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Blog entries | The illusion of home ownership
A blurb in a recent edition of Virginia Living magazine caught my eye because it discussed the condo craze currently sweeping the Ballston-Virginia Square-Clarendon corridor of Arlington County.
We lived there for 23 years, settling into Northern Virginia’s first high-rise condo, Tower Villas, at Virginia Square, in 1981. We rented the first year, paying $625 a month (including condo fee) and buying it a year later from our landlady. When we sold it in 2004, we walked away with a tidy profit several times over what we paid in 1982. The couple who bought it poured a ton on money into renovation and now rent it out for $3,500 a month plus the $575 a month condo fee. That’s six times more than we paid in rent our first year there some 25 years ago.
According to Virginia living, new two-bedroom condos roughly the size of our old one (1300-plus square feet) now go for $1.4 million and up and new condo developments sell out in a matter of days. The market flattened for a while in early 2005 but is now booming again.
An old rule of thumb used to say that your housing costs should not exceed 25 percent of your take home income. That means the couple renting our old condo should be taking home at least $16,000 a month or about $192,000 a year.
We paid off our mortgage in 1997 and held a old-fashioned mortgage burning party in a park across the street from Tower Villas. Amy and I pledged, at the time, to never, ever take out another mortgage on a home and, thankfully, we haven’t broken that pledge. Yet according to a recent study, fewer than 10 percent of Americans will pay off a home mortgage, down from 44 percent just 25 years ago and some financial advisers suggest paying off a mortgage is a bad idea. Now Americans just trade up, adding larger, longer-term mortgages and debt while keeping their monthly payments about the same. Another new twist is the “interest-only†mortgage where you never pay on the principal of a loan
Trading up to bigger mortgages and interest-only loans means you never actually own your home. You simply possess, for a time, a contract to live there. Saying you own such a home is only an illusion – just another fantasy in a society built all too often on false perceptions.
so
April 13, 2006 at 6:13 pm
To me there is a bigger problem occurring due to the greed of financial institutions. Even those that are paying principle on their mortgage, they are encouraged to take the equity for bills, fun, home improvements, etc. So, many people do not have any value in their homes and some even have negative value for 120% equity loans. In the long haul, with people’s propensity to spend beyond their means and to save minimally, there will be a very large problem in their later years. Pensions are almost a thing of the past and Social Security will not last much longer. Mortgage companies had started offering reverse mortgages to help older people address their living and medical needs but you have to have equity. That will not be available to many in this strange new environment. Hopefully, people are contributing to 401k or IRA plans, but there will be many that put off any savings.
dusty
April 13, 2006 at 6:57 pm
When my sister bought a new condo in the toney part of San Diego I asked how the hell she could afford it. She said bluntly..we will never pay it off, what does it matter, I want to live in a good neighborhood.It is an illusion but many people realize the truth and its a tradeoff.My husband paid off our house and although the neighborhood has gone downhill,we own this thing free and clear,only paying the property taxes and insurance now..but yes, I do think about moving to a bigger,newer house,better neighborhood sometimes..then I read something like this and thank my lucky stars.
Jim
April 13, 2006 at 10:28 pm
Had to respond to this since I lived in Rosslyn on Clarendon Blvd from 1993 to 1996, and I work in mortgage banking. Typically the national average home price grows about 2% over consumer inflation, which historically is about 4% or so; however, when the Federal Reserve began lowering rates in 2000 in order to cushion the deflating stock market, credit starting becoming cheap. Everyone who wanted to own a home had a better shot at getting one with the more affordable mortgage rates. In addition, money rotated out of the stock market and into real assets such as real estate. This rate driven increase in demand caused home prices to soar, particularly in sought-after metro areas such as the Baltimore/Washington/NoVA area.
Interest-only loans were originally targeted towards financially well-to-do people who did not want to tie up their money in a traditional mortgage; however, as interest rates rise, they are becoming offered to and used among those who cannot afford a traditional mortgage payment. This is not good since home equity has been the biggest piece of household wealth in the past, but now many have the option to get into trouble with this mismatched mortgage product.
If you are a real estate speculator and you think the future trend of home prices is strongly positive such as recent history, then an interest-only loan would give you a bigger return since it increases your leverage (you put less $ up front).
Finally, it is a good time to pay off or pay down your mortgage when there is no other alternative investment that will give you a greater after tax return. Example, if your mortgage rate is 6% before tax deductions or 7% after accounting for tax deductions, then you would payoff if other investments returned less than 7%. You would not pay off if you get a greater return elsewhere, or if you have a liquidity or cashflow concern. You don’t look at these numbers at all if you are moving because of another job, divorce or filing for bankruptcy.
The truth of banks being greedy lies in somewhere between truth and fiction. Those who are not financially sophisticated are apt bear the burden of their ignorance in dollars. On the other hand, if you don’t need money then it’s cheap. Try this example, compare the rate on a pre-approved credit card offer you get with one that you try to get by calling a bank and asking for credit.
Sean Pecor
April 14, 2006 at 12:29 pm
Jim’s comment was very educational. JJ Luna’s? Not so much.
Sean
GR
April 15, 2006 at 6:58 pm
If you dont require to live in a large city, you can easily buy an acre or 2 for less than $15K and a repossesed mobile home for less than $5K.
For less than what most people waste on a new automobile you can have a “paid for” place to live.
