why over-extending yourself in homeownership can be good??

[chiver78]

this article pretty much made my head explode. this pretty much described me back in 2006, when I over-extended myself to buy my townhouse - which I just sold a year ago (finally!!!) at a $35k loss.

When buying an "unaffordable home" in Boston might make sense

Boston.com Staff
November 11, 2015 1:15 PM

Affording a house in Boston can seem impossible, especially for millennials, who have low homeownership rates all over the country.

But what if paying too much now would actually be okay in the long run?

A new study from real estate listings site Trulia looked at the cost of homeownership and the projected income growth for the 100 largest U.S. metros, and came up with some hopeful news for Bostonians.

Trulia found that in areas where someone’s income is likely to grow over the course of a working life, buying a home with a mortgage that is currently “unaffordable” might actually be okay in the long run.

Explain, please.

-click the link above for the rest of this gem.

are these idiots (the authors/experts, not the homebuyers - just to be clear) trying to force another collapse?

[phil5185]

I agree in theory. You are citing a small block of time - but just like stocks houses are longterm investments.

I followed that 'over - extend' concept for 43 yrs. Bought our home and 4 rentals on a shoestring, refinanced all of them a few times, ATM'd them and invested the equity elsewhere. Sold the last rental just last month. At one point I had 6 mortgages on 4 houses - and kept them.

Contrary to the "talking heads", RE always goes up, just not every year.

[GRG a/k/a goldenrulegirl]

I have always expected that there is going to be a glut of housing stock -- especially McMansions -- when the Baby Boomers start downsizing and moving in to assisted living.  I think it's hard to forecast when the bulk of these homes will hit the market -- will it be a slow and steady sell off or will something else happen in the economy to trigger a large group bailing at the same time?  If it is the latter, then those other homeowners who are over-extended may be in a tough spot.  The market value of their homes could take a significant hit from which they may not recover.  I mean, if the largest segment of homeowners sells and is no longer buying, who would fill the void?  

[resolution]

I did that when I bought my first house. I was making 23k and bought a house for 100k, which is enough to make a YM head explode. I rented out a room the first few years to make it affordable, and by the time my roommate moved out I had gotten a few raises. It was uncomfortable and risky enough that I wouldn't recommend it to anyone, but I can see where they are coming from with the article.

[busymom]

IMHO, we're still seeing too many foreclosures (at least around here).  And, those who've graduated from college in recent years seem to be saddled with a lot more student loan debt than DH & I had to worry about.  I wouldn't be surprised to see another bubble burst.  Of course, then, after another collapse would be a great time to buy! 

[TheHaitian]

I believe it can work in theory and in real life.

Using us as an example:

When we bought our house we made combined 97k and purchased a 320k house or ~3.3 times our annual income.

Fast forward today (17 months later) we make 117k combined and our original mortgage is 2.7 times our income.

We currently pay $1,300/month towards our student loans. In 5 years or so (God willing) it will go down to ~$500/month and in 8 years $0.00.

Basically as our income increases (and expenses hopefully decreases or take a smaller percentage of the pie)... Life gets easier; you have more breathing room.

The key though is not to replace the increase income with more bills / lifestyle creep. But I would not recommend anyone to do it because no one has a crystal ball... Me losing my job would hurt is Big time and we know it.

I am trying to reduce our "monthly obligations" and keep the lifestyle creep away which is not easy (from the guy that just got some crown molding installed).

[chiver78]

my original plan wasn't to sell so quickly (in the grand scheme of things...) but in all honesty, I bought that house by myself. I was making $68k - barely, the raise kicked in the first paycheck AFTER I closed on the place - and the purchase price was $275k, with a $245k mortgage. if I had lost my job, I'd have been screwed!

I don't know how I did it, but I'm astounded I managed not to lose the place. oy.

[HoneyBBQ]

As far as I can tell, the appreciation and value of my house go up way faster than I can pay down the mortgage.

Bought 2.5 yrs ago for $1.1MM. Zillow says $1.4MM+.

Now, that's all theory, but Zillow is very accurate in the Seattle area, at least in my hood. And with a recent sale, it's got to be within a few %.

I'm getting 100k+/yr for free, assuming housing is stable, and someone would actually come to the table with that much money for my house.

So, even if you were stretched in Seattle, you'd have serious equity in a few shorts months. 

[Deleted]

It worked this way for us.  We should have borrowed more for the first house, but were very conservative.  When income went up and house 1 became too small, we borrowed 4x income for house 2.  We should have just bought a bigger house the first time, so we wouldn't have had the buying, selling, and moving expenses.  By the time we sold house 2, original mortgage was only 2x income and our expenses were way less. 

This is something that can be done when you are young and your income is increasing quickly.

