Too conservative for my own good.

January 17, 2013 · 32 comments

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I was chatting with a close friend a few days ago about the housing market. Big surprise right? We know what the median household income is in Seattle ($66,000), and we also know the median sales price of a home in Seattle right now is $380,000. What we don’t know is how the crap people can afford a $380,000 house on a $66,000 annual income! There are only a few logical conclusions…

1. They inherited the property

2. They received a financial windfall

3. They are house poor. 

4. They are risk takers.

If they inherited the property, or received a financial windfall, good for them.

If they are house poor, I can’t say I’m jealous of them. Nothing about living paycheck to paycheck appeals to me. I would never want to be in a position where I have to sacrifice traveling, eating out, or skiing just so I can make a mortgage payment. No thank you.

But what about the people who are just willing to take a risk. Debt has a pretty bad rap. Heck, I even named my blog Punch Debt In The Face because I think it’s so dumb. But reality is, debt can be a powerful tool for building wealth; like when one takes out a line of credit to start a business, or when someone finances a rental property.

Sure it’s risky. If the business fails, or the real estate market crumbles, you could lose everything. But how bad is that really? It’s not like you have to worry about going to jail. Maybe you get sent to collections and settle your debt for less than you owe, maybe you walk away from your house and get foreclosed on. Maybe you have to consider filing bankruptcy. While none of these things are particularly enjoyable, they are solutions.

Maybe I’m too conservative for my own good?

I mean, if we bought a $500,000 house last year, we’d have about 15% equity in the thing based on recent market appreciation. That’s a $75,000 gain in 12 months!!!

What did I do? Oh that’s right. I decided to keep saving money so we could easily afford a 20% down payment on a house priced $150,000 under what we are qualified to borrow. At last check, my savings account earned a paltry 0.75%. 

Do you see what I’m saying friends? It seems to me that the risk/reward comparison of using debt to leverage one’s financial position often favors reward. Think about it.

We buy a $500,000 house and sell it a year later for a $50,000 profit (after commissions). Or we buy a $500,000 house, watch the markets tank, and walk away from the property and let the bank deal with it (Washington is a non-recourse state). The system is set up to protect one against their own stupid decisions, so much so, that these stupid decisions are no longer necessarily stupid.

Interest rates are low, and house prices are still lower than pre-bubble days. Why not use the depressed market, and government bailouts (quantitative easing), as an opportunity to make some extra dough?

Oh that’s right, because I’m a wuss.

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Being conservative might not make me rich, but I guess it beats the possibility of being poor?

1 Gus

All I can conclude is that median incomes are not the ones driving the median house price. Unfortunately, it takes an above average income to buy even an average house, at least were we live.

2 A Friendly Fed

Ninja,

I completely sympathize with you because we live in an area with a lot of military so the housing prices are much higher than they should be considering the average income due to non-taxable housing allowances. We are also dealing with a couple other issues that prevent us from buying a house. (They might not prevent a “risk-taker” from buying but it prevents us) For example, we still own a property where we lived previously that was underwater when we left. We tried to do the right thing and get a renter and wait for the market to settle out before selling instead of just trying to short sale and walk away from our obligations. Now we find ourselves four years later trying to sell that house (after having rented it for 3 years) and save a down payment for a new house where we are now (which we can’t really do at the same time). I have recently wondered if we should have just “walked away” from our former property as we would probably be in a better overall position now. During the past four years we have also paid off all of our non-house debt. I say all this to say that I am constantly frustrated by trying “to do the right thing” (pay off debt, save a down payment, etc) while others seem to “cheat” and succeed.

But then when I read a post like this one I am reminded that in the long run it should be more beneficial to do the “responsible” thing. I mean what is the difference between “house poor” and “risk taker”? Aren’t they both kind of the same thing. And isn’t that mentality of “my house will appreciate 15% in the next 2 years” the reason we are in the housing crisis that we are in? Everyone decided that they should risk their families well-being on buying a house that they could not afford with the rationale that it would appreciate quickly.

I truly know how you feel because I am constantly trying to rationalize to myself ways to allow us to buy a house earlier or a bigger house than i know we can afford but it is a dangerous path to walk. Sure you don’t go to jail if you can’t pay your mortgage but a foreclosure and bankruptcy are not exactly painless experiences. Those are the types of things that can destroy a family along with its wealth. Sorry for the long rant but I really wanted to encourage you to keep the faith and do it right so that you don’t regret it later. That doesn’t make you a wuss, that makes you a responsible adult.

3 Lutus

Bankruptcy laws are a tangled legal web. You may live in a non-recourse state but where you will take your big hit is all the cash savings you have in the bank. You will be sued by the mortgage holder for any assets. Then you would no longer be house poor, you would BE poor.

