patrick.net

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.

Misstrial says

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.

GoldenPimp says

As a Quant HF Mgr,... Quant HF Mgr... lol

What is a Quant HF Mgr?

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.

Sybrib says

What is a Quant HF Mgr?

I think you meant:

What is a Quant HF Mgr®?

grywlfbg says

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

grywlfbg says

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!

bubblesitter says

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.

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.

Dale says

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...

Dale says

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.

Quant HF Mgr says

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.