[Cookies Galore]

I understand what was written, but I'm already such a nervous wreck over minor things, I can't sit tight for six years expecting my income to increase and ease my mortgage burden! Hell, hubs and I increased our annual income by $8700 a couple of weeks ago (me a promotion, him a small raise) and we are still looking at the same affordable houses as we were before. I want to enjoy my extra income, damn it!
We're also a different case for our particular area/peer group. We have super cheap rent right now, some of the cheapest where we live, so buying is an automatic increase in monthly outgo. We also live in 600 sq. ft., so someone's "starter home" is our "look at all this space!"

[Tennesseer]

What about over-extending yourself on a parking spot?

Two Boston Parking Spots Sell For $560,000 At Auction

[CCL]

Nov 11, 2015 16:30:44 GMT -5 phil5185 said:

I agree in theory. You are citing a small block of time - but just like stocks houses are longterm investments.

I followed that 'over - extend' concept for 43 yrs. Bought our home and 4 rentals on a shoestring, refinanced all of them a few times, ATM'd them and invested the equity elsewhere. Sold the last rental just last month. At one point I had 6 mortgages on 4 houses - and kept them.

Contrary to the "talking heads", RE always goes up, just not every year.

Sometimes not by much. Or maybe not at all if money isn't spent on maintaining it.

Of course Zillow says my house went up $30k since I bought it a couple months ago and the one I sold went down $20k so I guess that makes me $50k richer.

[GRG a/k/a goldenrulegirl]

Nov 11, 2015 19:01:03 GMT -5 Tennesseer said:

What about over-extending yourself on a parking spot?

Two Boston Parking Spots Sell For $560,000 At Auction

There is one parking space, just one, on the market now for...$650,000.

[Tennesseer]

Nov 11, 2015 22:27:14 GMT -5 GRG a/k/a goldenrulegirl said:

Nov 11, 2015 19:01:03 GMT -5 Tennesseer said:

What about over-extending yourself on a parking spot?

Two Boston Parking Spots Sell For $560,000 At Auction

There is one parking space, just one, on the market now for...$650,000.

I heard that the other day. I was going to use that one. But I looked it up and saw the sale was halted for some reason and the MLS ad was removed yesterday so I didn't post that story.

[GRG a/k/a goldenrulegirl]

Nov 11, 2015 22:48:37 GMT -5 Tennesseer said:

Nov 11, 2015 22:27:14 GMT -5 GRG a/k/a goldenrulegirl said:

There is one parking space, just one, on the market now for...$650,000.

I heard that the other day. I was going to use that one. But I looked it up and saw the sale was halted for some reason and the MLS ad was removed yesterday so I didn't post that story.

The problem can't be the appraisal.  

Must have been the inspection.  

[Peace Of Mind]

Is this WTF!? day?  Awesome!  Here is my input:

It's also good to max out your credit cards and buy a new luxury car annually.    Oh, and have tons of kids.  They're cheap to have today!

[Tennesseer]

Nov 11, 2015 22:51:54 GMT -5 GRG a/k/a goldenrulegirl said:

Nov 11, 2015 22:48:37 GMT -5 Tennesseer said:

I heard that the other day. I was going to use that one. But I looked it up and saw the sale was halted for some reason and the MLS ad was removed yesterday so I didn't post that story.

The problem can't be the appraisal.  

Must have been the inspection.  

Unlike the linked article where the two parking spots were behind a brownstone building and the spots were together, this $650,000 parking spot was in a parking lot building (Brimmer Street Garage) that was not open 24-hours a day and required the car owner to give the valet the keys to park it. And the below picture is what the park garage looks like inside. Hence the keys to the valet.



On Beacon Hill, the asking price for a parking spot hit $650,000, briefly

[GRG a/k/a goldenrulegirl]

Yup, the big 3 Boston stations all did stories on the listing and showed the spot.  But, hey, you can get the car detailed and there is a gas pump inside the garage to fill up before you drive off.  

[Tennesseer]

Nov 11, 2015 23:02:29 GMT -5 GRG a/k/a goldenrulegirl said:

Yup, the big 3 Boston stations all did stories on the listing and showed the spot.  But, hey, you can get the car detailed and there is a gas pump inside the garage to fill up before you drive off.  

That alone makes it worth every penny.

[GRG a/k/a goldenrulegirl]

C'mon, Tenn, you want to move back now, don't you??!!!!  

[whoisjohngalt]

Nov 11, 2015 16:30:44 GMT -5 phil5185 said:

I agree in theory. You are citing a small block of time - but just like stocks houses are longterm investments.

I followed that 'over - extend' concept for 43 yrs. Bought our home and 4 rentals on a shoestring, refinanced all of them a few times, ATM'd them and invested the equity elsewhere. Sold the last rental just last month. At one point I had 6 mortgages on 4 houses - and kept them.

