Annie, Dock, and the Economy
by Tony Chavira
There was once a couple who rented a charming home right at the western border of Culver City and Los Angeles. For 15 years, they lived out their lives happily and kept up a good rapport with the owner. until one day the owner decided to sell them the home for the negligible price of about $230,000. Happily, the couple accepted, and lived there a few more years until their last child went off to college in 2007. Knowing that they would one day want to move, they put their home on the market, and ultimately sold the house at more than a 200% profit. With they money, they moved to Australia and lived happily ever after.
This article is about the couple who bought the house from them: Dock and Annie. Married just a few years earlier, Dock and Annie had been renting a place a few blocks away since 2001. They knew they loved Culver City and they knew they wanted to stay in the neighborhood, but by 2007 they had agreed that cutting a monthly check for a place they didn’t own wasn’t much of an investment. Besides, they wanted to really start building their lives together, settle down and have kids.
The problem was that everyone else seemed to want to buy a house too. When they began seriously house-hunting in 2007, the market zeitgeist was completely different from today’s. It was commonplace to take advantage of seemingly free credit, buy a home at a low price, and sell it for massive amounts of cash by two years later. And by the beginning of 2007, it wasn’t unheard of for buyers to put down more than the seller’s asking price to close in a single day. Buyers would show up at homes they wanted with cash on hand, and jumbo loans—those larger than a government-set limit, with much higher interest rates—were handed out with minimal financial background required. Dock and Annie would no sooner look at places than those places would be snatched up in a frenzy for far more than they felt the house was worth. It happened more than a few times.
Annie and Dock's place
There was a something in the air, a feeling that we were running out of land. More than once someone told me that I would never be able to afford a house in the Los Angeles area again, and that the property in the county had pretty much already been purchased. Also, they had very different ideas of what they should get for the money they would be spending. Having grown up in Hawaii, Dock remembered this kind of frenzied housing climate during the 1980s and ’90s, and was used to the idea of 1,000 square foot homes being in the $750,000 range. Having grown in semi-rural Pennsylvania, Annie imagined that a $750,000 house would be thousands upon thousands of square feet and come with its own butler.
The market remained frenzied, and it took them six months to find the house of their dreams (which isn’t too bad). During that time they discovered the strange and sometimes seedy things investors would do to flip homes and make a profit. Each place included rococo schlock scattered through the interior to give a buyer the impression that they were buying something worthwhile. But the sense that the housing market was only going up was so prevalent that these tawdry additions didn’t matter. Each open house was packed, each real estate agent was ruthless, and each investor was coldblooded. Homes were not for living; they were for flipping.
So when Dock and Annie finally found the house of their dreams, they had to jump on it. They visited it during an open house, saw right away that it was what they wanted, and got a good friend who happened to be a real estate broker on the phone and asked her what to do. In two days, with her help, they got the jumbo loan needed to close on the house. And three weeks later, after the previous owners took care of some upgrading, they moved in.
They bought their 1123-square-foot home with $100,000 down and at a total price of about $775,000. They had to use a 6.8% interest, 30-year fixed jumbo mortgage. But the house is just where they wanted to be: right in the limits of Culver City. It was at the very top edge of what they could afford, but it was want they wanted, and sometimes you’ve got to do what you’ve got to do.
After diligently making more than their minimum mortgage payments for over a year, they watched as the market free-fell. And though the frantic, hungry market had frozen in place, the value of most properties did not. Theirs plummeted roughly $100,000. Today, their home is worth about $655,000, and they’ve paid off about $100,000 of their mortgage, and they’re not upside down (which is what really matters right now).
But how could they have known the economy would take a swan dive? When they bought the space, the sense was that if they didn’t jump on it right away they would lose out forever. They offered the asking price on the house and the owner immediately said “yes.” Their first thought was that they could have started lower, yet you never know: the owners weren’t in a rush and it looked like home prices were going higher. It’s too bad that the financial wind was blowing against them; yet only during such a housing bubble could they get the jumbo loan they needed.
Annie and Dock's place
By the time a year had passed, Annie and Dock knew they could refinance their mortgage. By then the housing bubble had burst, and refinancing ended up being more difficult than getting their initial mortgage. Pre-bubble, they were asked for only their monthly bank statements. The post-bubble refinance took months, and tons of financial information. A baby boy was on the way, so Dock’s paycheck would be their primary source of income. As he worked freelance, bankers who were looking for consistent pay stubs saw instead 12 separate 1099 tax forms. Though this is a common case in Los Angeles—many of our local industries hire people on a contract basis—it’s troublesome for a banker.
But there are bankers willing to consider the such people, and Annie and Dock were able to refinance their 6.8% 30-year mortgage to a 4.875% 30-year mortgage, though with one stipulation they had not expected: that they purchase private mortgage insurance (PMI), which lenders usually require if a mortgage is for more than 80% of a home’s value. PMI required a one-time premium payment of $10,000, but it enabled Annie and Dock to retain their jumbo loan (and home) despite the madness of the market. Sometimes, in their own words, “it’s what being an adult is all about”; you have to pay the price that comes with difficult decisions.
Besides, $10,000 is chump change in the long run. And once their balance drops to below 70% of the value of their home, they can probably refinance again and drop the PMI. Meanwhile, they love the place, and feel like it’s their own private haven in a city that Annie (especially) isn’t fully acclimated to, regardless of the number of years that have passed. As long as they get to keep their home, they feel like they have a place in Culver City. Even if it sometimes requires serious decisions in order to keep.
Next week we will focus on the trials and tribulations of another out-of-state couple who got more (and at the same time less) than what they bargained for when they bought their house before the bubble burst.