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grywlfbg
2011 Aug 30, 6:13am
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.
Well, I can tell you that in my experience this is changing in light of the recent bursting bubble. Several of my wife's friends who bought in 05/06 have told her (and in group settings) that they hate their house, they feel trapped, it was a mistake, etc. When they were buying and we weren't it caused some mighty fights between my wife and I but the repercussions of this housing bubble will reverberate for many years. A lot of people are scarred from this experience and that will affect their buying habits ling into the future.
Sorren66
2011 Aug 30, 11:30am
The couple in the article must have believed in the National Association of Realtors marketing propaganda that that real estate values would just keep going up and up in no relation to actual wages, cost to rent or any other economic factor. Smart people can and will do dumb things.
I lived in the east Bay Area of California from 1998 to 2009 and bought and sold 2 homes. In both cases we paid full asking because we didn't want to be out-bid/offered and then sunk $15-25K to make them decent (there really should be a law against mauve/salmon/pink carpet, tile and paint!). We sold in Aug 2006 due to divorce and missed the top of the market by about 50 days in my location. With the 1st house we almost doubled our money in 6 years (actual wage increase during that time was about 20%) and put that down on our next home. We were in that house (2500 sq ft nice semi custom in a nice area) for 3 years. It went up almost 50% in those 3 years and our income went up about 8%.
When we sold, the Ex and I walked away with about $225,000 each and no debt. We got very lucky with the timing but I will add that we lived within our means during this time, maxing our retirement accounts and didn't buy anything on credit that we could not pay off at the end of the month. Also we did not take any money out and even were making additional payments on principle. I did however keep track of the trends and subscribed to about 15 different housing sites and blogs during this time. This one included.
No way in the world was I going to buy in the Fall of 2006! The cost to rent was 1/2 the cost to buy the same house at this time. I rented until Oct 2009 while my Ex bought as soon as she could-closed April of 07. She is about $100k upside down in a very old small home that she put a ton of money down on. I ended up buying a bank owned home with 20% down that needed some work but in a very nice area. My house payment is 1/2 what I was paying in rent and 1/4 of what our house payment was on the 2500 sq ft home.
My fiancee was not so lucky-she divorced the same time I did-summer of 06 and being a single mom bought a home in the Fall of 2006. She lives in an average area but the home values have dropped by half since she has been there. She keeps making her mortgage payment but of course is not happy she is paying 2x as much as the couple who bought across the street this summer.
Moral to the story is that people can and will buy into the herd mentality/bubble when it comes to investments and real estate. I count myself in that group-no one held a gun to my head when I signed. I agree that the couple in the article should sell most everything and get out from under that huge debt. At their age and income they have enough time to start over and live within their means while still saving some money for college/baby/retirement.
Misstrial
2011 Aug 31, 4:31am
Well, I can tell you that in my experience this is changing in light of the recent bursting bubble. Several of my wife's friends who bought in 05/06 have told her (and in group settings) that they hate their house, they feel trapped, it was a mistake, etc. When they were buying and we weren't it caused some mighty fights between my wife and I but the repercussions of this housing bubble will reverberate for many years. A lot of people are scarred from this experience and that will affect their buying habits ling into the future.
Good to know and thank you for sharing :)
~Misstrial
bubblesitter
2011 Aug 31, 4:35am
When they were buying and we weren't it caused some mighty fights between my wife
I am in the same boat. In fact I still have a hard time convincing my wife that it is a no brainer NOT buying declining value real estate and the people who bought post 2005/2006 still comes up with inflation argument. Oh it will payoff in long run cuz interest rates are super low. Economics 101. Duh!
FortWayne
2011 Aug 31, 5:49am
I am in the same boat. In fact I still have a hard time convincing my wife that it is a no brainer NOT buying declining value real estate and the people who bought post 2005/2006 still comes up with inflation argument. Oh it will payoff in long run cuz interest rates are super low. Economics 101. Duh!
and funny enough, economics 101 dictates that when rates are low it's the worst time to buy because low rates skew the prices higher.
I could see though how that gets ignored. Wifeys do get emotional about those kinds of things when they want to nest.
