patrick.net

hmm.. As a Quant HF Mgr Id expect you to be a little more sophisticated with finance.

The $93k doesnt include the rental income on their condo.

Assuming its close to cash flow neutral and the wife earning potential.
I dont think their situation sounds so bad.

toothfairy says

hmm.. As a Quant HF Mgr Id expect you to be a little more sophisticated with finance.

The $93k doesnt include the rental income on their condo.

Assuming its close to cash flow neutral and the wife earning potential.

I dont think their situation sounds so bad.

Wow, that's just scarey. But I guess it's normal for many. We bring in about 165 a year -/+ and have a grand total of about 285k in debt (mortgage and student loans at about 5.375% and 4.5%). I sometimes have trouble sleeping at night. I cannot imagine having more than double that, and having or wanting kids!

toothfairy, from your reply it sounds like you may be in a similar situation as the couple in the article. tidy up your own balance sheet and perhaps then you won't feel like attacking the messenger. :-)

Thanks, cab. It will be interesting to see others' reactions. I agree with you that my straight forward recommendations are not harsh at all; people who feel "entitled" will likely react to it as such, though.

Over the past few decades "living within one's means" has gone out of vogue. It is my opinion that most of this has been enabled by the continuing drop in interest rates over the period. I expect to see some behavioral "reversion to the mean" when rates go back up and begin to approach historical averages.

I feel sorry for the couple and sincerely hope that they pull through but as time passes they are moving closer to defaulting on existing debt.

These stories boggle my mind. I am married with 2 kids, single income, pulling in 200k a year. I have student loans of about 110k at 3% that I service at $460/mo over 30 years. Other than that, I have no debt. I currently rent and have done so for the last 5 years because of the bubble that continues in socal. Even with the significant cash savings we have accumulated, I cannot fathom getting myself into that magnitude of debt just to own a house let alone two. I would much rather live beneath my means rather than do what families like these do and stress about it.

the numbers are very unclear/missing.

but toothfairy does have a point.

if they are close to cash flowing on their rental, then a $410k town home with $66k equity means ($344k mortgage debt + car loan + student loans) on $93k/year is far different than $783k debt on $93k/year.

it's not stated know how much cash reserves they have either.

if the wife starts working after having the baby (maybe grandparents are close by), then that's a second source of income and their debt-to-income might not be so bad.

Typical real estate stupidity. They'll probably get uncle sams taxpayer funded loan mod and foreclose in 10 years anyway.

where is the link to the article?

Quant HF Mgr says

These articles never fail to count "home equity" under the "Assets" section of peoples' financial situation. It says this couple has $66,000 in home equity. Bwah, ha, ha. Sure, right. Did you get those figures from Zillow? Or better yet a local realtor? Are you factoring in selling costs to liquidate all of that "equity"? Of course not. A quick off the cuff guess is that they are sitting on about half that much "equity."

Yes, the definition of equity has been twisted around. It only is for getting more debt by the lender/bank. More debt that is it...
And if equity is pegged to current market value, one that is inflated certainly will see that equity wealth go negative.

Instead of buying another home, these folks need to learn to save instead of spending. At this rate, they will not ever see what 'real money in the bank' means.

I have a sneaky suspicion that the wife is not going to agree to any logical austerity measures. She knew they were in deep debt, and she decided to have a baby. Yeah, of course it was the guy's idea first, what am I thinking? ;)

In 2008 my wife and I were in this situation but worse, after investing in 5 properties. Later on, Chicago made a bid for the Olympics. We fist bumped with pride, believing that we could sell later for a profit.

Shhheeeeeeeeeeeeeeeeeet. We had 4 rentals plus a single family home, revolving consumer debt, and 2 cars to the tune of over 1.1 million in total debt. All of this on a monthly income of 5400 take home servicing nearly 9K outlays.

By then our tenants bailed, we couldn't rent the rentals. We listed them for sale to no avail. So we tried to file bankruptcy and were eventually told we were over the 1.04 mil limit, plus the fact that the trustee and the hot chick from the Treasury Department told my wife and I that our 403b retirement contributions were "abusive", since they were so high, whatever.

I hated my wife for living up to the ethnic stereotype that we could not manage our money. I hated my wife for following the herd when everyone were buying overpriced homes. I hated my wife for having never lived on her own, learning to identify wants vs. needs. I then realized it was not her fault, but mine for not divorcing her ass. I then began to hate myself.......

