The House Hunt Continues

Another week and the house hunt continues. So what's new? Not enough, unfortunately. We have yet to put down another offer on a house after our first and only attempt failed. There were a few interesting developments though:

Limited Supply - I would think that in this kind of market there would be a larger supply of homes for sale. Strangely, in the areas where we are looking only a couple of new houses that broadly fit our needs come on the market every week. Last week I ran across some statistics that showed that the average time houses were spending on the market in Santa Clara County (where we are house hunting) is over 80 days... Maybe people are sitting on houses if they can afford to wait out the buyers market. If that's their strategy, I think they will have to wait for a long time.

More Open Houses - nevertheless, this weekend we went to a couple of open houses. One of them, which looked good on paper - had 5 bedrooms. Of course the listing didn't mention the fact that two of those bedrooms were literally under ground... one of these underground rooms actually had a small window that opened up underneath the deck in the yard... It is really quite amazing to me what crazy layouts some of these houses have. The other house we saw was too small for us, was over 50 years old and looked like it was never remodeled. It also smelled like an ashtray. We ran out of it in about 3 minutes.

Haven't Given Up Yet - remember that house we put an offer on? Well, it still hasn't sold and we asked our agent to go back to speak with the sellers' agent to see if anything could be done. Last night our agent called me back saying that the sellers are willing to reduce their price by $20K below their previous counter-offer, but that this was their best and final offer. They would also expect us to take the house as-is. If we decline and they receive no other offers, supposedly this weekend they will be taking the house off the market.

This is a really excellent house and at the price it's being offered it's probably a good long term buy. The only problem is that this latest offer is STILL about $50K above our budget. We simply can't afford it.

I am entertaining the idea of a final hail Mary. Perhaps I'll ask our agent to try to set up a meeting for me with the sellers' agent. Yes, it's unorthodox, but what do I have to lose? The house has been on the market for nearly 5 months, and has not garnered any offers. Holding the house - which was no doubt an investment property - is only going to generate further losses for the sellers. There is no way that they could rent the place at a price that will cover their financing costs and taxes on the place, plus a rapid increase in prices is really unlikely to happen any time in the next several years. Look at where tech stocks are 9 years after the tech bubble burst...

It's not that I am trying to negotiate hard, we simply cannot do the deal at the price that is being asked, and apparently neither can the sellers. The market is telling the sellers that their asking price is not right, but they are refusing to listen. I think there is a win-win deal to be had here, if the sellers accept the new reality of the market.

Maybe I can get them to see the light on this, but I am not betting on it.

Any advice, ideas and suggestions would be appreciated.

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House Hunting Update

Last week, while I was traveling on business, my wife went house hunting with our realtor. She saw several houses and thought that a few were worthwhile for me to look at as well. On Friday, when I got back in town I left work early and we went to look at 5 of them. The score card: one really nice house, two reasonable ones, one horrible and one... no longer for sale. The owners decided to rent instead of sell.

Anyway, one good house is all it takes. While it has been on the market for about 4 months and the price has come down substantially, it is still about $80K above our budget. We asked the realtor to help us decide whether we should still put in an offer. She thinks we should, but I think it may be difficult to get that house with our budget.

The two other houses I thought were decent would also work, but each of them requires a substantial amount of improvement before I would be happy. In any case, both are substantially less attractive than the house we liked. It's just like I said before, it looks like the house you want is always just a bit above your price range.

In the meantime, our mortgage pre-approval came through for the full amount we wanted. The mortgage broker had to send us the pre-approval letter three times, because she kept misspelling my wife's name... I don't think we'll be using her services when we actually apply for a loan. If she can't handle the fine details of spelling a name correctly, how can she be expected to handle our loan application correctly? Call me picky, but I want someone meticulous to help me hunt for a mortgage and to handle my finances. Am I wrong?

One more step successfully completed: I transferred some funds into our checking account. Just enough to cover our down payment when we decide put an offer on a house... we are locked and loaded. Now it's just a matter of deciding when and how to pull the trigger. It's all about patience and a steady aim.

Exciting stuff. No?

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Adventures in Home Buying Continued...

Our house buying adventure continues. In this episode: first meetings with a realtor; getting pre-approved for a mortgage; realizing that compromises are a part of the deal.

First Meeting with a Realtor - good friends of ours recently bought their first house and were so enamoured with their realtor that they convinced us to use her as well. Turns out the same realtor also helped a couple of other friends, so supposedly she knows what she's doing.

