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On the flip side...
Sticking with the housing market, here's the story of a young first-time home buyer. And I mean young. She bought a foreclosed home about a month ago. At age 20.
In fact, Denise Tejada and her 22-year-old brother both bought homes in the San Francisco bay area. Denise is a reporter at Youth Radio, which featured their story:
You gotta like them. Two immigrant kids saving from age 15, working hard, encouraged by their father to be smart with their money. But we wanted to know why they wanted to buy homes, what the process was like and what they're giving up to do this.
This week, I interviewed Denise. You can listen to it below, but here are a few details, some of which aren't in the interview:
Denise works three jobs so she can afford her new house. She makes $2470 a month but pays $1328 to service her mortgage. That means 54% of her income goes to the house, leaving her with $285 a week to live on. Doable, but tight. She's breaking the 30% rule and then some, not to mention she's still spending out of pocket to renovate the yard, fix the roof and paint.
She got a loan to renovate the place, which was just a "box" with no kitchen or bathroom when she bought it. She says the renovation has increased the value of her home from $155,000 to $255,000. In the interview, she describes the process of getting the loan.
She also answers the question, "Do you see this as an investment or a home?" (That's at 6:10)
Denise is clearly intelligent and motivated. She's learning a lot through the experience. And she's already light years ahead of many young people in terms of respecting the money she makes. But so far, she's sacrificed going to college to buy this home. And she's spending an awfully big chunk of her income on it. I hope she doesn't lose one of her jobs.
If she can find a buyer, she might make a nice profit. She'll also collect the first-time home buyer tax credit next April. But is this what young people should be doing? Take a listen. What do you think?
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HI, I spoke with Denise. Her loan is a 30 year fixed loan from FHA, with a 5.1% interest rate. She got a 203K HUD supplemental loan from HUD, on the same terms, to renovate the home. In the end, her total loan is 183K in size. We didn't publish these details, as there's some confusion about the amount she put down and how much she paid in closing costs. Still trying to sort that out.
What is going on here? 3.5% down on a loan amount that is way over rational amount for her income?
So the FHA is already forecasting $50BB of losses leaving all the blood in the hands of the taxpayers and the lunacy of the housing bubble (low down payments and exorbidant loans) is still being perpetuated by the government, EVEN WHEN the banksters have tightened lending standards.
Enough of the rhetoric, I need real change.
Wow. It's as if the last two years never happened. What if she loses just one of her three jobs? Entirely possible given increasing unemployment, with no end in sight. I appreciate how hard she is working, but this is a good example of how government intervention in the housing market is leading to disaster (with taxpayers left to clean up the mess, again).
There are so many things that are wrong with this story: treating a home as an investment when, even with the recent debacle, housing returns over the past ten years have been waaaaay over historical returns in most places leading one to assume, at best, a flat market for quite a while. She started out underwater, we're on the hook for it, and you are using it as an exemplar. Booh.
I challenge Scratch Pad to follow up this story in 12 months and give everyone the outcome.
One of the most interesting thing any business-related source could do is follow-up stories. I've seen a number of highly touted "news" stories of someone's supposed success quietly fold while the "reporters" have moved on to something new. Paul Harvey was definitely on to something with his "rest of the story" theme.
yeah, I wonder if she'll rent out the two rooms for $750 each... which would service the monthly payment on the loan. ohh look, free housing! then when rents go up to 900 a month (the rising price of gold IS signaling coming inflation, no?) then she'll be about $500/mo cash flow positive, and can move out, rent her own room out for 1000 (it would be the 'master' bedroom right?) and THE HOUSE would be generating 2800 a month. servicing the 'taxpayer's' debt and assisting her on the next mortgage on her next property.
I guess if more people actually UNDERSTOOD real estate then we wouldn't get these funny economic turbulii, eh?
Young people definitely shouldn't be doing this. College is the surest way to increase her take-home above $2470/month. Loans for education are the friendliest around when it comes to interest rates and repayment terms.
In her situation, it would have been far better to borrow for school, invest 10% of her take-home in an index fund, save 10% as cash and live on the rest. If she's getting by on 46% ofher take-home pay, she'd do just fine on 80%. The 10% in the index fund will probably be worth a lot more than the house will 10 years from now.
Putting 54% of your take-home pay in an illiquid asset like a house is never a good idea. The current state of the economy is bad enough, but even if it weren't, there's always the chance of some other emergency.
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