Through debt-induced insomnia, I discovered this blog, Christine E. Springer, Irivine Housing Blog, and YouWalkAway blog. I found white people walking away en masse. I was shocked, then angered, then annoyed, then intrigued.

Some minorities joke that the bankruptcy laws were changed only when black and hispanics started filing. Ha, Ha, but I knew that the window of walking without real consequences would eventually close, but I couldn't pull the trigger..........just yet.

Then, the house behind me which had previously sold for 445K, sold for 38K in a foreclosure sale. My 415K home was now worth 149K and there were no buyers. I am the first to admit that I was stupid. Yet when my wife and I ran the simple amoritization table, learning our 415K loan at 7% interest resulted in nearly 1 million over 30 years......ha, ha, yeah right.

Then Morgan Stanley walked and the Mortgage Bankers Association walked. Since I am a middle child and very sensitive to inequities, I wondered whey they could walk and I could not. They were richer, bigger, and ran the world, but still no better than me. My friends, said, they are the BANK, you are just you. You can't do what they do. Slave mentality, debt mentality..................

So we walked. We were issued 1099's for each of the rentals. We paid the taxes with our newfound savings. We fought the foreslosure to a standstill for nearly 2 years and have been living rent free since. My credit is trashed but my wife's is recovering.

My real estate investmens were stupid and doomed from the start. But I saw no sense in continuing to throw good money after bad. My finances and marriage recovered. We live off over her salary and save mine. (See, we can handle money, LOL.)

I am not bragging, just telling my story. I have been criticized and applauded for walking away and squatting. I don't think what I did was worthy of applause. I think it's a necessary evil. I will have to leave one day, but I know I can legally drag out the foreclosure for another 3 years at least.

There is no way I will pay when I can walk & stay.

There are many who followed Patrick from the rise through the utter BS of too many trying to justify the bubble lunacy, and now through the crash and burn. We have offered personal viewpoints and opinion on this entire mess, but frankly this thread is disgusting to me IMHO on so many levels (ignorance, fantasy, aspiration, dreaming, debt, ruin, dreams, personal responsibility, and outright abuse) that for once I am beyond comment.

romeotybalt says

I am not bragging, just telling my story. I have been criticized and applauded for walking away and squatting. I don't think what I did was worthy of applause. I think it's a necessary evil. I will have to leave one day, but I know I can legally drag out the foreclosure for another 3 years at least.

The banks have to take some blame too. People should not be able to dig a hole that big, there need to be limits.

I would hope that in the near future, for the sake of this country, the people who live within their means are rewarded for it, and the ones who gamble and lose can not run away.

bubblesitter says

I feel sorry for the couple and sincerely hope that they pull through but as time passes they are moving closer to defaulting on existing debt.

I wouldn't. They've made a conscious choice to join the late night tv watching, retiree abusing land lord crowd.

These poor people, fed the lie from a young age probably. I feel so grateful. Sure I only make about $40K a year at most, but I have zero debt, and no kids. Simple can really be better for a lot of people!

I used to be but am no longer convinced that people who spend way beyond their means are going to pay for it in the future. It is frustrating to live within my means while people around me spend recklessly and nothing seems to faze them.

I have a couple of friends that are very similar to the couple in the OP. They spend hundreds or even thousands of dollars every single week buying all the latest electronics and other high-end stuff. They have a huge mansion that they keep adding more and more luxury amenities to (such as a full size home theater). They are a 1 income family but they spend so much that I just cannot fathom where they are getting the money from. We are a two-income family where one of our incomes cancels out theirs so we actually have a whole second income that they don't. And we rent a modest SFH for a third of their monthly nut.

They also have two young kids that will go to college soon. When I mention anything related to college fees, they just say they saved or will save nothing for that because the kids will get 100% loans for their entire college. I save diligently for my own kids' college funds so it is mindboggling to me to hear that. I didn't even think that 100% of college fees can be funded via loans. But they don't care at all about it. They don't save anything for college or retirement.

And the most frustrating thing is that there does not seem to be any present or future consequences for their behavior. At least I can't see any. It brings a lot of doubts into my mind whether I am actually achieving anything by saving and living within my means. I could also splurge today like they do but I am holding back thinking of my kids' future but perhaps they are right and the kids can take care of themselves.

What do you guys think?

These people are about the same age as me. Regardless of how people want to factor in that rental income, the fact is, this couple is highly leveraged and they had better hope their revenue stream does not dry up. If someone gets sick, laid off, or in a car accident, it may be a wrap.

