Sometimes our eyes are bigger than our appetites.
That’s what happened to my friend Sandy when she bit off more than she could chew with her 3,500 sq. ft. townhouse in one of Chicago’s swankiest neighborhoods.
Big Mortgage, Shiney Appliances
When the economy was sky rocketing, Sandy had a couple good years in the financial industry. She parlayed that short-term success into a long-term obligation, a 30 yr. $267,000 mortgage with all the bells and whistles.
Sandy gorged herself on designer appliances like Viking and Sub-Z while the party raged on. Woman and children watched in awe as prices shot higher.
But now, the economy is in the tank, and guess who doesn’t have a job? The place that was supposed to produce big returns is starting to look like a blender.
“Add cash and hit puree.”
Sandy’s townhouse is shredding her bank account.
She has a fat mortgage, expensive taxes and pays monthly dues to the condo association.
So why not just sell the place and downsize into something more affordable? Simple solutions for simple problems, right?
Wrong!
Sandy is Trapped, She Can’t Move
Let’s back this conversation up for a second.
What kind of a bank lends money to people who don’t have jobs?
None that I know of or I’d have an account there.
Even if she extracts $200,000 of equity from her current place, which would be a windfall for anyone, she would still need a mortgage to cover the difference and get into the next place.
Could she squeeze into something for less than $200,000?
Not a bad question, that option is on the table.
But it requires stepping over a colony of bums drinking busch light at 6 in the morning to get to work, probably not a good fit for someone coming from a half million dollar townhouse in a fancy neighborhood.
In the meantime, Sandy waits, faithfully paying her mortgage and keeping her windows open to save money on electricity.
And her house? Oh ya, it’s worth less than it was 4 weeks ago, no big deal.
The Housing Myth Busted
Sandy bought into the myth that real estate is a silver bullet investment and overextended herself, a very common mistake with all the mania surrounding housing these days. But that is pure fallacy, becuse on a historical basis, housing has not been a great investment, returning only 3% annually, a mere 1% better than inflation.
And housing has been known to go through 20 and 30 year periods of doing absolutely nothing, making the upward action over the last few years an extreme statistical anomaly.
So before you sink an enormous amount of money into a new place expecting big returns in 3-5 years, here is a good question to ask yourself.
Would you rather have a big chunk of your money tied up in a massive, ice-berg like asset that is extremely expensive to move, or some stocks and bonds where you can get in and out with the click of a button and make immediate adjustments to underlying economic fundamentals?
When you buy stocks and bonds, you become the house; you get paid to do nothing. If someone is willing to give you that edge, you’d be crazy to not take advantage of it, because as everyone knows, the house always wins.
Housing Prices Chart
chart provided by Bill Marsh/The New York Times