4 Petunia 100

Um, “non-recourse” means the bank has no recourse if you default. The only remedy they have is to foreclose. You can’t be sued for your other assets.

5 Lutus

I stand corrected…

http://www.investopedia.com/ask/answers/08/nonrecourse-loan-vs-recourse-loan.asp#axzz2ITi5aTt5

I don’t come from a non-recourse state (obviously).

6 SavvyFinancialLatina

I often wonder if this society rewards bad, irresponsible decisions. Wait I don’t wonder, I know so….

7 Jessie's Money

Jordan and I went through the same thing a year ago – and we stuck with what we decided we could afford. Not what the banks told us, or what the ‘markets said’ or anything else. We drew the line. Our’s was, after down-payment, GST (we bought a new house so had to pay tax) and CMHC (Mortgage insurance – we put 5% down) we wanted the end mortgage to be not a penny more then $350,000.

It wound up being just under $349K which was great! Sure, now that we’ve been in the house we have a bit of a wish list – but I’m so glad we stuck to our guns!

8 TB at BlueCollarWorkman

It’s hard to say with all that kind of stuff. I get confused fast. But you knw what you coudl do? Do a post on what the hell “non-recourse state” means. And you could also keep drawing animals based on personality stuff. I like the wuss. It’s aweosme, lol.

9 Midwest

I would add length of home ownership to the median household income and home price stats to make sense of what financial state others are in. I know the average is like 5-7 years nationally, but a higher number might also explain this.

I was recently looking at Scottsdale Az. Some off the wealthy neighborhoods on city-data.com show a median income of 120-190k. Their homes were over a million dollars, sometimes multiple millions. How the hell could you put yourself in that position?

10 Mo D.

Both times we were pre-approved for our mortgage, we bought homes about 110K less than our approved amount… and why’s that? For the EXACT reasons you listed; we didn’t want to be house-poor, we wanted to continue to have at least 1 good travel vacation a year (and have it paid for before we even left), and have an Emergency Fund. I LOVE that our bank account doesn’t go in the red, and all bills are paid in full, on time.

The last place we purchased in Sept./12 had our commute jump from 7 minutes to about 25, but it was turn-key, totally gutted and renovated; we really lucked out!

I’m sure the right place will come along for the Nanjas!! :-)

11 Donnie

Bad analysis Ninja. Your 4 options are only true if every person is buying a house, which is obviously not true.

Suppose the 50% of people below the median income all rent, and the 50% of people above the median income all buy. Now, suppose the median income of that top 50% is $126k. That would put the median house price = 3*median income of home buyers, which is the rule of thumb.

Need more variables to be able to say whether $380k is a good price or not.

12 Savvy Scot

Sorry Ninja… I’m with Donnie on this one

13 Johnny @ Our Freaking Budget

I always expected a wuss to have six legs, but I can live with being wrong.

Part of what makes a conservative life more appealing to me is avoiding the increased stress of living riskier. I nearly suffer a heart attack watching the final minute of an eBay item I’m bidding on. I can’t imagine the stress level I’d feel with a lot more skin (especially skin that isn’t mine) in the game. But to each his/her own.

14 The Happy Homeowner

Hahaha…I do the same thing, therefore I know I could never take on more than what my current budget/savings allows

15 Karie

We have a lot of equity in our home because we bought at a good time below our means. Now with 3 kids we are at our means. We are too conservative for our own good. I feel like we’re living our life relatively stress free financially but very middle of the class, middle of the road. We had so many opportunities we could have taken but didn’t want to take the chance of losing any of our money. We’re doing a slow and steady thing, but inside both of us want to take a chance but we are very comfortable right now so hard to do! If you don’t have much and have little too lose, it’s a different story.

16 Karie

The reason people have so much money is because they are not first time buyers. Here’s our story:
In 1997, we bought a house for $130,000 – the mortgage was so low we made plenty of additional payment. We sold 2.5 years later for $160,000. We bought our second house for 250,000 in 2000 and sold it for $325,000. Again this house was below our means, we made extra payments and built equity. During these years, we had one car.
In 2004 we bought our third home which we are currently in for $390,000, our neighbors recently sold for $690,000. So we could sell and buy something bigger or sell and buy another property to live in and one to rent or cash out and rent ourselves.
There has been a huge run up in real estate in some areas where I lived. In 2000, we could have bought a property on a lake in a community where there is just 1 big lake. We should have seen the value in that. The property was selling for $250,000, it’s now probably worth close to a million. We chose another property.
In 2006, we could have bought a property on a prestigious golf course for $750,000. Even fixers backing onto that golf course are worth 1.2 million now. Sure, I’m disappointed we saw these houses and didn’t buy them but if there was a crystal ball, everyone would have bought them!! I don’t believe in gambling our savings away, but we could have taken some risks.