We met with her in person last Thursday and I have to say, I am not THAT impressed. Clearly she is informed and energetic, but she spoke to us as if we were unprepared and uneducated children. Lady, I already explained I am a lawyer and an MBA by training and before setting an appointment with you we read a couple of books on purchasing a house and did our homework on what it is that we want to buy. Give some respect. After that initial meeting though, she aggressively threw herself into the project and while I am traveling on business, she has been going out with my wife to see some houses. Some interesting prospects at this point, but nothing that blew my wife away. I'll get to see some of the better prospects this weekend.

Getting Pre-approved for a Mortgage - our realtor recommended a mortgage broker and I spoke with her and went through the pre-approval process. As I twittered a couple of days ago, the broker thinks that we should have no problem getting the mortgage we are looking for. Another nice piece of information, our FICO score: 799. Identical for both of us. Sweet. Maybe paying our bills on time all these years and having no debt will pay some dividends.

Compromise is Part of the Plan - here's an axiom: no matter what your budget, the house you really want is only $100K more expensive than your budget... urghh... The budget will hold. We are made of iron. We shall not fall prey to temptation. Not, I say. Not.

But it's not just the budget. Every house has something a little off. Maybe it's too close to the freeway or too far from the park. Maybe the kitchen is old or the lay-out is crappy. It's actually upsetting, but it appears that compromise is required when looking for a house. I guess the important thing is to be patient and to not compromise on those things that are REALLY important to you.

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You Gotta Know Who to Divorce...

Last week I met an old colleague and friend for dinner. This guy moved from California to Florida with his family, but subsequently he and his wife started what is turning out to be a fairly messy divorce. This story would have little to do with a personal finance blog, except for the fact that my friend recently discovered that his soon to be ex-wife has been collecting rent paid on the couple's California house, but has not been paying the mortgage on it. Apparently this has been going on for about five months. The house is now in foreclosure proceedings and my friend's credit is shot.

Of course, if he was half way responsible, my friend would be checking to make sure all was going well with the couple's various financial assets, if for no other reason than to make sure that nothing untoward was going on in the midst of a nasty divorce. But, that's who my friend is. He is a very lively, slightly less than responsible, very fun kind of guy. He is a "big picture guy" and this type of thing is too detail oriented for him.

My friend is taking this all with amazing calm and composure. Certainly more composure than I would exhibit under the circumstances. He is very much aware that his credit is essentially ruined, but doesn't feel like there is much sense in going crazy. He is now trying to work with the lenders to avert foreclosure...

It just goes to show you, you need to know who to divorce.

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Of Wild Fires and Recessions

Everywhere you look these days is economic doom and gloom: lay-offs, bankruptcies, foreclosures. However, it is important to understand that recessions are the way in which free market economies restructure themselves and prepare for the next phase of growth. It is actually a very dynamic, if painful process, by which available resources are reallocated more efficiently.

Take for example the construction industry. For years it was common wisdom that house prices are a one way ticket to riches. People everywhere invested in real estate not so that they could live in a house, but for the financial returns that they expected to generate from such an investment. Such influx of capital, drew ever increasing amounts of our economic resources. Since people act according to their economic incentives, more businesses got into real estate, more people became real estate brokers, more construction and financing jobs became available. In short - more economic resources were allocated to real estate than were needed to support the underlying economic need, i.e. houses for people to live in, as opposed to houses for investment purposes.

Once the real estate bubble burst, houses reverted to what they truly were: places to live in. With the disappearance of the financial incentives to invest in real estate,  all the jobs, money and business that were flowing into that market, are rapidly shifting out. Some are shifting by choice, and some are being forced out as overcapacity mercilessly cuts prices, financing and jobs.

The same process is occurring in many other industries. From manufacturing to airlines to finance and hospitality. The causes in each industry are different, but the effect is similar: capacity is being destroyed. While the situation looks bleak right now - the seeds for the next expansion are being sown as you read these lines. While many firms will go under and unemployment rises, the businesses that survive find themselves strengthen by reduced competition and by lower input costs, as materials, labor and equipment all become cheaper in a downturn. Workers will be cut from industries suffering from overcapacity and from under-performing firms, but will be hired by ones that are healthier. This transition will take time and will no doubt involve a great deal of heartache.

Much like a forest fire is scary and devastating but in the long run is critical to the health of the forest, recessions are the way in which market economies weed out the weak firms and restructure themselves, preparing the ground for a new economic crop. The job of government is to make this transition less difficult, not to stop it from occurring. As firefighters have come to recognize in recent years, the longer you delay a fire from burning the more devastating it becomes when it finally breaks out. The re-adjustment must be allowed to happen. Weak firms must be allowed to go under, over capacity needs to be cut and prices must be allowed to find their natural equilibrium. A controlled burn is better than a raging inferno, so I am not advocating the government not interfere. I am only saying, the government should be a vigilant fire marshall, minimizing the damage from the fire but above all considering the long term health of the forest.

