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toothfairy
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2011 Aug 28, 9:37am
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.
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.
bubblesitter
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2011 Aug 28, 1:44pm
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.
FortWayne
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2011 Aug 28, 2:29pm
Typical real estate stupidity. They'll probably get uncle sams taxpayer funded loan mod and foreclose in 10 years anyway.
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? ;)
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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