Houses Are Still Underwater?

What owning a home can and cannot do for you.

The article by Ryan Dezember at the WSJ about his 10 Year Odyssey Through America's Housing Crisis is making the rounds this weekend and it is an excellent read. Dezember and his wife bought their first home in coastal Alabama shortly before the crisis for $137,000. As the crisis unfolded they got divorced and the house's value cut in half. So far the experience as written is not that unusual, many markets like Phoenix and Las Vegas cut in half or close to it as well. While you should click through to the article just to read it, it also gives a good reminder of the mortgage mechanics that many faced by being so far under water.

The crisis led many to through in the towel on the dream of home ownership. It caused others to proclaim that owning a house should not be thought of as an investment.

Years later, Dezember's house is still dramatically underwater. He recently sold it for $112,000 to a couple retiring from Minnesota. I looked up the neighborhood on Zillow, there appears to be two houses on the market for $82,000. What compounded Dezember's story (the neighborhood) was the proximity to the Deepwater Horizon disaster. This makes his experience very unusual relative to the country's crisis. Another compounding factor that is becoming increasingly common is that the neighborhood had an opioid problem, he said it was pretty bad. I am not sure how much of the neighborhood's valuation troubles should be attributed to the opioid crisis, I'm not judging, I really don't know. If perception is reality and he perceived that the opioid crisis hurt his home's value, that's good enough for me.

The housing crisis dissuaded people of one myth, that housing prices can never go down. One of my colleagues at the Fire Department said that to me once in about 2006 or 2007. But the fact that it can do down in price doesn't nullify the validity of a house being an investment. It is not a one-way trade is all and like other investments, there is risk of losing money especially with the wrong (short) time frame.

James Altucher for many years wrote countless articles about what a bad idea he thought it was to buy a house. You pay the mortgage, you pay taxes and you pay to fix stuff when it breaks. Paying rent, he believed provided a mobility that you can't get from owning a place. If that resonates then obviously you wouldn't buy a home.

I do view owning a home as at the very least a store of value when held long enough. I believe at the very least it can keep up with the rate of inflation and often do a little better than that. Depending on the market, a mortgage payment could be less than a rental payment and as you make those payments you'd be reducing your mortgage balance and building equity that would not be building by otherwise making rent payments.

The above paragraph is nothing you haven't seen before, it is about the most basic or simple argument there is for buying a house or condo. With a nod to the post the other day, simple is often best. If you are young and buying a home then you easily could be mortgage-free at a young age which creates all sorts of options for life changes or robustness in the face of some adverse circumstance like losing a job at an age where you might not be easily hired anymore. Someone close to me is buying their first house at 61 years old. They are taking a 30 year mortgage and while a 15 year would be better, by the time they are in their early 70's they will have a usable piece of equity should they need it. To be clear, the context is not taking a HELOC to buy a new car but having at least something to draw on should something negative come along.

Again, this is basic stuff, it may not apply to someone looking to flip a house in a few months or even a few years but I believe it stands up and if you don't, then again, you may not want to buy a home.

One other point from the article to circle back to is that Dezember sold his house for $112,000 to a couple retiring from Minnesota. The cost of living on the Gulf Coast is very low. I've written a lot of articles about retiring to a foreign and inexpensive country, even if just for a few years, to beef up a retirement plan in terms of letting an investment portfolio grow and being able to delay Social Security living off the rent of your home back in the US. A version of this scenario can play out on the Gulf Coast, depending on where you're coming from.

The median home value in Minnesota per Zillow is $242,000. It is not a stretch to think that the couple from Minnesota had paid off their old house, thus banking $130,000 via downsizing. That is a large enough amount to bolster a modest investment portfolio. To be clear, there can be no shortcuts in terms of researching where you're moving to. If Dezember's old neighborhood still has an opioid problem, it'd obviously be wise to look elsewhere and some research would need to be done on whether there is any long term impact from the oil spill but it's a potential opportunity. And if that one doesn't pan out, there would be others.

A neighborhood with an opioid problem certainly wouldn't be one to consider if you have kids. As long as the problem was contained underground, and I was in little extra danger from addicts robbing me - something mitigated by installing security and knowing which areas not to travel around alone at night - then I'd not completely disregard it as somewhere to retire cheaply.

Now if the problem is crack...

agreed, tough to research this, the realtor is unlikely to volunteer "oh and the house two doors down is a crack den."