by Tony Chavira
Before my final articles in this series of stories about first time homebuyers—in which I will discuss homebuying with someone who has purchased more than 15 homes for himself over the years—I want give them all a little context. Each person or couple has had their own reasons for wanting to buy a home, their own journeys through the buying process, their own setbacks along the way, and their own feelings about how things finally came together. But I haven’t discussed what it means to buy a house.
Many of my interviewees considered a home an investment, and that’s a pretty common concept (considering that a home is usually the largest purchase a person can make). But if you scan the articles and run the numbers, you’ll see that the properties are atrocious investments. A downpayment is usually 20%. With a $300,000 home, that means that you’re paying $60,000 right off the bat. Then consider closing costs. For taxes alone, Reid dished out another $20,000 on the spot; else the deal would have ended before it began. Andy’s place needed a few months and another $20,000 to upgrade. Dock and Annie needed to dish out $10,000 for private mortgage insurance (PMI). Then there are moving costs, title insurance, lawyers, and whatever else you may end up needing. Assuming that those costs are another 10%, that’s another $13,000 on top of the $60,000 you needed for that $300,000 home.
Then, over the lifetime of that purchase, you’re going to be dishing out your hard-earned cash on all kinds of maintenance issues, as well as on monthly mortgage payments. And I can promise you that things around your home are going to fall apart. Part of the reason Rick and Bhanu chose new places (where they’d have to pay a homeowners association) was that they didn’t want to deal with maintenance costs. Part of the reason Michelle and Erick were severely limited with their federally-assisted loan was that the house had to be perfectly maintained, and so many on the market needed work. Poor Joe completely depleted his savings. Worse, now that he’s trying to get out, he’s trapped with an “investment” he cannot simply cash out and leave behind. I would never buy a stock I couldn’t walk away from, and you wouldn’t either, so why do it with a home?
Homes work more like leveraging tools than proper investments. You could have just as easily invested the initial $73,000 in the stock market. It probably would have taken the same time to do research and it might have given you better returns. But having $73,000 in stocks doesn’t allow you to leverage a loan for $500,000 in stocks. A $73,000 down payment on a home that costs $300,000, over time, can allow you to leverage the cost for a nicer place with a higher price tag. The home is more of a savings plan with maintenance fees than an investment.
Then again, there’s no rational reason to see your home as an investment if you plan on living in it forever. Andy and Cindy love their home, and are still working on it little by little. Despite their wily neighbors, Michelle and Erick plan to raise their two young kids in their home. Erin and David think that their housee is perfectly located (one mile from work) and perfectly situated for a future together. If they really wanted an investment, they probably would have started a Roth IRA or something. Instead, they wanted to live someplace they’d love. They have their own place in the world. It belongs to them.
Well, mostly. All land is still owned, in part, by the government. Otherwise, how could they justify taxing you for it?
Looking back, the average listing price for homes in Los Angeles was about $160,000 in 1996. Only ten years later it was $550,000. Three years after that, it came down to about $340,000. With swings so dramatic, you can’t blame the average homebuyer for being too disillusioned by the homebuying process: between 1996 and 2006, homes more than quadrupled in price. And ten years is long enough to start believing that prices will continue to go up.
In 2006, homes were being listed for monumentally high prices, then selling for even more. Multitudes of buyers were bidding on the same homes, and there was a sense in the air that we were actually running out of homes. Check out this chart:
Now pretend that the chart stopped right at the 2006 line. Now pretend that you’re a financial analyst. What would be the first thought that went through your mind? Sell! Prices are clearly going to fall sometime soon, so sell now. The crash ended the homeownership dream for the couple before Andy and Cindy, and they were evicted. It also happened to Dock and Annie, and now they’re stuck with a jumbo loan.
Still, this is only part of the picture. There is a certain increase we should expect in the price of homes no matter the circumstances. The price of everything has gone up dramatically since the 1970s, including homes:
The thin lines represent trends for how much homes should have cost had the housing bubble never happened. But it did, and the thick lines reflect reality. If you look at the very end, trends and actual prices are starting to converge, and that’s a great sign for those of you interested in buying homes now.
The housing market isn’t going anywhere. People want to live in urban homes, close to public transportation, stores, schools, parks and their work. They want to live in charming, green neighborhoods, with low utility costs. They want to live close to markets, and to sustainable farming and cheap, fresh produce. Put your cash down on a home in a neighborhood that does things the right away. You’ll get a great place to live with a value that will continue to increase.
The best advice I can give you is to know what you need before you start looking at houses. If your kids need to be close to a school and a park, your home will have more value to you if it’s next to a school and a park. If you spend long hours at work, maybe it’s more valuable to live nearby. If you hate driving, look for homes near bus and rail stations. Make a list of the things you need and limit your searches to neighborhoods that accommodate those needs. You can work to increase the value of your house, but increasing the value of a neighborhood gets political (since so many people and policies are involved in making those decisions).
Next week, as promised, we’ll begin a three week interview with a former broker, featuring every drop of advice he can give us.