awgee: thanks for your comment.
I just recently read an article by a Washington Post report detailing his and his wife's current homeownership experience. They had bought their first home in Washington D.C. for about 495k (a townhome) using an ARM with very little down. They are both professionals (he's a reporter and she's a physician) and wanted to own a place in a good neigborhood where they can raise their kids, and jumped on the first chance they could to own, and now they're wondering if they made a mistake or not. Bloggers were dissing on the couple for being financially imprudent, blah blah blah, and questioning their intelligence since it seems so OBVIOUS to all the bloggers now that they were buying at crazy peak home prices.
When I read that article, I knew EXACTLY how they felt. My wife and I were in the same boat in 2005: we just got married, wife just completed 10 years worth of higher education, acquaintances who never completed school owned 2 or 3 homes, and we thought we DESERVED to own a home after "throwing our money away on rent" for the past 10 years. We didn't want to spend more than 500k since my wife was still studying for her pharmacy board exams and not working full time yet, so we got the best we could for that amount, which was a condo in Tustin Ranch with 100% financing. We thought we'd just sell it in a few years for a little profit (if lucky) or break even (if prices stayed flat), since PRICES NEVER GO DOWN IN IRVINE. We never even thought about the probability of housing prices declining, or that if it did, we might have to bring money to the table to sell our house. Didn't even picture that happening, so blissful were we in our ignorance.
We were more fortunate than many people. Our mortgage payment was a small fraction of our income, and we certainly learned much about what it means to be a homeowner. Just like the couple in the Washington Post story, we wondered if we made a mistake. On the whole, we were not mistaken in wanting to own a home. We weren't even mistaken in getting 100% financing, since it our mortgage payments were very doable. Our mistake was looking purely at what we could afford in terms of payments and trying to get the best we could for those monthly payments at that time. At our income level, we could afford a pretty big monthly payment. What we should have done was think about whether that house was worth the monthly payments and would we be happy in this situation if the projections of selling in a few years doesn't go as planned.
After being introduced to this site and reading the great analysis on this site regarding home valuations, I told my wife we need to sell our house as soon as we can, even at a small loss. Not because we couldn't afford our payments, not because we couldn't make a profit from it, or anything...but because we want to live in a bigger home in the next few years, and we can save more money by renting cheaply to buy that next bigger home where we'll live until we retire. AND since prices were gonna decline.
The difference between me and the Washington Post reporter is that he's just begun to ask the difficult questions, and by the time he's got his answer, his options become very limited due to the events of the last 2 weeks. He and his wife will want a bigger home soon I am sure, but he'll be upside down on his townhouse soon and will have to come up with a big cash outlay to escape his mortgage burden.
This reporter's story, as well as my own, is the reason why I now see why a 20% down payment is such a critical factor in determining home loan approvals. When you have some skin in the game, it makes you think twice about making that purchase...otherwise, that 100% financing seems like Monopoly Money. It's like paying for things with cash versus credit card. If you have to pay for the new plasma with a stack ful of 20 dollar bills, you'd think twice too!
Sorry for the long post, but I had to expound
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