Author Topic: Sucker bought a house at the WORST possible time  (Read 530 times)

0 Members and 1 Guest are viewing this topic.

Offline Matthew

  • Mod
  • *****
  • Posts: 23120
  • Reputation: +20273/-246
  • Gender: Male
Sucker bought a house at the WORST possible time
« on: December 31, 2007, 10:44:23 AM »
  • Thanks!0
  • No Thanks!0
  • But at least she's not a RENTER -- you know, those people who sit in front of the TV all day with a cigarette and a beer, are on welfare, and have loud marital disputes every other day. Oh, and they drive beat-up cars.

    Yes, I'm being sarcastic here -- and pointing out what many people think of renters.

    But right now, renting is the sane thing to do in many markets. Should she have kept renting for $850 a month, or "bought" a house for $600,000 which costs her $3000 a month for the next FORTY years?

    Matthew



    Retirement plan interrupted
    This 31-year-old psychologist can't let a costly mortgage stop her from saving

    NEW YORK (Money Magazine) -- When Patty Marquez graduated from the University of Minnesota more than five years ago and moved to Southern California, she thought about buying a house.

    But with prices already sky-high in the Southland market, "I was scared," says Marquez, now 31. So she rented for more than four years.

    But all along, even as prices in the region continued to climb, she kept thinking to herself: Isn't owning a home the right thing to do? Last February the school psychologist, who now makes $77,000 a year, took the plunge and purchased a $600,000 duplex, putting 3 percent down on a 40-year fixed-rate mortgage.

    Though prices started to ease by the time she bought, her timing was still poor. Since Marquez bought the property in Signal Hill, Calif., just north of Long Beach, home values in her area have fallen more than 3 percent, and they're expected to drop an additional 9 percent in 2008.

    Becoming a homeowner hurt her net worth in more ways than one. After she bought the duplex, Marquez's monthly housing expenses jumped from about $850 when she rented to $3,000. Even with the money she earns renting out a portion of her home, her net housing expenses have more than doubled.

    As a result, Marquez stopped contributing to her 403(b) retirement plan. So after getting off to a good start - she already has $65,000 saved up in her tax-deferred account - Marquez wonders if her house is mortgaging her future. "I don't want to put a halt to saving," she says, "but I won't be able to save as much as before."
    Where she is now

    The most important element in her financial life is her mortgage. It is the $582,000 elephant in the room that she can't ignore. In order to afford it, Marquez had to stretch her loan out to 40 years, fixed at 5.1 percent, with the first 10 years being interest-only.

    The longer term means she'll build equity in her home at a slower pace. And during the initial interest-only phase, she won't build any equity at all. Plus, once this period ends, her total monthly payments will jump to nearly $4,000, which will make it that much harder to afford her home while saving for retirement.
    What she should do

    There's no easy way out of this bind, says Sandra Field, a financial planner in Los Alamitos, Calif. If Marquez were to sell now, she might not get enough to pay off her mortgage. Still, creative thinking can help buy Marquez some breathing room, Field says.

    Squeeze more income from her property. Marquez currently rents out half of her duplex, charging $1,100 a month. A longtime renter herself, Marquez says she's reluctant to jack up that price. "I just don't want to do that to my tenant," she says. But Field points out that not only is her renter paying below-market prices, but he's been paying virtually the same rent for the past five years.

    So "he must have expected a significant increase with a new owner," Field says. She suggests Marquez raise the rent to $1,400 in early 2008 and then continue hiking it by $50 every year. The rising rental income should give her some financial flexibility during the interest-only phase of her loan and help cover some of her costs when her payments jump after that period ends.

    Restart her 403(b) contributions. Ideally, Marquez should be saving around 12% of her salary each year, says Field. And until recently, Marquez was saving more than that - about $10,000 to $15,000 a year. Though she stopped contributing to her 403(b), Marquez says she could probably scrape together $4,000 a year to put into the account. Field says even a small amount helps. And if Marquez raises her rent, that should free up another $3,000 to $4,000 for her 403(b).

    Tweak the investment mix. With fewer dollars going into her retirement plan, Marquez needs to be more mindful of the money she already has in her account. Field thinks Marquez's nest egg is too heavily tilted toward large-cap U.S. stock funds like Van Kampen Comstock (ACSTX). Marquez chose Van Kampen to manage her 403(b), but Field says the Van Kampen choices within her plan don't offer her a good small-cap option.

    So she advises Marquez to switch her provider to Fidelity. That way, as she revamps her portfolio, Marquez will have a broader range of funds to choose from, such as Fidelity Small Cap Stock (FSLCX) and Fidelity Diversified International (FDIVX).

    "This is a transitional period for me," Marquez says. "There's a lot of change, but I'm hoping to find my way through."
    Start your Amazon.com session by clicking this link, and my family and I get a commission on your purchase!

    Offline Matthew

    • Mod
    • *****
    • Posts: 23120
    • Reputation: +20273/-246
    • Gender: Male
    Sucker bought a house at the WORST possible time
    « Reply #1 on: January 05, 2008, 08:35:23 AM »
  • Thanks!0
  • No Thanks!0
  • The problem is that every month her house is vacant, she has to come up with $3K.

    You're saying that she's benefiting because she's still living in the house, and getting someone to help with her mortgage. I guess that's true -- but how many cases do you have where the owner is NOT living in the place -- and still charging HALF of what the mortgage is costing them? That's why there's going to be further price reductions in housing, as investors dump their millstone-around-the-neck properties. Remember, one must pay property tax, mortgage payment, PMI, and insurance REGARDLESS of what the market will bear for rent -- and regardless of whether or not you can find a renter to pay that going rate!

    And you have to have a DECENT job -- as in, a CAREER type job, to afford that. If the economy takes a downturn (I correct myself -- WHEN the economy takes a downturn) money isn't going to be flying all over the place.

    It is best to be able to afford your house on a $8/hr salary -- if worse came to worse. Better to spend 15% of your income on your house payment and be able to keep your house during the Depression than spend the standard 33% of your income on housing and lose your house as soon as you loose your decently paying job(s).

    So many people don't realize that -- the more money you're making per year right now, the more you have to lose!

    In other words, it's better to make $35K and spend $25K a year on expenses, than to make $100K and spend 90K on expenses. Both are considered "living within your means", but do you see the difference?

    Matthew
    Start your Amazon.com session by clicking this link, and my family and I get a commission on your purchase!


    Offline Matthew

    • Mod
    • *****
    • Posts: 23120
    • Reputation: +20273/-246
    • Gender: Male
    Sucker bought a house at the WORST possible time
    « Reply #2 on: January 05, 2008, 07:43:27 PM »
  • Thanks!0
  • No Thanks!0
  • But you could just as easily say that with all the overbuilding nationwide (builders kept on making houses even to the present day -- even after demand had long since crashed) that there are going to be a LOT of places for rent --

    Especially as investors will want to do SOMETHING to tread water a bit. Joe the investor is paying $3K a month for a house, and he can't sell it -- so he's losing money every month. Assuming he's not rich, he can't afford this house for long. So either he will get foreclosed on, or he will have to find a renter to buy him some time.

    Matthew
    Start your Amazon.com session by clicking this link, and my family and I get a commission on your purchase!

     

    Sitemap 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16