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Buying young

Scott Jagow Oct 20, 2009

My post last week about the 20-year-old woman who just bought a home has prompted a lively discussion and more questions. It also prompted the young woman to respond. So, here’s more on it:

Here’s the link to the original post, On the flip side. It includes my radio interview with Denise Tejada, now 21, and the original Youth Radio piece about her and her 22-year-old brother. They both recently bought homes in the San Francisco Bay area. Her family immigrated from El Salvador. They are US citizens.

Denise got an FHA loan to buy her home for $155,000. She took out a second loan (called a 203-K loan) to refurbish the place. The total loan amount is about $183,000. She says, “In total, I gave the bank $5,087 + $1,500 which were all deposit and closing costs.”

So her “down payment” was no more than 4% of the value of the home when she bought it. She will get all of that back and then some with the first-time home buyer tax credit. However, as one commenter pointed out, she will have to stay in the home for three years to keep the credit.

Denise’s fulltime job covers her $1328 a month mortgage payment which includes insurance and taxes. Her two part-time jobs cover her living expenses. She makes $2470 a month. 54% of her income goes to service the mortgage. Here’s what she says about that:

… I’m left with $1,142 per/month, which is plenty for me. I have two credit cards–that I barely touch–a cable bill, gas, food, and utilities. I’m not scraping to get by.

During a time when so many people are losing jobs, of course, I think about what would happen if I lost one of mine. However, I honestly think I am prepared. I have some options. I could find renters for my two additional bedrooms. I’m young and able-bodied and ready to work, so I could probably still get work that other people don’t want. For instance, I could clean floors, windows, etc. I don’t want to be someone that depends on the government to sustain me financially. I was brought up with a work ethic of working hard until the end. If I was really strained financially, I know my family would be there to support me.

She’s gotten plenty of feedback, including this comment:

Denise, this is going to sound harsh, but copy this post and file it away on your computer. I fully expect you to be foreclosed on before 2012. And the reason why I’m not giving a shorter timeline is that I’m assuming that you’re going to get several credit cards and max those out as you play the credit juggling game…

First, there is a HUGE housing glut in this country. The country is currently experiencing negative household formation which makes the housing oversupply even worse. Based on this statistic alone, housing prices will continue to fall until an equilibrium is reached – by my ballpark estimates, that’ll be 2014 or so.

Denise says with the fix-up, her home has increased in value by $100,000. I have serious doubts she could sell it for $250,000 now or anytime soon. But beyond the valuation issue, she doesn’t seem to be in fantasy land:

I came to this country to achieve the American Dream. I’m an immigrant and I know the value of hard work and making good, honest choices. I didn’t buy this house on a whim. Buying a house is a risk for anyone, and as a young buyer, I’ve been challenged all along the way. With hard work and sound decisions, I’m planning to prove my doubters wrong.

Still, the issue for a lot of people is not only the fact that she’s chosen to do this instead of going to college – at least for now – but also, the government is subsidizing her choice. Clusterstock’s John Carney picked up the story and wrote this:

The Tejada family obviously has a very strong worth ethic and a savings ethic as well. Unfortunately, something appears to have gone haywire when it comes to homes. The children were encouraged to work and save but then to spend their savings on homes and to be completely unafraid of massive amounts of debt. This is, in short, a living breathing example of the ideology of home ownership at work.

We wish the Tejada’s nothing but the best of luck. We hope she really can keep paying her mortgages and that she somehow makes money on her house. But it is outrageous that the FHA is guaranteeing her loans, putting the taxpayer on the hook for her precarious financial situation.

Feel free to add to the discussion here…

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