My 10-Year Odyssey Through America’s Housing Crisis
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Last week someone offered to buy it for just a bit over my mortgage pay off balance. I will lose a few thousand but at least I will be out of the landlording business. I have my fingers crossed that the inspection goes well but I'm not holding my breath.
> From the original purchase in 2005 to last year’s sale, I lost $25,500. My losses as a landlord? At least $35,000. Whatever the sum, it no longer mattered. I was free.
It's scary how similar even his figures are to mine. I bought a much more modest house than I could have bought in a prime location, I fought hard to get a great deal on my mortgage, I paid bills on time and kept up with maintenance, and I've kept up with the market trends so as not to miss my chance to refinance/sell.
Time and again I asked myself what I did wrong to lose 60k+ of my hard earned money over a decade. But after an investor friend of mine discussed his plans to buy numerous distressed properties to fix and rent them, I realized what had happened. The Great Recession had turned affordable residential real-estate into a zero sum game. I, along with millions of others had to lose 10k each per year to make it worth it for him to be a residential real-estate investor. My piggy bank investment was competing in the same arena has his tooth-and-nails livelihood.
The big lesson is that market manipulation can convert a non-zero sum activity into a zero-sum activity. It used to be that your small family home was a safe, gradually appreciating asset. Most everyone won, few lost.
> In 1944, John von Neumann and Oskar Morgenstern proved that any non-zero-sum game for n players is equivalent to a zero-sum game with n + 1 players; the (n + 1)th player representing the global profit or loss. https://en.wikipedia.org/wiki/Zero-sum_game#Extensions
Just need one new player to turn the game around. Enter my friend and a few thousand others like him with resources to buy out every third upside-down house in the neighborhood with cash, upgrade bath and kitchen, and then rent them out long-term with a team of property managers. It's a sellers market but very few homeowners are bidding up sub-200k houses. Instead it's the cash investors low-balling the price until owners such as myself and the author just break down and say 'Screw it! At least the 60k loss will save me some taxes next year.'
My dad remarried after my mom died and moved into his wife's house. He rented it to me for a few years at below market rates. A felt a little guilty about that, all and all it was a cut of $25k in four years. Next guy he rented it to stopped paying rent after a year and took another six months to evict. Guy trashed the house. Cost my dad $60k.
You probably don't want to be a landlord. I don't.
I think you're slightly misinterpreting this although I could certainly be wrong. The idea here is that you can add a n+1th player to a game who captures the excess profit or loss, but that player isn't allowed to influence the game. In this case, the n+1th player would be the net change in the economy.
It's an interesting idea though. The only real source I found discussing this was the original book: http://jmvidal.cse.sc.edu/library/neumann44a.pdf page 528.
As background: My father was a handyman turned landlord. I've worked on rental houses since 1st grade. A large number of landlords have a similar background. It's not a coincidence. They make money off properties in the price range you describe in a very particular way - they do nearly everything themselves. It is an arbitrage on the cost of maintenance. Think about it this way - if an electrician/plumber/contractor is going to charge $100/hour to do work on the house and rental prices have this cost baked into them, then you can effectively earn $100/hour by doing the work yourself. Enough people do this that the equilibrium price drops below the cost of having professionals do all of the work. Since that is probably the situation you're in, of course you're going to lose money. You seem to have said you have external management on top of that. That in itself would pretty much wipe out the expected yield. The cashflows from <$200,000 houses are WAY too low to have someone else managing it for you.
So your game theoretic analysis is somewhat correct, but it's more of a feature than a bug. There is an army of people willing to do unglamorous work with their nights and weekends, and as a result they are not only able to do well by themselves but also systematically lower the cost of housing.
You also made a dangerous statement about historical returns on real estate. Historically, across a wide span of markets, real estate tracks wage growth. The recent shift since the mass financialization that started in the 80s being a complete aberration. The alternative is that the real cost of living would grow exponentially. Even with the excess credit of the last 15 years that hasn't happened for most of those outside of SF.
If you want to buy a house to live in, I suggest you view it as a consumption good and not an investment. Your money will almost certainly do better in equities.
Retail investing, and especially trading, in equities isn't necessarily a better proposition. It's concerning that you recommended this instead. I hope that your family's hard work paid off.
I have been solo-preneuring a project that will help those like your family to realize their dream. It's been a long journey.
I bought a house in 2007 in Los Angeles. It dropped like a rock. Then it came back. It will never be a great investment. But guess what? We lived in it and it is cheaper than renting. That is the true benefit of a mortgage (particularly in CA where they limit how fast they can raise property taxes): you can lock in your housing cost for a long time. That is a great value for a family.
They confused short-term market fluctuations with general long-term trends that have to do with typical inflation and land scarcity.
Really though, housing overall should be a somewhat negative sum game. That would be evidence of good policy. Both in terms of physical deterioration showing up as depreciation and in terms of particular locations not exploding in value.