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Why Real Estate is a Horrible Investment

I am not one to kick an interesting investment opportunity when it's down - in fact, I think that the best time to buy assets is when their values have been dramatically beaten down, and if that's your line of thinking, real estate should certainly qualify. However, I still think that owning real estate for investment purposes is a horrible idea. I am not talking about investing in real estate through REITs as a method of diversifying your portfolio - that is actually a good idea, we invest about 8% of our portfolio in REITs for exactly this purpose. When I am talking about real estate being a bad investment I am talking about buying residential real estate for investment purposes.

I have previously written that buying a house is a bad investment, and I stick by that original statement. However, I am not against buying a house, just as I am not against buying cars, TVs or new clothes. A house is a place you where you live in, it is not an investment. Granted, houses tend to have a good resale value and if you are fortunate, the price may even go up over time. My point is that your residence is your home, not an investment. 

So why do I think that real estate is typically a bad investment idea? My argument can be summed up in a single word: leverage. Leverage is the reason that most people think buying a house is a great investment opportunity to begin with.  Let's say you are buying a house worth $100,000, and let's assume that you have 20% to put as down payment, i.e. $20,000, and the rest you finance using a mortgage. If the value of the house goes up 10% in  the fist year, it is now worth $110,000. However, your mortgage is still only $80,000, meaning that your equity is now worth $30,000. In a single year your house went up 10% in value but you got a 50% return on your original investment. Who could turn down such a wonderful bargain? You are using other people's money to super-charge your returns. What a brilliant idea! Isn't this the perfect money making strategy?

Of course, that's not the case, as our current economic meltdown has made abundantly clear. The cold logic of leverage, which does phenomenal things to your returns on the market upswing, has an evil twin that emerges when the market heads south. Same example: a 20% down payment used to buy a $100,000 house, only this time the house value goes down 10% in the first year. Now the house is worth $90,000 so your original $20,000 investment has been cut in half when the mortgage is accounted for. If the value of the house declines by 20% your investment is wiped out completely.

The bottom line is this: investing in real estate by financing the acquisition through mortgage, is exactly the same as investing in the stock market using borrowed money (investing on margin). While the market goes up, your returns are turbo charged, you feel on top of the world, but when the market starts to fall, the value of your investments quickly goes up in smoke. Now here is the crazy thing: the government would never consider encouraging people to buy stocks on margin, but they have made many policy decisions aimed to do just that in the case of the real estate market. Millions of Americans have allowed themselves to be duped by the fallacy of a real estate market that folks claimed could never go down. "All real estate is local" the saying went. Even the most naive real estate investors and home buyers no longer believe that there is any asset in the world that only appreciates in value without ever falling.

Remember this lesson when the next bubble starts to inflate.

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Don't Bail Out Homeowners

Talk is increasing about a government bail-out for home owners who cannot handle the burden of their mortgages. This annoys me no end. My regular readers know that I have previously written strongly in favor of the government bail out of financial institutions. Why then do I object to a bail out for individual home owners and how can I justify this seemingly inconsistent position? Here goes:

No Win for Taxpayers - when bailing out financial institutions, government, for the most part, received an equity stake in the banks or received other assets that once the markets stabilize will become more valuable and may actually provide tax payers with a substantial return on their investment. The proposed bailout of homeowners will not provide tax payers with any upside or assets in return for their gracious intervention. It will simply make the problems of overwhelmed home owners go away by a wave of the magic wand, at our expense.

Picking Winners and Losers - I am a renter. My wife and I made the decision to rent for a combination of reasons, the most important of which is that we simply cannot afford to buy a house in our town, nor did we think that stretching to buy one would be a good or safe investment. On the other hand, many other folks have made a financial bet on the supposedly permanently rising prices of real estate and decided to gamble their life's savings to buy a house.

A specific example I have in mind is one of the people that worked for me in my previous company, who bought a million dollar house in San Jose, California, even though his household income was dramatically lower than mine, and who did so through an aggressive ARM with a 5 year teaser rate.

Why would government take my money, to reward those homeowners who made bad financial decisions? Not only does such a decision hurt me and millions like me directly by wasting our tax dollars, it also penalizes us by artificially putting a price floor under the housing market, thereby keeping houses out of our reach while letting those who made irresponsible decisions reap financial rewards for their financial recklessness.

By bailing out homeowners, government would be making winners out of irresponsible home buyers, and doing so by penalizing responsible renters and (to a lesser degree) responsible home owners.

