Monday, October 8, 2007

"Bitter Renters" vs "Homeowners"

Quite a heated exchange going on over at Housing Panic:

Over the last 2 years if you are a fairly regular reader of economic or housing blogs, you have seen the rancor that both "homeowners" and "bitter renters" have for each other. Usually confined to politics or favorite sports teams, your housing status seems to be a hot button issue now. While I am very aware that I am biased in this debate, I would like to share with the readers the exact moment that I stopped looking for a house to buy and relegated myself to the "bitter renter" life.

It was the fall of 2003, and my wife and I had looked at about four or five homes in the town we currently rent in. We are both employed in the biotech high tech area, and we both make a good salary (she makes more than me, Ouchie!). We also were sitting on a hefty windfall that I was able to secure form company stock option sales before the Nasdaq blowout (Angelo Mozillo from CFC read my book!). We went over our finances and figured a price range we were comfortable with given a fixed 30 year mortgage. We finally found a home that we liked a bit. It was reasonably priced (at the time, 2003 is a while ago) and seemed to have what we were looking for. The house needed a new roof, and the basement was not finished, like most of the other homes we had seen. The driveway was in serious disrepair, and there was no outside deck or patio in place. None of these things are major issues, and in fact doing the improvements was a hobby my wife and I were looking forward to. We went to see the house one more time before making an offer, and as we were leaving, another buyer pulled up to see the home for the first time. I was surprised to see a woman I went to high school and college with get out of the car. She had dropped out of the biotech program after 1 year, and instead got an associates degree in dental hygiene or some thing. Her boyfriend (not fiancee or husband) worked at UPS. Now the home we looked at was in a moderately upscale neighborhood for the area. That night we made out our offer sheet at list price. The next day the realtor called us and told us that the new prospective buyers made an offer on the spot for 12% over list price and also waived the home inspection contingency. The home sellers wanted to know if we could match the offer, as we were pre-approved for significantly above what we offered, while the current offer had no pre-approval. We declined to match, and the house went to the people I knew had no way of affording that home using conventional means. We stopped looking after that, and have instead saved and invested money over the last few years as renters.
So am I a "bitter renter"? You bet your ass I am. I would very much prefer to live in a larger home and not an apartment. I would like a yard to have a couple of dogs (we have a small pug now). I would like lots of things a home can give, but I will not become part of a silly bidding war for a home. I will not use leverage and exotic financing to gamble on real estate. A key difference between myself and most folks running around with a banks money is that if they lose the house, that's all they have to lose. I on the other hand have lots of capital and assets to lose in a home price implosion. Its a choice thing. Am I right or wrong? Depends. From 2003-2005 I looked like a fool. Since then I look pretty smart. Here in the northeast the prices are falling hard, and we are at 2003 pricing right now. I know of lots of people that really stretched to get in in 2005-2006. One couple I know got in a bidding war for a townhouse and hopelessly overpaid for the property. 1 year after moving in, they still have only patio furniture for the inside of the home, as the mortgage, property taxes, and condo fee eats up every cent of their income. They also have a baby on the way now as well. Its a tough spot to be in.
The way I see it the housing mania of the past 3 years was fueled by all the crazy mortgage and easy money out there. When home buyers tell renters they are throwing their money away paying a landlord, what they fail to see is the real truth of the issue. By using ARMS, option ARMS, negative amortization loans and the like, recent buyers have in effect not "bought" a home, but purchased an option on a home that depends on future appreciation. That appreciation is now gone, but the option is still in place. If a home's value drops 30%, you are in effect paying rent to a bank on a miss priced asset.
That's my take on the issue. I know its a emotional debate. Sadly, many people equate where they are in life and how they feel about themselves with what kind of home, car, entertainment center, etc they have. The housing price explosion is a manifest of a society that values looks over substance, get rich quick over long term growth, and the "don't care how, I want it now!" (to borrow a phrase form Willy Wonka film).
Most average people are unaware of the dangers of leverage, and they have little experience with large sums of capital. I think over the next few years there is going to be a hard lesson taught.
Have a good night!


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