If that house has been "earning" more than your friends' paycheck for a couple years, you might want to be true friend and at least lightly suggest that she look into the pros and cons of selling it now.

When the market turns she could be in serious trouble. On the other hand if she sells now she could make a tidy profit!

Comrade Chairman Greenspan said...

usedtoloveRE said...
"It seems that 1) prices are going down and 2) sellers are getting greedier and greedier."

I think the papers said last week that the median price is still going up, but sales are slowing.

From reading Ben's blog, this has apparently been a sign of topping markets elsewhere in the country. Prices can continue up because there are still a few greater suckers left, or sellers can throw in incentives to effectively (and invisibly) lower the price.

Anonymous said...

(1st Anon)Yeah, I've mentioned she should take her equity and use it to buy a less expensive place outright. But she's determined not to leave her house.

I doubt she'd be in serious trouble though. Her parents cosigned on the loan(obviously) and pay some of her bills.

Regarding the price reductions in Seattle, they've risen slightly over the past 6 weeks. For the city itself, there were 338/1778 at the start of Feb. (19%) now it's at 419/1784 (23.4%)

It seems that if the place doesn't get any offers in the first 7-14 days, the price gets cut immediately. Probably because the well priced properties are selling in under a week.

Hard to say how many properties have been relisted after being taken off the market. I've seen quite a few pop back up, but no real #'s. I thought this was against MLS rules, but apparently it's common.

Anonymous said...

Is Seattle next? I don't know. The prices haven't hit that kind of ceiling (as the Bay area). Though I'm renting, we're also actively looking for a house & actively pissed off that there is nothing under $400K. I mean nothing whatsoever if you have to be within commuting distance of downtown Seattle. I have no idea about houses at the higher end of the scale, but starter homes are still getting bid up if they are priced competitively.

The main problem from a buyer's perspective is a severe lack of inventory out there. The price reductions are everywhere, but I think that's because sellers are being convinced by their real estate agents to price up up up. You just don't see a lot of urgency on the part of sellers for some reason around here. It's like no one in Seattle is willing to give up their house. And if they do, they feel entitled to their 300% profit. This is the meanest market I've ever experienced.

Anonymous said...

Patience, patience, we're just a little slow to "get with the program" up here.

Actually, I've been watching the MLS since fall and comparable properties ARE coming on the market for lower and lower prices.

But you are right. There are still some areas of town where a neighbor sold a home for a 200% increase and now all the neighbors are waiting for theirs.

We HAVE hit a ceiling. It may not be as high as San Fransisco or NYC's ceiling but that's what makes Seattle Seattle and SF SF.

There is no reason Seattle prices would should or could be as high as Californias. Seattle's a great place and a lot people love it here but if 600K buys the same in SF as it does in Seattle, you'd see a pretty big exodus out of Seattle.

get the partystarted said...

Anon 5:53 "You just don't see a lot of urgency on the part of sellers for some reason"

If you check back on some of those addresses, you'll see that a lot of those houses were bought a couple years back for half or less than half of what they are asking now.

If I bought a house in '04 for 400K and my neighbor sold theirs last summer for 1M, I might just put mine on the market for 1 M too on the off chance that I'd win the lottery.

Would I be desperate to sell though? No, I'd just be hoping for a sucker to come along and get me on to easy street.

Anyway,if you talk to mortgage brokers around here, we've got plenty of f'd borrowers whose loans wil be re-setting this year and next.

So the desperation selling will commence sometime soon.

seattle price drop said...

Great price drop news for those of you who are contemplating stretching to buy a house:

Prices in Seattle are coming down faster and harder now. Rather than the "10K off after a month on the market", we are now starting to see 30- 50K off within 40 days.


4809 University View Pl:
Original Asking Price: 689,500
43 DOM dropped to 649,000

4703 4th Ave NE:
OAP: 699,950
after 39 DOM: 669,950

4753 5th Ave NE:
OAP: 599,959
after 20 DOM: 549,950

DO NOT STRETCH to buy a house. The next step is lower initial asking prices which should start by this summer. And the higher interest rates go, the lower asking prices will be.

Anonymous said...

San Fransisco market going down!!!

Seattle soon to follow!!!

Hopefull soon-to-be-homeowners unite. We will take this insane market back!!!

Anonymous said...

Prices aren't going back down to 2002 level. 20% decline is expected but that's about it. Unemployment remains very low. Some people may borrow more than they can handle but unless they lose their jobs, they will be fine. I agree with the 2nd comment. When push comes to shove, people can tighten their belts and pay for that mortgage.

seattle price drop said...

Here's a couple more rapid (and sizeable) price reductions:

4706 35th Ave NE
original asking price: 750,000
21 days on market: 715,000

4170 42nd Ave NE
original: 775,000
42 DOM: 725,000

Keep waiting!

Anonymous said...

anon #4:

In order for rental prices to rise in Seattle, either one of two things has to happen:

(a) there has to be a significant infusion of renters to live in all of the inventory, or

(b) there has to be a significant decrease in rental inventory.

Granted, Seattle is a popular destination for many different people, but not everyone can live here. The weather alone tends to discourage people from being here more than a year. Seattle is nice, but it isn't California.

So, that leaves the second option.

Right now, there is a LOT of rental inventory out there. You not only have apartment buildings and multifamily properties, but you also have people living in MILs and houseshares. There is a lot of "hidden" rental inventory in this town; potential landlords have no idea how much competition they have for renters because MILs and houseshares are not counted in rental statistics.

Dare I say it, but there will be MORE rental inventory before there is less of it. The median house price in King County is now over $400,000; most home buyers now cannot afford the mortgage without finding a renter to share some of the cost. Therefore, as prices rise, more "hidden" inventory will make itself available to potential renters and keep rent prices spectacularly low.

Anonymous said...

ditto to above. Also, keep in mind that renters pay rent in cash, not with loans from the bank. So the amount of rent a landlord can charge is defined by wages in the area, unlike the current run-up in home prices.

Rents also tend to deflate as housing deflates and go up as housing prices increase. Just so happens that home prices got so out of whack from the real economy this time that they just couldn't keep up! But they could go down a bit as RE goes down.

At any rate, they can't go up much- the economy can't support it. And if a lot of people need to bail from their homes, it could add to the pool of rentals as long as smart buyers aren't buying.

Have you noticed how many of the MLS listings are empty homes?

Anonymous said...

I drove from QA to the U District yesterday and counted at least a dozen Rent/Lease signs on the way.

But let the papers keep earning those RE advertising dollars by screeching that rents are going up :)

Anonymous said...

Well, I have at least three months income in savings as do several of my friends and we are all in our 30s. In order to do that, our rent is 1/5 our monthly income, our cars are paid off and we don't shop for entertainment. People look at me and assume I am poor (even though I just moved from a nice house in Phinney Ridge) because of my spending choices. But screw them. I have everything I need, everything my child needs and I don't have a bleeding ulcer every month when I need to pay bills.

People are so enamoured with buying houses because they see it as a no-brainer way to make money and they are "sick of paying my landlord's mortgage". But I know my rent on the house in Phinney Rigdge ($1400 incl. utils) did not even begin to cover the mortgage. I would rather invest in something that was flexible enough where I can stop puttng money in if I need to.