This is really basic stuff that doesn't require a great deal of financial sophistication.
Your situation doesn't require the explanation of a zero-sum game. The simpler explanation is that you purchased a bad investment which yielded a negative return.
All my friends have bought houses. Some of them have bought houses worth 2.4M in Cupertino. Most of them are Indians on H1B visa and not Green Card in sight!
Are Bay Area prices sustainable? Am I being unnecessarily paranoid?
There are places in middle America with open positions for many people that have relatively inexpensive living costs in comparison to places like SV, Seattle, New York, and so on.
Indianapolis has some of the cheapest housing in the US, but it also has very low salaries for software professionals. I have a lot of family there, and I just can't move back. Sure, it's nice to own your entire house for only $150k, but the pay cut means you'll spend longer paying it off than you thought.
Recommending people move to Gary or Kenosha simply to avoid living in Chicago is pretty silly and a vast over-reaction. Markets have priced in the fiscal issues and Chicago is still cheaper than comparable cities for tech professionals. Even with increased taxes, Chicago will remain cheaper than New York, Seattle, Denver, Los Angeles, San Francisco, Boston and DC.
Pretty much every city/state in the US has a pension crisis and will require tax increases. Would you recommend people avoid these places?:
- Houston - https://www.houstonchronicle.com/news/politics/houston/artic...
- Dallas - https://www.dallasnews.com/news/dallas-city-hall/2017/11/13/...
- All of California - http://www.sacbee.com/opinion/editorials/article199693069.ht...
- Seattle - http://www.foxnews.com/opinion/2017/08/22/what-seattle-incom...
Always prefer to live in places that do not have basket case governments that kick the can down the road for the next guy to fix. Previous generations avoided fixing the problems by anticipating that new blood would bring in their money, and they could grow their way out of trouble. Don't be the sucker that comes in to a new situation who is then expected to carry old baggage.
I don't think Illinois is bad enough that anyone should move away if they already live there, but their choices are to move away, become more politically active, or be left holding the bag for prior decades of bad government.
It's like any other relationship. You're going to have an easier time with someone who seems capable of dealing with their own problems, than with the person who pushes responsibility for their problems on to you.
If you simply must live in a particular place, you need to account for bad government as a price premium. If you intend to work in California, you need to increase your salary demands, to account for its insufficient housing stock and property tax laws. It just so happens that many businesses in California can currently meet those demands. A lot of places with bad government cannot, so just don't go there.
And if your local government seems to be turning sour, you need to stand up, make some noise, and let those responsible know that you will not allow your home to become one of those places. If things still go bad, leave. Corruption only works when people go along with it.
And that is why I moved from Chicago to Kenosha in 2002. As it happened, I then moved again to Madison in 2005, but that was moving to something rather than moving from something else.
What kind of city sells its own parking meters? The kind you don't move into.
- Wisconsin has higher income taxes than Illinois
- Kenosha and Madison have higher property tax rates than Chicago
The parking meters were sold 10 years ago under a different mayor, update your talking points. Meanwhile, Wisconsin is handing out $3 billion to a Chinese manufacturing company (http://money.cnn.com/2017/09/18/news/scott-walker-signs-foxc...). This is the same Wisconsin (and same governor) who cut school funding a few years earlier (http://www.politifact.com/wisconsin/statements/2014/sep/07/g...).
What kind of state cuts school funding and then gives billions to a Chinese company? The kind I don't move to.
I work (in an office, not remote, mind you) at a tech company in the Research Triangle area of North Carolina. Most of the people I know also work in tech companies. In fact, outside of state government and the school systems, the major employers around here are all tech companies and research universities. You can easily have an entire career in tech, working in-person, in good jobs doing cool stuff. And the cost of living around here is a tiny fraction of what you'd pay in the SF/NY/LA/Seattle.
If you want to live in [big overpriced city] because you like said big overpriced city, feel free to do so. But HN really needs to get over this ridiculous idea that big, overpriced cities are the only place to have a tech career.
Some folks were able to walk away with $1M cash and just rented after. The rent to home price ratio is crazy in Toronto and they were able to rent a home for $3000 that would cost $6000 in mortgage payments.
My neighbor owns 15 houses and lives in Europe most the year. I'm working on the same path (may buy their homes in the next year or two, we're in discussions).
Also, you have to be prepared to sue, file liens, and use sheriff evictions.
Everything is easier if you're local. If your investment is large enough, flying in to deal with your properties is a reasonable business expense (I wouldn't do it outside setting up a company and having general liability in addition to your normal house insurance).
His house has more than doubled in equity though, so not too bad from his perspective. I moved back to the midwest where shit is reasonable, now I just blow that 3400/mo on fun stuff instead of mortgage/rent.