Quite honestly, young folks need to be living well under their means. Most couples I know are on two incomes. Usually, 1 income for a middle class couple is enough to cover living expenses. That 2nd income, should be entirely put away. I find it odd that people are willing to mortgage themselves into debt for a home when they have the option of renting, saving, and buying that same home for cash in a fraction of that time.

Alas, only a few people I know actually live this way. Others seem content to blow their paychecks on new phones every 2 months, vacations, new cars, and fancy dinners out every week.

chi_renter says

They don't save anything for college or retirement.

I don't think many people can afford to retire these days anyways! We plan to work until we croak, luckily we love our work - - we love it so much it does not even seem like work.
You can finance college 100%. Not wise, but people do it all the time.

PersainCAT says

That is i couldn't imagine NOT paying for my kids college 100% it just seems irresponsible to not get your kids off to a good life start if u can in anyway afford it.

At worst I'd finance it 100% and then pay it back when i can as a parent. Kids shouldn't have to worry about that if at all possible.

Agreed. Why let them start out in life already in debt? Very unfair. I went to college through the state system, I had Cal Grants and my folks chipped in. Thank god I owed nothing at the end. Same with grad. school. But, not everyone is made out of the same cloth. My brother became a plumber and didn't go to college at all. He just couldn't sit still and focus in school, lol, but he's doing just fine!

Interesting post! I live in a townhouse in Leesburg, VA! I have been a faithful reader of patrick.net for about 2 years now. I am always curious to see something about my part of the country, and this just hits the jackpot. Or, rather, the "get out of Leesburg real estate" buzzer alarm.

I did a redfin search of all Leesburg townhouses sold in the 400-425k range, and they're 1. fairly new construction, built within the last decade; 2. likely to be "luxury townhomes," probably between 1700 and 3000 square feet in size; and 3. located in fancy neighborhoods. If they bought in Lansdowne, the monthly HOA fee itself is likely to run into the hundreds of dollars, so those people can't cut their expenses by canceling their cable or landline phone services. If they bought in my neighborhood during the height of the bubble, then they pay 90 dollar monthly HOA fees, and they're about 50k or more underwater on their mortgage.

My spouse bought our townhouse before the bubble got out of control, built new in 2002, and paid about what patrick.net says would now be on par to renting. While I began to read about the real estate market on patrick.net and the Northern Virginia Housing Bubble Fallout blog, my family toured about 30 homes, and have seen hundreds, even thousands of homes for sale online. We were looking for fantastic deals in Northern Virginia. Our conclusion, after submitting a measly two offers, neither of them accepted? We could not match any deal with the 2002 price of our townhouse. We're still in the same townhouse.

Thank you, Patrick, for your important work in housing consumer advocacy! I drive my spouse crazy, reading about housing every day, but I suppose he can be thankful that reading sites like yours has replaced my frenetic house hunting! Plus, your links have exposed me to our new realities of peak oil and economic decline. Reading your site has helped keep our bills low and our lives less stressful. That is just what Americans need right now.

That same townhouse would probably list for $80.000 in my Baltimore City neighborhood.

There are far too many young women that play "pecking order" with their girlfriends and engage in overspending in order to meet perceived group expectations.

This is how it goes:

"Homeowners" have greater status than renters, so the idea is to take out a large loan in order to make the grade for group approval - whether or not it makes financial sense.

The bigger the house and the more prestigious the zip code = greater status in the female herd, so taking out loans for cars to match the neighborhood makes sense to these sorts of people.

Ever watched Suze Orman's "Can I Afford It?" segment and listened to the young women go on and on about how they "need" a $15k++ diamond engagement ring because "how would it look in our social circle to have a small diamond" - type of thinking?

Next up is to be a SAHM (Stay At Home Mom) because its now known that mostly wealthy women can afford to do so. This is another leg up over someone else in the group as far as status is concerned.

More often than not, the husband's of these women are soon off to affairs and the marriage is over within 5 years.

They never learn.

~Misstrial

At one point in my life I owned a condo and house. I bought the condo first, then I moved to Silicon Valley and rented out the condo (while renting something else). Then when I bought a house and got married (in that order), I still had the condo.

Neither of us had student loans (mine weren't that big and I had paid them off already).

I'm wondering if my numbers when we first bought the house were anything like this couple's. We put 20% down on the house, so that was about $65K of equity. The condo price was going nowhere, I wouldn't have had more than 10% equity in it, maybe $10K or so. I had periods with no tenant, and that was a loss. I only broke even by depreciating the place as a rental property. So we owed $370K on supposedly $440K worth of property (which would be less if we had to sell them). We were both working, earning typical engineer-type salaries. This was in the early 1990s.

