Rhonda Porter at Rain City Guide penned this recent post in which she talked about her first house, then and now. I liked the idea, so I am stealing it.
I find this trip down memory lane timely, because I think with all of the bad news lately a reality check might be in order. As bad as it feels, it isn’t all that bad if you put it in context. This is particularly true if you are a sideline-sitting buyer in this market.
We purchased our first Scripps Ranch home in 1989. This wasn’t our first home, mind you, just our first nail-biting, how-will-we-ever-eat-again purchase. I was 29 and Steve was, well, more than 29 at the time. We didn’t know it when we signed the papers with the new home builder, but Daughter #1 was on the way.
First, a little history. We didn’t just pack up the Model T and move inland as first-time buyers. We both started with condos (Steve’s first was a studio) and inched our way through a series of respective purchases to a small honeymoon condominium in Pacific Beach. Every purchase involved the requisite 20% down and a 30-year fixed rate loan. It wasn’t that we were smarter than anyone else; it’s just that those were the programs that were available. The loan on that last home before the big move carried a double-digit interest rate, and we felt lucky to have it. There were no stated-income games being played in those days. On the contrary, those mean lenders required us to document our incomes and assets. Good grief. So, we were forced to live within our means.
In 1989, things were starting to get a little crazy. As much as we loved the beach life, even found the sight of transients rifling through our garbage on trash day charming, we felt that our children (the ones who didn’t exist yet) would be better served by life in the ‘burbs. And we happened to be in the midst of a buying frenzy. Selling was a blast. We sold our beach place pre-MLS, full-price and as is. They also let us rent back for eight months. Much like the most recent crazy days, sellers could write their own tickets then. Buying was a different story entirely.
Meanwhile, back at the Ranch, we had our eye on a new home project. The Galleria, they called it. Heeding the sage advice of the friendly folks in the new home sales office, we didn’t wait for the day of the phase opening to come. We arrived two days prior - and secured our number two place in line.
Yes, that is Steve’s backpacking tent. A maintenance guy who worked in his office, Jay, agreed to camp out for two long days and nights to secure our spot in line. Steve and I both had “job things,” so we paid Jay a moderate daily wage and brought him three squares a day (all of which came in biodegradable bags with golden arches on the side). Steve even loaned him his lantern so he could get a little bedtime reading in when the sun went down. Securing the number one spot was the Stevens family. They had a motor home, and Jay hated them for this.
We got the house (even though I should have been immediately disqualified due to a very bad hair day) but, more to point, the market began a downward spiral approximately seven seconds after the County Recorder stamped our deed. Six years later, in the mid-90s and now with two babies on board, we wanted a larger home. We even thought we “needed” one. Yet, our next down payment would come from our equity, and our equity had been doing a disappearing act. So we stayed. Our five-year plan became an eleven-year plan, eleven years being the time it took for our home’s value to again equal our purchase price. And when we moved, our daughters cried.
By the numbers, here is how it went:
Purchase price in 1989: $389,000
Sale price in 2000: $414,900
All of you math majors will quickly recognize that this did not represent a overly impressive return on our initial investment, particularly considering the improvements we made over the years, and it took us eleven years to get there. It was hardly the winning lotto ticket to financial security, but we were thrilled. We were able to buy that bigger home, the one we still enjoy. During the past eight years we have seen our home over double in value, and we have seen it lose a good chunk of that “appreciation.” But, our payments are actually not much higher now than they were for that first Scripps Ranch home, thanks to an insanely low interest rate we have hung onto for dear life. And, although I hear Tahiti is nice this time of year, I have yet to visit, because we haven’t refinanced ourselves into oblivion.
So, back to our Galleria home. We nailed a 10.5% interest rate in 1989, and we were giddy. With 20% down, that meant a monthly payment of $2847. Today, I will be generous in my estimate of value, putting the current market price tag at $750,000. Assuming the same 20% down and a 7% interest rate, today’s buyer would be making a monthly payment of $3992. Yes, the payment would be higher today, by about 29%, but this is over a 20-year period. I will let you pull out your calculator to figure out what that means adjusted for inflation, but I think you will agree it is not a huge number.
Finally, I’ll offer my take-away. Depending on their particular circumstances (when they bought and how much of that equity check has already been cashed), sellers who don’t need to sell may find that now is not the right time. Buyers who are considering a purchase, on the other hand, can be happy that interest rates are half what they were not so very long ago and they can be happy they don’t have to live in a pup tent for the privilege of making a rash decision in a frenetic market. Prices today are revisiting 2002 to 2003 levels, and we can argue all day long about where the bottom is, but it is not a bad time to buy (really!) if you look at the big picture. So many buyers seem to be focused only on the price component, forgetting that interest rate swings can quickly negate any future price movement. And we all tend to forget the historical, fundamental reasons we buy our homes - for shelter, for daily enjoyment, and for the long-term, however long that may end up being.