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.

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.

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10 Responses

  1. 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.

  2. 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.

  3. 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.

  4. 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.

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