Wednesday, October 24, 2007

When houses don't sell

A friend of mine in the US Midwest bought a house at the peak a couple of years ago, paying close to $300k for a 2500 sq feet home in an excellent location in his city ( contrast that with where we are in Alberta right now ). They are doing pretty well, making combined income of $150k or so. They made a good down payment of around $100k when they bought their house. But of late, my friend hasn't been very happy with his job and says that he sees limited growth prospects with his current employer. Of course, in our past conversations, I've suggested that he relocate to another location for better prospects. He says he would want to do that, but just can't. Why?
Because his house wouldn't sell.

There you have it. The love affair with housing having all but ended in the US, house ownership is again becoming a 'lifestyle' decision . This is not an unfamiliar story to me. I've known several long time Edmonton residents who tried to get out of this place on a few occasions in the past (mid 90s) but couldn't. Why? Their house wouldn't sell.

Now when they say their house wouldn't sell, they really mean that it wouldn't sell for the price they paid for it or perhaps 20% less or more depending on the stage of the real estate cycle.
My friend can probably sell his house for around $250k right now, but that would wipe half of the down payment he made. And he must get an exceptionally good job offer at another place to really compensate for this loss. I doubt he's going to find that so easy.
I don't quite know why he bought this big a house when they really are a DINKS family. These guys are fiscally very savvy and easily save several thousand dollars after paying all their expenses. So the question of ownership brining forced savings is not applicable to them.
I think a lot of people buy houses simply because it has become the 'normal' thing to do. That is people expect that you'll buy a house when you make good money and can afford a down payment. Of course, I never agreed with this approach as it misses out on so many other fundamental factors like:
  • What are your long term goals? Are you working towards them? Is buying an expensive house going to prevent you from fulfilling these goals?
  • Do you like what you are doing work wise? That is do you really like the work you are doing and will be willing to do it for the next 20, 30 or 40 years (depending on the size of the mortgage), primarily for the sake of paying your mortgage?
  • Do you really like the place where you are buying? Or is it just because of the job that you are buying a house? What if you get a better offer at another place? That is, how strong are your ties to the place where you are buying?
  • Does it make senses to buy economically? Is renting a better option? What's the Price/Earning for the property you are planning to buy.
  • Are you comfortable in paying an amount almost equal to the cost of the house over a 25 year period to a bank in interest that did nothing more than creating money out of thin air?
  • Why are we buying a house? Is it for social status? Is it because everyone else in our peer group has? Have we considered all the associated costs?
Of course, people need to ask tens of other questions before going on to make the biggest purchase of their lives. It's funny a lot of people will 'waste' hundreds of hours of their lives clipping coupons and chasing 'better deals' for insignificant purchases but not get fully educated when spending hundreds of thousands of dollars on buying a home. It's sad, but true.
I know at least half a dozen people who have bought during last year or two in Edmonton and Calgary. I suspect they are likely to be long term residents of this province.
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