PasadenaNative
2011 Sep 1, 1:25am
Houses, kids, diamond rings....this explains why I can't relate to the mainstream woman, lol!
Rich Dad, Poor Dad, should be required reading for all high school students! Our company, onlineauctionu.com teaches people how to get out of debt by making more money and more importantly how stop the decisions that got them in the hole to start with.
MisdemeanorRebel
2012 Aug 28, 4:15am
Rich Dad, Poor Dad, should be required reading for all high school students!
Whenever I hear that book referenced, I know an MLM or Shady Internet pitch is not far away...
Our company, onlineauctionu.com teaches people how to get out of debt by making more money and more importantly how stop the decisions that got them in the hole to start with.
Yup.
zzyzzx
2012 Aug 28, 4:15am
What are you doing buying a $410,000 townhouse in Leesburg, Virginia?
Every time I think I might be better off in VA, I look at real estate prices there. I agree that's outrageous.
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Articles like the one I'm referencing below demonstrate why there are still bubble home prices in certain areas. This particular article also shows how poorly people manage their own finances, and does a good job showing how much the country's people are still relying on inexpensive and easy to obtain debt.
The article is called "The Financial Fix" (that ought to be in quotes, btw, because it is anything but a "fix" that this advisor gives them) that appears in Money Magazine, September 2011 issue, Page 42.
Where do I start??
This 31 and 32 year old couple have $783,000 in debt! The debt is made up of a mortgage on a townhouse, a mortgage on a condo, plus car and student loans. First off, that is a terrible position to be in. They are in way, way over their heads. But it gets worse.
The wife is expecting their first child so they only have the husband's $93,000 / year income. They say they are "barely breaking even on [his] salary"...uhm, no, you are not breaking even at all. You are losing ground (to debt and financial slavery), and fast. If they could apply all $93k of his income toward all their debt, it would still take them 8.41 years to pay it all off! OMG. That's attrocious.
"They decided to keep their old condo as an investment, but so far it's been a cash drain." Silly people, you ought to stick to consulting or whatever it is that you do. "Real estate" as an investment if often highly overrated, as the returns on residential real estate have, on average over long periods of time, only barely beaten inflation.
What are you doing buying a $410,000 townhouse in Leesburg, Virginia? Anywhere in Virginia, for that matter? That's bubble pricing if I've ever heard it. Making matters worse is that they still own a mortgage on a condo. Why does a young, white collar dual income (previously) no kids couple have to buy a townhouse or condo in Virginia? Because we are still in a significant housing bubble in multiple areas of the country...and Leesburg, Virginia is definitely one of them.
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."
If the tenant skips out on paying them rent, the article tells how the young, naive couple will be on the hook for mortgage payments totaling 42% of their income (!!!), not factoring in maintenance and repairs. Gulp!! Gasp. That's a mighty scary position you are putting your family in, sonny. And btw, I'd definitely factor in maintenance and repairs.
These young kids are financialy screwed because they are trying to live "the American Dream" that someone else told them they should. Why do you have to have a kid if you cannot afford it? Parenting magazine just quoted a new study saying that the typical cost to raise a child to age 18 is approximately $190,000. This couple is already in a financial hurt locker, and now they are adding a newborn child to the picture. Wanna bet that they'll "have to" have a second child? I've seen it too often.
And why did they have to buy a house? (a condo) And then another house? (a townhouse) This is a great example of the real estate pathology that many people still have today.
Since the "financial advisor" gave them terrible advice (let me guess, the financial advisor also thinks real estate is a good investment? And has hundreds of thousands of dollars of debt to her name, too? That would explain the horrendous advice to this young couple), allow me to intervene further by offering some sound financial advice for them:
1. Sell your new townhouse immediately
2. Sell your condo concurrently
3. Sell your car / cars and pay off the loans immediately
4. Use any remaining "equity" funds from above sales to pay off any and all debt
5. Rent a nice apartment or home for a couple of years
6. Buy a conservative used car with cash
That's really only a beginning but still much better than the article offered for them.
#housing