I finally gave up and sold the condo a few years later. Too much of a headache managing it, looking for tenants, paying the property manager 7%... Now if I'd held on another few years, the place would have tripled, but I had owned it for FOURTEEN YEARS and it barely moved in supposed value the whole time. I finally sold it at a $15K gain over what I paid for it, but all the costs had certainly eaten that away by the end. I was just happy to get out from under the obligation.

This couple sounds seriously deluded. Their property values aren't going anywhere but down for a long time. The property money has already been made: in the mid-oughts.

Does the Money Magazine article discuss their HOA fees for the townhouse and the condo? That's going to add some serious expenses to an already scary monthly budget.

where is the original article?

Quant HF Mgr says

Why do you have to have a kid if you cannot afford it?

The govt helps subsidize it through tax deductions.

And why did they have to buy a house? (a condo) And then another house? (a townhouse)

Again, more govt subsidies through tax deductions.

I'm sure it's not the only impetus for their spending and lifestyle choices, but fact is that our current tax code is bribing people like this idiot couple to do everything they've done so far. Slap an "American Dream" sticker (made in China) on them, extrapolate it across the country to millions of other people, and it's easy to become pessimistic about individuals, institutions, and govt becoming more responsible throughout after whole ordeal.

toothfairy says

Assuming its close to cash flow neutral and the wife earning potential.

You should assume they're going to win the lottery jackpot every year too. It said up above that that they only have the husband's income.

I dont think their situation sounds so bad.

It only takes one super-naive, spoken opinion such as yours to validate one person's rationale for buying what they can't afford and drowning themselves with debt.

A $400k townhouse in Leesburg is one of the dumbest purchases anybody could make.

Hysteresis says

if they are close to cash flowing on their rental, then a $410k town home with $66k equity means ($344k mortgage debt + car loan + student loans) on $93k/year is far different than $783k debt on $93k/year.

No it's not far different. Look up above at the bottom line. THAT is what they have to pay off. Making the assumption that they have 66k less in a mortgage isn't a silver lining, just that they have 66k more in their other (possibly revolving) debts.

I have no student loans, no car loans, zero children, make more than that, and I wouldn't feel easy about taking on that kind of debt for a house. Tack onto that that they're already bleeding money on a condo, and you're crazy to insinuate that this isn't irresponsible behavior.

if the wife starts working after having the baby (maybe grandparents are close by), then that's a second source of income and their debt-to-income might not be so bad.

Maybe the grandparents are nearby, maybe they're not. A presumption of available slave labor to take care of a child for 12 hours a day for free is asking a lot. Lots of assumptions made by you and tooth_fairy here, yet you still can't make a good case.

If the wife starts working, they're going to pay an astronomical amount for day care. In Northern VA, it runs well upward of $1000 a month to the point that it's not even worth it a lot of the time for some couples.

Later on, Chicago made a bid for the Olympics. We fist bumped with pride, believing that we could sell later for a profit.

Holy shit. Really?

Do you have relatives that work for the water department?

Serious question too. I know suburban developers that were thinking Chicago would land the Olympics too, but they weren't bidding until the votes were counted.

Where is the article? You guys could read the OP.

Money Magazine, September 2011 issue, Page 42.

Do these even end up on their website?

wtfcapinv says

romeotybalt says

Later on, Chicago made a bid for the Olympics. We fist bumped with pride, believing that we could sell later for a profit.

I know suburban developers that were thinking Chicago would land the Olympics too, but they weren't bidding until the votes were counted.

It makes sense for developers to be happy about the Olympics because presumably infrastructure will have to be built, but seems naive for a random homeowner in Chicago to be excited about a 15-day event. There seem to be a few options:
1) you have a house that will be taken by eminent domain = cash out
2) your house will be near the festivities, so maybe you could rent it for a lot of money per day for 15 days 5 years from now; however, in the meantime, you will suffer from construction fatigue for the next five years, and there will be many more housing units to compete against after the Olympic Village is abandoned by the athletes after the closing ceremonies
3) your house is nowhere near the festivities, so who cares?

If you are #1, okay fine, but for #2 or #3, why would you be happy about the Olympics? History shows that not all cities benefit financially from the Olympics, and recent history shows that many recent hosts spend more money than comes in later.

FortWayne says

bubblesitter says

I feel sorry for the couple and sincerely hope that they pull through but as time passes they are moving closer to defaulting on existing debt.

