My wife and I bought our first house right after we got married in 1996. We bought it on a real estate contract from the husband of a woman I had known since we were in kindergarten. The interest rate was 8.5%. Later, as our family grew, we kept that house as a rental and bought our second house. We lived in that house for 5 years then sold it and moved to our current house where we have lived for the past 17 years.
We bought our second house for $230,000 and sold it for $360,000. Being quite adept at using my HP 12c calculator, I figured out our house had appreciated 9.37% per year. When we bought our current house in 2006, I knew houses in Albuquerque weren’t going to continue to appreciate at that rate, but even if housing appreciated at the rate of inflation, our new house was going to be worth a lot of money in the future. We will be rich!
The Great Recession
Did I mention we bought our house in 2006? In 2006, we sold the second house without even putting up a sign. You just had to tell someone you wanted to sell your house and people would come to you with a full price offer. Housing was kicking ass!
December of 2007 was the start of the great recession. Housing prices dropped dramatically. I would look on Zillow and it would say our house was worth less than what we owed on the mortgage. That’s called being upside down. There were lots of foreclosures and people were just walking away from their homes, destroying their credit.
Personally, I didn’t think that was either the right or the smart thing to do. For one thing, I was the one who decided to buy the house and borrow the money to pay for it. I also know they aren’t making more land but they are making more people and over time, the value of the house would eventually go up. Most importantly, my family needed a place to live. No matter what my house was worth, we still had a roof over our heads, a kitchen, bathrooms, bedrooms, a neighborhood where my boys grew up, etc. A house might be worth money, but a home is worth more than that. Our home was the place where the boys’ friends came to hang out and play pool, ping pong and video games. They never knew my house was worth less than what I owed for it. Who cares?
Today, my house is worth more than what we paid for it back in 2006. The two apartments that our sons rent cost more than our mortgage payment. Now let’s look at what I’m talking about when I say, you can’t spend your house.
Before the Great Recession, when the housing market was booming, people always used to brag to me about how much equity they had in their personal residence. I would always tell them, that and fifty cents (at the time) would buy you a newspaper.
There are basically two ways to take money out of your house. You can sell it or you can borrow money from a bank or mortgage company using the equity in your house as collateral for the loan. If you sell your house for more than you owe, then you could, spend your house. Of course, you are homeless at this point, but you can afford the newspaper.
If you take out a second mortgage or a home equity line of credit, you can access cash, but you’re on the hook to the bank or mortgage company for more money and if you do sell the house, the amount of equity is reduced by the amount of your mortgage and the line of credit.
Real estate can be a great investment. Some of the greatest fortunes have been made in real estate. That being said, I don’t think your home is an investment. It’s a place to live. Besides changes in property taxes and the cost of insurance, it’s a way you can lock in your house payment.
Then you add in the cost of utilities and costs of maintenance and repairs and decide if you can afford it. The good news is the prices of houses generally go up over time and if you think of your home as an expense rather than an investment, then the appreciation on your home is the frosting on the cake. You have a place to live, the cost of living there is pretty stable and over time, you will build up some equity.
I have heard some real estate gurus say they rent where they live and own properties that can make them money. They truly look at their personal residence as an expense. I can see the logic, but I think most people want more stability with their payment and like the thought of someday actually owning their home.
In today’s residential real estate, at least here in Albuquerque, prices are high, inventory is low and mortgage interest rates have risen. If you’re in the market to buy a house, and you look at your personal residence more as an expense rather than an investment, I think it makes it easier to stay within your budget no matter what interest rates are doing or how much prices have risen. If you can afford the expense, then there are the advantages that we discussed earlier.
However, if the prices are too high or the interest rates make the payment out of reach, do something else. Maybe you have to rent for a while longer or wait until interest rates fall. Maybe you can save more money for a bigger down payment and you won’t have to borrow as much. Hopefully this short piece helps. If you want to talk about this in regard to your overall financial planning, reach out to me HERE. As always, thanks for reading. KB