Right now we’re just continuing to pay off our mortgage and looking for an opportunity. If a person speculated and bought a house in the right neighbourhood at the right time and had some money backing them up, they could have made half a million to a million or more but does anyone really know for sure what the future will bring?

17 StackingCash

What city do you live in? Must be in Vancouver, B.C.

I just took a look at a house we were close to buying in 2006. It sold for $511k. Zillow says it’s worth $213k now! Granted Zillow is not perfect but…

Being conservative saved us from that disaster, but I do admit for the past few years I do feel like we have been missing out on opportunities. Hence, our new risky position we are taking if and when we do buy our next house.

18 becca

There is only a small relationship between the population of one median (household income) and the population of the other (home prices).
For example, in 2009 the overall median household income in the US was 50,221 (according to the US census http://www.census.gov/prod/2010pubs/acsbr09-2.pdf); whereas the median household income of all homeowners for that year seems to be 72,200 (http://economistsoutlook.blogs.realtor.org/2011/03/21/median-household-income-of-home-buyers/).

In 2011, the median household income for Seattle metro area was 64,085 (http://www.deptofnumbers.com/income/washington/seattle/). If the Seattle metro area follows the same trends as the rest of the country did in 2009, then we’d expect the median household income of homeowners in the Seattle area to be 92,132. Also, the median home price might have been closer to 350k for that year. Which still makes people house poor, but not as crazily so as you might first have thought.

19 Matt

I am the same way. Its going to take me awhile before I sign up for a mortgage. I don’t want to live my life just to maintain a house.

20 krantcents

Although buying a home is leveraged, you do not have to go beyond your comfort zone. Buy the property at the right price and get a low interest rate with a payment that is comfortable now. Your income should increase and the mortgage payment becomes even more affordable. The property should appreciate and it is a win/win. There can be a downside, but it hopefully was a one time thing.

21 StackingCash

Depending where you live, you cannot easily say that one does not have to go beyond one’s comfort zone. From what I can tell, it’s going to be a tough road for the Ninjas to find that perfect house without spending a ton of money. Also your view of how one’s income should increase is optimistic, a great deal of bad stuff can happen within a 30 or even a 15 year mortgage.

22 StackingCash

What a funny blog post. It struck a chord with me because I’m a personal finacial wuss to the extreme :) However, when it comes to big money like this, I do not mind one bit. Basically because we don’t make a lot of money, I feel anything over $40k is too expensive, including a house! However, because of this terrible interest rate environment for saving, I feel compelled to spend it all on a new house. Damn that Ben S. Bernanke!!!

23 The Happy Homeowner

I must be a financial wuss too, because I’ve wanted an investment property for a few years now, but I keep rationalizing why now isn’t the time to buy one…Hmm…

24 Nick

$380,000 is a bargain. Here are the numbers for where I live:
Median household income: $66,200.
Median house price: $634,300

25 bethh

Those sorts of discrepancies (median income vs median home price) was one of many reasons I didn’t buy in the 2005-07 time frame, and is why I was not at ALL surprised when there was an implosion. I totally saw that one coming (though not the major ripple effects).

But as Donnie points out above, it’s only relevant to look at the median income of home-owners, and even better would be to look at the median income of purchasers in the last 3 years, not that I have any idea how you’d get that. It’s going to be interesting watching this process, I admit I was disappointed when it looked like you might already have a winner on your hands.

26 Mortgage Mutilator @ Mutilate The Mortgage

According to a major bank’s calculator here in Australia, a couple each earning $66,000/year and with yearly expenses of $48,000 would be allowed to borrow __$680,000__ That’s likely with a $20,000 deposit too. It’s retarded. A $380,000 loan wouldn’t bat an eyelash down here in our ridiculous housing bubble country.

27 Virginia

Mystery solved. Most people who are earning less than the average salary rent and do not contribute to the average home value. Ta-dah!

28 Nick

Based on those home prices, homes here are a steal! For where I live:

Median Household Income: $111,651
Median Home Price: $200,000

Unfortunately, we make less than that and our house cost more than that when we bought last year. But still not anywhere near the 1:6 income:price ratio like some of these other places…

29 Laurie

Totally get what you’re saying, Ninja, about being conservative. But at least you can sleep at
night. :-). Only take those sorts of risks if your conscience won’t bug you about walking away.

30 Jane Savers @ The Money Puzzle

You probably sleep better because you are conservative financaily. I know I do.

Maybe you should set aside a certain amount of your income to be wild with. Peer to peer lending, bond funds from countries that are younger than you are or IPOs from companies like Facebook. Greater risk means greater reward but there is always the chance of a massive crash and burn so only risk what you can afford to lose.

31 Evan

Nothing wrong with being conservative! I often say my risk tolerance is that of a widowed 89 year old grandma!

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