Contrary to the "talking heads", RE always goes up, just not every year.

I am curious - did you ever have any "larger" life events - unexpected/prolonged job loss, long term illness (you, your spouse, kids), had renters that completely destroyed your house or the area turned into a ghetto and you couldn't give the house away?  Any other events I am not creative enough to think of?

What you are describing can be great if all the cards fall just right.  But it's also very very VERY risky.

[haapai]

Hmmm, I clicked on the link to the Trulia study and while they do explain how they calculate projected income growth, I didn't notice any explanation regarding how they they calculate expected increases in property taxes.  Did anyone else see an explanation? 

[Deleted]

Nov 11, 2015 23:31:59 GMT -5 whoisjohngalt said:

I am curious - did you ever have any "larger" life events - unexpected/prolonged job loss, long term illness (you, your spouse, kids), had renters that completely destroyed your house or the area turned into a ghetto and you couldn't give the house away?  Any other events I am not creative enough to think of?

What you are describing can be great if all the cards fall just right.  But it's also very very VERY risky.

I agree. I'm not surprised that it's the realtors who are pushing the "buy the biggest house you can afford" crap again. Salary increases aren't what they used to be, so I wouldn't count on frequent generous increases that outpace inflation, even though some here have gotten them. I still remember a sad tale on creditboards.com (and there were many similar ones just before the financial crisis- I should have seen it coming). A couple was in foreclosure on their dream home. The realtor had told them this was their "forever home" so they went with every upgrade- they mentioned "hand-scraped" wood floors. Now they were underwater.

When I lived in NNJ, I HAD to borrow more than I was comfortable with if I wanted to own anything decent, and made out very well when I sold them, thank heaven. One was bought in 1985 and sold in 1997; the other bought in 1997 and sold in 2003. If mortgage interest rates had skyrocketed, either of those deals could have been a disaster.

When DH and I moved to a LCOL area in 2003, we did NOT buy the biggest house we could afford. We'd just married and released about $300K in equity from the houses we sold, and our combined income (he was 65 and getting SS) would have easily qualified us for some $800K McMansion in a gated community with 8 bedrooms, 5 bathrooms and a few acres of pristine lawn. Instead, we paid $240K for a house that we sold earlier this year for $298K- after putting at least $70K into upgrades over the years. That was typical of the market. I would hate to have seen that happen on an $800K scale. The money we invested after we sold our houses did much better! When my employer was acquired in 2006, our fixed costs were low enough that I didn't feel I had to panic and jump ship in case I got canned, as some of my colleagues did. Staying turned out to be a good move for me- I lasted another 4 years and they were good ones. Two years later, when I decided the next job was intolerable, retiring was a lot easier with a mortgage payment of only $860 a month.

Phil is talking mostly about investment houses and to me that's something else, as long as you can get good tenants. Over-extending yourself on your own residence (especially when it's for bells and whistles and extra bathrooms you don't need) carries risks, and the heavy fixed costs can limit your options later down the road. Many of the sad stories I read during the financial meltdown were of people who had lost jobs but couldn't relocate because they were underwater on the mortgage and didn't have the cash to bring to the closing so they could take a job elsewhere.

ETA:  GRG is right- DH and I sold our McMansion and we're nowhere near going into long-term care; it was just more house than we needed and too much work to maintain.  I suspect that's one reason the house didn't appreciate much; the wave of McMansion sales is starting already.  A couple in our church had a bigger, more splendid McMansion with more updates in a sought-after town.  They put it on the market for $575K in May.  It just sold after multiple markdowns.  The last listing price was $469K.  Not sure what price they actually accepted. 

[muttleynfelix]

Has no one else had taxes and escrow go up on them? If we had over extended on either house, we would have been screwed because our taxes went up so much. Our first house, we built so our taxes went from vacant land to a house. I expected it, but it still hits you - $200 a month would screw any one over extended. This time our taxes went up based on the sale of the home. Our escrow is going up $65 a month. Not chicken feed. I might get a raise... In March. But it will have to be over 3% to account for the change in taxes, health insurance and my automatic increase to my retirement before my savings account feels it. I'm not sure that will happen since we missed out on a bunch of work this year.

[NomoreDramaQ1015]

I wouldn't be able to sleep at night knowing I am counting on my salary increasing so I won't be house poor.   DH and I have both been thru several wage freezes over the years and even afterwards the raises were puny. 

Unless I sell my house what it's worth is only a piece of paper.  It doesn't do me any good if I can't pay all the rest of my bills b/c I am trying to cover my mortgage!

People on this board are above average when it comes to finances and real estate.   Your average person is not Phil.  I think that tends to skew the opinion on articles such as this.