Moral Hazard Galore - even though we have all taken to calling it a bail-out, financial institutions were not really bailed-out in the common sense of the word. AIG shareholders were completely wiped-out in the government take-over, BearStearns share holders were very nearly wiped-out. Banks who are now receiving equity infusions from the government are receiving this cash infusion in exchange for shares which dilute the value of shares held by other shareholders and which will hopefully yield a profit to tax payers in the long run. What I am trying to say is that the government may have bailed out the financial institutions themselves, but shareholders have been duly penalized.

However, the government is now proposing a true bail-out of homeowners. It is not talking about wiping out the equity of home owners and turning them into renters or of letting them walk away from their loans without going through bankruptcy, it is talking about improving the terms of their loans so that they are better off. Seriously?

The System is not at Stake - With all due respect to home owners, the financial sector was on the verge of complete collapse, one that would surely have dragged down strong industrial companies and small businesses along with it. This was not a question of saving Wall Street, it was a question of saving all of us. The boat was sinking. The same is not true of individual homeowners. Yes, collectively homeowner losses are a drag on the economy, but no one is even claiming that this will bring a complete meltdown of our economic system. The situations are simply not comparable.

Worried about the economy? Let's talk economic stimulus. Let's talk tax cuts, let's talk public works and infrastructure improvements. Hell, let's even talk a second stimulus check to individual tax payers. BUT don't go and reward exactly the sector of the population whose financial irresponsibility and greed is a major reason for the current economic trouble!

The Great Money Give Away

As I write these lines Congress is taking it upon itself to give away my money. It is doing so cynically and under the guise of helping out the needy. It is doing so through the insidious instrument of a housing bail-out bill. I first warned about this possibility back in April 2007, in an article titled A Subprime Bail-Out? Hell No! However, Congress is coming out with a resounding "Hell, Yeah!" and the President announced that he will sign the bill. What am I upset about? Here is a brief summary.

During the housing boom, me and millions like me sat on the sidelines. We all saw what was going on and knew that a bubble was being inflated. We either could not afford a home because of rising prices or we decided that house prices were so unrealistic that they were getting set-up for a dramatic decline. For whatever reason we did not jump into the market. In my particular case it was a combination of both reasons. Living in the San Francisco Bay Area means that even with two good salaries, buying a decent house (newer than about 50 years old and in an area of town where no drug deals are happening in broad daylight) is a just barely within our grasp, and not without considerable financial risk. We also looked at the price appreciation and judged it to be unsustainable. Congress is rewarding us for our financial prudence and skepticism by taking our money and giving it to the beneficiaries of the housing boom.

Those folks who bought more house than they could afford, who took out ridiculously structured mortgages knowing full well that they were accepting a major economic risk, those who laughed at us for not getting in on the get-rich-quick real-estate scheme - those are the people who are getting our tax Dollars, to assist them as their house of cards comes tumbling down and their exotic mortgages are being foreclosed.

Essentially, Congress in its infinite wisdom, has turned the housing market into a "heads you win, tails I lose" proposition for us lowly renters, who never bought a house. If house prices continued to appreciate do you think Congress would come out with a rescue package for renters whose prospects of getting a house became slimmer? Do you think Congress would ask home owners to share their outlandish real estate profits with those of us who rent? So, home owners got all the returns during the boom and we are getting the downside risk during the bust. This is Washington justice for you, also known as sheer lunacy.

The New York Times published a detailed article covering the specifics of this wealth transfer bill, under the title "Housing Bill Has Something for Nearly Everyone". Read it and you can decide for yourself. My own very strong opinion is that government should stay out of the asset markets with the exception of providing robust regulation.

For you guys out there who will profit from this new housing bill, enjoy my money.

What Real Estate Crisis?

News outlets everywhere are filled with stories of gloom, doom and implosion in the real-estate market. If you believe the stories, California home prices are down about 18% from a year ago, but out here in the San-Francisco Bay Area, or to be more specific on the Peninsula, where most folks make their living from the high-tech industry, prices have barely dipped.

For example, home prices in Mountain View (home to Google) are actually up about 5% year over year, according to Zillow. The same source shows prices in Menlo Park, center of the venture capital industry, are up about 12%, and Palo Alto, home to Apple Computer and Stanford University has gained about 13%. What gives?

Well, I don't know this for a fact but here is my theory. Our local economy is more closely tied to the technology sector than to anything else. Silicon Valley has been churning out millionaires at amazing rates in recent years. Google and VMWare on their own have no doubt made several thousand of new millionaires out of their stock option holding employees. The average person around here cannot afford to buy a house using his regular income. Your two options are to undertake a long range commute from some of the more remote and affordable suburbs (I know several folks who commute 40 or even 60 miles each way), or to hit the jackpot when your company goes public.