Michael
April 13, 2006 at 11:52 am
Doug,
The myth of home ownership goes much further than interest-only loans. While you have paid off your mortgage, you still don’t own your home, but merely rent it. If you don’t pay your rent, you’re asked to leave and the home gets a new renter. Yes, the term is Property Tax, but seriously, let’s call it what it is shall we? To go one step further, you also paid a hefty chunk of change for the priveldge of renting said home. Those unfortunate enough to have interest-only loans are simply going to pay forever for the priveldge of renting a home. Well, maybe not, eventually, the city/county, etc. will probably just take it and build a strip-mall.
Sean Pecor
April 13, 2006 at 8:19 pm
I have to play devils’ advocate. Current mortgage interest rates are at some of the lowest levels in 40 years. In most places, Real estate is appreciating at a minimum of 10%. In Franklin County where demand is far higher than in Floyd County, the appreciation is 20%! If your mortgage interest on a newly purchased home is 6.25%, your investment (and yes, a house is an investment) is appreciating above and beyond that rate. Furthermore, you can reduce your taxable income by the amount paid in mortgage interest.
Doug got out from under a mortgage, sold his house for a huge return on his investment and was able to buy a nice house in a rural area outright. He invested wisely. Most young folks aren’t in a position to buy their first or second house without a mortgage.
Home ownership isn’t a myth. There is a legal differentiation between being the owner and being the lien holder. Sure, if you stop paying your mortgage you’ll quickly find yourself in default. At that point, no, you will not own your home. But someone who finances the purchase of a home is in fact the owner of the home.
Property tax is a good thing. If you own property in a county then you are obligated to help support that counties’ infrastructure. The more property you own, the more you pay. Without property taxes, all these second homes in my county would expect local governments to pay for their road maintenance etc but they would not have to pay a dime for it. Property taxes ensure all homeowners pitch in regardless of where the homeowner primarily resides. The value of the amount of Franklin County real estate that I own has two commas in it, yet I’m happy to pay property taxes. In fact, coming from Vermont where the property tax rate was over $2.00, I find it somewhat amusing that people think Virginia property taxes are too high.
Sean
JJ Luna
April 14, 2006 at 3:18 am
I have been in favor of renting rather than buying (unless you can pay cash and could afford to lose the house) for the past 50 years. The big reason is FREEDOM, which is what I stress in my book “how To Be Invisible. Here are some good reasons to rent:
. If you rent from month to month, you are free to pack up on short notice and move, whereas I’ve seen homes stay on the market for a year or even two before being sold or repossessed. Here are a few of the many reasons why you may suddenly wish to leave an area earlier than you now expect:
• One of the neighbors is unbelievably obnoxious.
• Another neighbor has a dog that barks all night.
• A drug dealer or a child molester moves into your area.
• Your in-laws start shopping for a house on your street.
• A stalker has targeted you, and the police cannot protect you 24/7.
• A job or business opportunity opens up in a faraway state.
• A friend in Hawaii invites you to come on over and says he’ll help you get settled.
• You get laid off or fired, and the job market in your area is in the pits.
• Your 16-year-old daughter sneaks out at night to see her 25-year-old tattooed, earring-laden boyfriend who’s an industrial-strength loser. You need to move to the Aleutian Islands—fast. (If you can cope with 16-hour shifts, there are high-paying jobs there on the crab-fishing boats working the Bering Sea out of Dutch Harbor.)
• Although innocent, you are about to be arrested for a horrific crime, and you have no alibi that will stand up in court. You need to pack up tonight and race to Canada, Mexico, or the Turks and Caicos Islands.
Teresa
April 14, 2006 at 3:15 pm
Do you know, in lands other than America, if you default on your home loan, the bank/financial institution does NOT own your home? They can foreclose and force the sale, in order to recoup their loan amount, but the home is still owned by YOU, the purchaser, and any proceeds above the loan and foreclosure costs go directly to the homeowner.
The way American banks do business is nothing short of loan sharking.
Michael Young, Esq.
April 14, 2006 at 5:45 pm
I note that the only people on this thread defending the indefensible are those who have a monetary interest in the current methods by which people become indentured servants perpetually to their mortgage lenders.
As an attorney, I wholeheartedly agree with JJ Luna’s comments, both from personal experience and what I’ve seen over the years in clients’ lives.
I would also point out that Doug Thompson’s article is consistent with the views expressed in Dr. Thomas Stanley’s works, “The Millionaire Next Door,” and “The Millionaire Mind.” One banker described in Stanley’s books actually gloats over how the lender actually owns everything while the borrowers are mere servants.
If one insists on buying a home, the ideal method is to pay cash for it. A less attractive, although reasonable alternative, is to put a minimum of 20% down and finance the balance over a 15-year fixed term mortgage. To paraphrase Dave Ramsey, “creative financing” means too broke to afford a house.
Note also that the few retired people who do end up owning their homes mortgage-free rarely take the steps necessary to protect against long-term illness. In many instances, the government can slap a lien on the home to recoup nursing home and other long-term care expenses…and the government can look back 5+ years at any property transfers for recoupment purposes. Recently a couple that had been married for nearly 50 years in Ohio had to get divorced because the husband’s health costs were taking everything. The only way the wife could retain any assets was to divorce the husband she loved.
As a final note, in many areas of the country rental space costs between 50-60% of buying the same property…and when you buy, you get the responsibilities for property taxes, all repairs, etc. Mortgage interest deduction or not, there are far better things one can do with that 40-50% difference for investment purposes or paying down other debt.