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Flipped…

As I read the news every day on the economy and the slumping housing prices, I have to say that I’m not all that surprised. How many people were oblivious to the fact that banks can’t continue to give away money for free and that eventually people wouldn’t be able to pay their mortgages and would start walking away from these homes that they never put money down on in the first place.

Everyone got excited about the fact that they could buy a home with no money down and live the life of a homeowner, paying the bare minimum. Some even got excited about buying homes and flipping them before the mortgages reset, allowing them to make a ton of cash off depressed property.

Unfortunately, the saying “what goes up, must come down” is a reality. In California, housing prices have been out of control. When you can’t even buy a 2-bedroom cottage for less than a million dollars, you know that something is wrong. When five couples are having a bidding war over that 2-bedroom cottage, you should really know something is wrong.

We have some friends that recently purchased a house. My advice during their search was to choose a good location because when the inevitable fall happened, they’d be in better shape.  They didn’t listen.  They didn’t want to “waste their money on a condo” and, instead, bought a house across the Bay. Their home is a 2-bedroom home that is smaller than our townhouse and in an area that could be called “undesirable”.  Think about it.  Every home in the Bay Area sells for more than $650K and they find one for $500K.  Um.  Ever think that something may not be quite right.

First, in this area, a 2-bedroom house is undesirable to most couples or families. Families typically look for 3-bedroom homes so that they have room to grow. Second, the only way to actually get to their house is through this kind of seedy, ghetto type of area.  They’ve admitted to hearing gunshots and have bars on their front door, which I’m not exactly sure screams “homey”.

Had they taken my advice, with the market the way it is, they’d only be down maybe $30K or so.  As of today, they are down about $70K. The hope is that they’ll get back into the black before their interest-only loan resets.  My prediction is that they’re in for a tough time.

The real estate market has hundreds of these stories. People wanted to live the high life and compete with the Joneses. They wanted homes they couldn’t afford and are now paying the price. My advice at the time was to just buy what you could comfortably afford and to make sure you had plenty of money left over after paying all of your expenses. If you can get buy with a 2-bedroom condo, why buy a 4-bedroom house with a family room?

As I move forward with the reconstruction efforts with my HOA, I continue to hear people saying that they’re going to have to foreclose… that they’re going to lose their homes. We’re talking about an extra $250 a month.  If that’s going to send them into foreclosure, then I can’t help but to think that they’re already headed there.  You shouldn’t buy a house if you can’t do it and not have any extra cash in your budget.

I think it’s fair to say that we’ve been warned. The news of a housing and credit bubble has been around for a few years. They’ve warned us that it would burst and that housing prices would reset to where they realistically should be.  It’s really no surprise.  It is unfortunate.  But maybe this is a lesson to everyone that we should all remember to live within our means and not to try and constantly keep up with everyone else.  Maybe everyone else is also living outside of their means and when they fall, we’ll all fall.

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