Since the tech sector has been largely unaffected by the downturn until recently, home prices in this area continued their seemingly never ending climb. Well, I think things are about to finally change. Last week I read an article that stated that not a single venture backed company went public last quarter. In addition, venture capital firms have been much more conservative in their investments in recent months (which means fewer high-tech jobs, and fewer future IPOs). This suggests that the flow of money may taper down if not cease altogether.

In my opinion, it's only a matter of time before our local real estate market takes one on the chin. The market is already showing some signs of slowing - there are now multiple houses for sale on my street - something that previously was very rare, as available homes would be immediately snapped up. In the counties of San Mateo and Santa Clara, which together cover Silicon Valley, prices have already started to decline in recent months. In my opinion there is a decent chance that this measured decline will turn into a more dramatic drop in the near future.

I guess we'll just have to wait and see.

Guest Post: The Pitfall of Using Home Equity for Debt Consolidation

This is a guest post from Miranda Marquit, who edits debt consolidation information for DestroyDebt.com. If you are interested in publishing a guest post on Money and Such, take a look a these guidelines, and drop me a line. I am looking forward to hearing from you.

And now, to the post itself:


When you get into a great deal of debt, one of the tempting solutions is to use your home equity for debt consolidation. This can seem like a good idea, but there are pitfalls -- especially now that the housing market is struggling so much.

Advantages of home equity for debt consolidation. There are some advantages to using home equity for debt consolidation. It does make it easier to get a debt consolidation loan (if you are going that route). Additionally, you end up with a lower interest rate. An interest rate, mind you, that comes with tax benefits. So that can be a definite advantage to using the equity in your home for debt consolidation. But it may not be the best idea for you right now.

Disadvantages of home equity for debt consolidation. The biggest pitfall of using your home equity for debt consolidation is the fact that you are exchanging unsecured debt for secured debt. Unsecured debt is debt that isn't backed up by anything tangible. Creditors can try and get you to pay, and they can wreak havoc on your credit score, but that can't actually really force you to liquidate any of your tangible assets for payment. Secured debt, on the other hand, has a tangible asset to back it up. In the case of home equity debt consolidation, this asset is your home. You use the equity in your home to pay off your consumer creditors and the bank owns more of your house. This means that if you can't make payments, you lose what is likely your biggest asset through foreclosure.

Another issue is the fact that many homes are moving into the territory of negative equity, due to falling home values. You may take out a home equity loan now to consolidate your debts, but if home values fall further in the next few months, you could find yourself upside down on your mortgage. And, with home values as they are now, even a home equity loan may not cover all your debts. You may only have enough equity for 3/4 of your debt -- or less. This means that you still have multiple payments to make.

As an alternative to using home equity for debt consolidation, you can use a process of aggressive debt reduction to take care of your debts on your own (pay down the card with the highest interest rate first). Also, if you feel that debt consolidation is the easiest way, there are organizations that will help you consolidate your debt without a loan. Just watch out for high "administrative" fees and other costs. And, if you are concerned about your credit card interest rate, it is possible to negotiate a lower rate yourself. In some cases, you can even negotiate to close the account and finish paying off the balance at the lower rate.

Editor's Note: I am cetainly no expert on debt consolidation, however I do have legal training (which I have not used in over a decade). I believe that the statement claiming that lenders cannot actually force you to pay unsecured debt is not correct. The difference between secured and unsecured debt is that in the event your assets are not sufficient to cover all your obligations, creditors holding secured debt have precedence over non-secured lenders, i.e. they get paid first from their secured asset, and the non-secured lenders get whatever is left (if anything). Unsecured debt does not mean that your lenders have no recourse. They can still come after you, even though the process they need to follow to come after your assets may be more cumbersome from their perspective. Am I off on this? Anyone?

Recommended Articles

My post about finding a job in a tough economy was included in this week's Carnival of Personal Finance. It has been a while since I participated in one...

I also found a couple of other interesting posts - this one talks about how GM is trying to sell us a "green story". Many businesses are green washing these days - it's simply trendy and most folks don't pay enough attention to sift the real environmental reality from the crap claims. For example, the other day I saw a BMW ad announcing that the company has a hydrogen powered car available for sale and they are now simply waiting for the world to be ready. Come on! Give us a break! We are not THAT stupid.

This other article was particularly fascinating for me given that I have never bought or bid on a house. It talks about how a realtor was able to help her customers buy a house even when their offer was not the highest one that the owners received. Apparently, it's all about convincing the owners that the bid her clients are submitting is the most likely to close. Interesting.