If done right yes overextending yourself can be a valuable tool, but you have to know how to use that tool otherwise you'll end up hurting yourself.

[yogiii]

Nov 12, 2015 10:15:43 GMT -5 muttleynfelix said:

Has no one else had taxes and escrow go up on them? If we had over extended on either house, we would have been screwed because our taxes went up so much. Our first house, we built so our taxes went from vacant land to a house. I expected it, but it still hits you - $200 a month would screw any one over extended. This time our taxes went up based on the sale of the home. Our escrow is going up $65 a month. Not chicken feed. I might get a raise... In March. But it will have to be over 3% to account for the change in taxes, health insurance and my automatic increase to my retirement before my savings account feels it. I'm not sure that will happen since we missed out on a bunch of work this year.

Yes we've been in our house 7 years and the taxes are 1k/year more now than when we bought. 

ETA - also we bought near the peak so our house is likely worth a little less than we paid for it. Overall doesn't matter as we plan to stay "forever" or a very long time, but if things were tight and we had to sell, that would not be in our favor

[Ryan]

This advice doesn't really work for people that are kinda stupid with money because they'll just take things to the next level and use that to justify a purchase of an enormous home.  

It can be helpful for people that are too conservative.  I thought my monthly payment was expensive and it represents only 10% of my gross salary.  In hindsight, I could've used a slightly bigger house and would've been better off spending a bit more.

[muttleynfelix]

Nov 11, 2015 16:30:44 GMT -5 phil5185 said:

I agree in theory. You are citing a small block of time - but just like stocks houses are longterm investments.

I followed that 'over - extend' concept for 43 yrs. Bought our home and 4 rentals on a shoestring, refinanced all of them a few times, ATM'd them and invested the equity elsewhere. Sold the last rental just last month. At one point I had 6 mortgages on 4 houses - and kept them.

Contrary to the "talking heads", RE always goes up, just not every year.

Which is fine unless something goes wrong? What happens when your taxes go up? How about your health insurance triples so that it now coats more than your mortgage? What about thousands in medical bills? A layoff?

Frankly Phil, sometimes I think you must have lived a pretty charmed life, at least in your 20s and 30s.

[emma1420]

I think this advice works if you are early on in your career, you plan on staying in the area long-term, and you live in a very high cost of living area with limited housing stock.  When my brother and his wife bought their house they bought the maximum amount they could afford.  And it's a good job that they did because they just sold their house and it had appreciated over 70% in the three years they owned their house.   They would never have been able to afford to purchase a larger home if they hadn't stretched with their first home. And my brother's income (my SIL is a SAHM) has gone up steadily.  They also live in an area where at worst housing prices might stay flat, even during the recession they didn't decline.  

So I do think it makes sense in some cases.  However, in MCOL and LCOL areas I don't think make much sense at all.  Primarily because houses don't appreciate wildly like they do in some VHCOL area.  There generally isn't the fear that you will end up getting priced out of the market.

[phil5185]

Phil is talking mostly about investment houses and to me that's something else, as long as you can get good tenants. Over-extending yourself on your own residence (especially when it's for bells and whistles and extra bathrooms you don't need) carries risks, and the heavy fixed costs can limit your options later down the road. Many of the sad stories I read during the financial meltdown were of people who had lost jobs but couldn't relocate because they were underwater on the mortgage and didn't have the cash to bring to the closing so they could take a job elsewhere.

I am curious - did you ever have any "larger" life events - unexpected/prolonged job loss, long term illness (you, your spouse, kids), had renters that completely destroyed your house or the area turned into a ghetto and you couldn't give the house away? Any other events I am not creative enough to think of?  Well, you didn't list my motorcycle crash, lol.  But, yeah, a few of those other things happened too.
What you are describing can be great if all the cards fall just right. But it's also very very VERY risky.

As for the 'bells & whistles' and buying unneeded sq footage as a KUWTJ - I concluded early on that it's good to own 5000 sq ft or 10,000 sq ft of RE - but don't consume 10,000 ft yourself.  But 10,000 ft  that is bringing in several rent checks, appreciating annually, and not tied to the calendar (in case of a forced move) - is the exact opposite. Ie, not a cost but an income. Plus a great source of seed money for a stock portfolio.

IMO, the 'very very VERY risky' and the 'carries risk' is an important factor in the financial mediocrity of younger generations.  Since the information age, people have been exposed to Finance magazines, Planners, Discount brokers, 'How-to' Websites, etc.  All of them (correctly) warn of risks and provide their recipe to invest with minimal risk (but only after 6 months of EF, no car payments, no CCs).   But that can only lead to mediocre successes, a few $100,000 of no-risk assets. 

OTH, wealth-building requires risk - risk management, risk mitigation - not risk avoidance. Very little attn is given to risk analysis, risk quantification, risk management.