I wouldn't. They've made a conscious choice to join the late night tv watching, retiree abusing land lord crowd.

Seconded, I don't wish anything other than a painful lesson that they'll carry with them their whole lives, and instill in their children. For them to "pull through" would require a significant charitable act, something that would no-doubt be paid for by their neighbors and taxpayers in general.

People won't stop doing this stupid shit so long as idiots like this couple don't have to live with the consequences of their decisions. In this case, they're going to drown in debt to the point that they'll need to walk away, leaving the losses for someone else to handle. They obviously kept their condo because they thought "twice the property, double the equity earnings", which was their only real plan for paying off their debts.

I've met many people (around here) like this couple, and it is nauseating how the more debt they accumulate, the more they feel inclined to brag about their "second" and "third" homes. They rock out the dual-income and stretch themselves in every way imaginable, while milking the provisions in the federal tax code to subsidize their selfish yuppy lifestyles.

The general belief is that because DC is an "immunozone" with low unemployment and high incomes, that RE in the area will appreciate considerably over the next decade and beyond. If it's hard to convince them that a reversion in housing prices could happen, then it's impossible to convey how a reversion in real income levels might occur after a decade of steroid-fueled federal govt expansions. Their tiny, greedy little minds cannot accept this since only the most overly optimistic situation can be their baseline for financial planning, excuse for spending, and justification for stretching themselves.

And yes, I've overheard the "oh shit" moment amongst associates and coworkers when they go to have a kid and realize that they can't quit one of their jobs or afford day care.

You never know the whole story. Magazines like to publish articles to make sensation, to attract readers like you! HAHA

chip_designer, you said, "You never know the whole story. Magazines like to publish articles to make sensation, to attract readers like you! HAHA"

-- Actually, I believe that magazine tried to position this story as a "regular / typical couple" and doesn't think there's anything sensational about their situation. THAT'S the problem! The couple is sensationally screwed financially, for a long, long time to come.

Imagine if this couple - no, all couples - and individuals - had to have 20% down before being able to finance a conventional mortgage. If that were the case, articles and stories like this would cease to exist.

What if you are white collar and can't save 20% for a down payment? Then it is one of two things:

1) You are trying to bite off much more than you can chew, financially speaking. Change your plans. You are not financially fit enough to "own" a mortgage.

2) Bubble prices are still ruling the marketplace where you are trying to buy.

Quant HF Mgr says

What if you are white collar and can't save 20% for a down payment? Then it is one of two things:

1) You are trying to bite off much more than you can chew, financially speaking. Change your plans. You are not financially fit enough to "own" a mortgage.

2) Bubble prices are still ruling the marketplace where you are trying to buy.

Exactly. The counterargument to this is usually "this means no one will be able to buy" (usually stated by realtorsused house salesman). Yes, and that's a good thing -- it means prices are too high and incomes aren't high enough to sustain them.

If the bank needs a government guarantee to make the loan, it is by definition not a market loan and is not economical to make. Banks would charge much higher interest rates if it wasn't for the government guarantee because risk would be far higher. As it is, you and I pay for deadbeats.

toothfairy says

Assuming its close to cash flow neutral

Cashflow neutral is for chumps. The property needs to have positive and adequate cashflow to be worth it. Otherwise, why bother taking the additional risk and hassle? Why not just invest your money in a real investment instead? If you had just one month of vacancy, and that pushes you over the edge, you're not doing it right.

It's nice to know people still like to give so much hard earned money to the banks. Could not believe, even up here in the midwest it's $250 a week for childcare, glad I decided to never get married, even with my 50k salary I'll be lucky to retire someday. I don't know how some people get by, must be entitlements.

corntrollio says

It makes sense for developers to be happy about the Olympics because presumably infrastructure will have to be built, but seems naive for a random homeowner in Chicago to be excited about a 15-day event. There seem to be a few options:

Much, if not most, of the Olympic development was to be targeted at long-term depressed neighborhoods. It makes some sense that the developments could lead to a permanent increase in values in those neighborhoods.

corntrollio says

realtorsused house salesman

Ahem,

corntrollio, it's Realtors®, - OK?

Absolutely not, Sybrib. My argument is that realtor has become a generic term to mean used house salesman and should lose trademark protection.

corntrollio says

Absolutely not, Sybrib. My argument is that realtor has become a generic term to mean used house salesman and should lose trademark protection.

Used house salesman would be a compliment. Realtors are a generic term for Housing Mafia.