So, I decided to hire a property manager (Lesson 1: Never be a landlord if you're not going to be present to manage the property yourself - PMs take their 10% cut of the rent and do absolutely nothing in return) to rent the place out and sell in a few years after the market had recovered - which didn't happen in Colorado Springs until recently.
Last summer I gave my tenant her 60 day notice, found a listing agent, and my wife flew out to Colorado Springs to help prep the house for sale...
Turns out the tenant had totally trashed the place. In fact, she had been operating a rabbit breeding operation in the house (there were rabbit cages stacked floor-to-ceiling in some places, and a large outdoor hutch had been constructed in the back yard). Carpets ruined, feces smeared on walls, and a general unholy smell throughout the entire house. Hell, large amounts of rabbit bedding and feces had been dumped into the crawlspace.
This is the tenant I had cut a lot of slack to over the years with late payments, etc (Lesson 2: Never cut a tenant any slack - if you do they'll walk all over you).
What should have easily been a $40k profit (had the house sold at market rate) turned into a $5k loss (at least I didn't end up owing any capital gain tax, pfft). I will burn a house to the ground before I become a landlord ever again.
Also, Zillow keeps sending me updates on the property value (which magically keeps going up), despite my attempts to make it stop (I don't want to know, really) :(
It sounds like a very bad experience with a management company. Was this your first PM company?
If I ever find myself upside-down on a mortgage again, I'm going to short-sale, walk away, or find a reputable local arsonist to deal with it.
They got bailed out, the author didn't. He should have foreclosed.
The banks lent money they didn't have. I don't see why the author paid it off. I respect his integrity, but he should have declared bankruptcy.
As the article points out, however, the author was gainfully employed elsewhere. So in this case, the threat of recourse was quite real.
I don't hold a clearance though, so I can't speak from first hand experience. Always be upfront with your employer and clearance sponsor if you're considering bankruptcy.
I don't disagree at all that anyone in debt to a bank should use every avenue open to them, just as the bank will.
I don't get this. Banks must always do this, they exist because everyone else wants to lend short term or borrow long term. Anyone who acts as the counterparty to that is automatically a bank or bank-like.
I guess what you mean is that when the banks borrowed short term (as they must), they did it using home loans as collateral, and that more of those loans defaulted than was expected.
How does that justify defaulting?
But that's not really what happened. Banks made a lot of poor quality loans, then packaged them up and sold them on, taking a spread in the process. Some banks (e.g. Bear Stearns and Lehman) kept some of that risk on their books, but others (Goldman) didn't.
This wasn't a case of banks using their mortgage book as collateral, it was banks originating and actively marketing a dangerous product. It's also worth noting that some banks knew that the products they were selling were low-quality and likely to default.
Then the US government stepped in and propped up the instigators of the crisis. People who made poor borrowing decisions had a part to play in the crisis too, but I think it's fair to argue that the pain could have been distributed more evenly.
Under the circumstances, I can see why it might seem fair to walk away from an obligation like the author's mortgage.
How can you expect people to not default in a system endemic with corruption and rife with irresponsibility?
I guess you could sell and take the equity out of the house but you lose so much money and time to the banks.
Had he walked away from the property, he’d still have his 401k (protected from creditors by federal law; he could’ve lived in the house for years while it went through foreclosure and put his mortgage payments in his 401k) and if the lender absolutely decided to pursue the deficiency judgment (rare), he could’ve settled for pennies on the dollar or declared bankruptcy and still been hundreds of thousands of dollars ahead.
Just sad. My advice to those who read this: never get emotionally invested. It’s just business. Look at the numbers, and throw out any sense of morality of the debt repayment. That is how the system is built; act like a rational actor within it (losses are built into the mortgage interest rate). Your future self will thank you.
I've spent hours on the phone trying every way I can to resolve some issue and it too often just comes down to being a jerk. But in so many ways they create the rules of the game.
> I prepared to sell our house. To cover sales commissions and other expenses, we’d have to sell it for more than we’d paid for it
yea, that's not how house prices are set.
Did he? He kept his job, didn't get drunk or hooked on pain pills, bailed out what sounded like a very uncooperative ex-wife, and all through it kept his house clean and even took care of the neighbor's dog. If anything, I'd say the story comes dangerously close to being a humble brag.
Whatever money difference there was be between him and pretty much any of the others, including the couple who skipped town with pizza on the counter...I'd gladly pay it twice over to have neighbors like this guy.
Probably should have just gone ahead and done that but I didn't want to move.
Being a model citizen or nice neighbour or a bank's best friend is another story.
Not because you think you have some kind of honour debt to me.
If the best course of action for you is to walk away from our deal, then I encourage you to take it. I would hope you understand me doing the same.
Rule of thumb: pay back your grandma, but if the corp lender will screw you if he had a chance, treat him the same. Debt from people really trying to help you out and debt from companies trying to milk you left and right isn't the same.
Should one feel guilty of not paying, if you CC rate goes to 30% for being late a few payments and they do nothing to lower the rate?