Remember in 2005-2007 when real estate was all anyone could talk about? Their price appreciation, no interest loans, buying to flip or buying to rent out… It was the it thing to do. Everyone was making money and/or using their home equity like a piggy bank to finance remodels, new kitchens, baths, vacations….
I feel we are in a similar spot although it is different this time. Nowadays a borrower need to prove their ability to borrow and the recent price appreciation has priced people out of the market and taken away the SoCal step-up method that allowed people to use their equity to trade up to a nicer or bigger home. What are you going to do today when you sell your home in El Segundo for $1.2 million that you paid $800k? Take your $400k and put it down on a $1.5 mil home adding another $100k in debt and raising your property taxes $88%?
I bring this up because I met a guy this week that was in Oh-Shit I can’t sleep mode. Despite the several hundred thousand in equity he had in one of his two properties, his income was not enough to qualify for a refinance. Oh Shit.
Back in 2010 he had an opportunity to buy a home in Culver city in the mid $600s. He was only approved for $400k and used a hard-money lender to carry the $200k. AT TEN PERCENT! The interest on $200k at 10% is around $1000 a month. All in he’s in for $4000/month. Then he somehow gets a co-signer that believes in his real estate mogul aspirations and he buys a duplex in Inglewood. He can’t really afford the Culver City home so he rents it and is barely cash flow positive. He pulls a similar move in Inglewood and rents out half of the duplex helping cover the mortgage in Inglewood. Now seven years later he is feeling the cash flow squeeze and can’t get out.
All in he owes $1.3 million and commented that he did not earn a six figure salary. and he’s a single dad so there’s no second income for the bank to look at.
So despite his inability to sleep he’s unwilling to let go of Culver City because “real estate in SoCal” will always be worth more in the future.
My bubble alarm started going off. He has the potential to make enough money to change his life but thinks if he can only keep this sinking ship afloat for a bit longer he will be on his way. It’s that or the house of cards falls and he loses everything. Is that investing or gambling? Yes I’ll give you that a house in Culver City will be worth more in 20 years than today. But if in those 20 years we have another giant earthquake, or the real estate market gets soft for 10 years (see Japan) or he gets injured and can’t work….the list goes on. If you can’t afford it though the bad times, price appreciation is meaningless.
That is the problem, when people began to look at their homes as an investment instead of a roof over their head it changed the mentality and logic about risking this amount of money for a place to live.
I wish him luck. And if you read this and are thinking of going all-in on a house you don’t really like that costs a million dollars ask yourself if it’s worth it?