Smart people do stupid things

[PKMAN]

A few years ago, at the height of the housing bubble, a guy I knew sold his modest house for a good profit and pocketed $100K+ in net gain. He went ahead and bought a house for $700K. But instead of using the net gain as deposit, he used it somewhere else and mortgaged the entire amount, with 2 loans and monthly payment of about $5K.

He’s a smart (well educated, calm and analytical type) guy with net take home pay of $7K, but a single-income family (wife’s a fulltime homemaker) with 3 kids. What was he thinking? How in the world would someone think it’s OK to have mortgage payment be 70%+ of total monthly take home pay?

I’ve bought 2 homes in the last 10 years and have always abided by the 2 golden rules I learned when buying the first home:

1. Mortgage amount should not exceed 4X of combined (gross) family income. Ideally should be kept at 3X.

2. Monthly mortgage payment should NEVER exceed 50% of combined (net) monthly take home pay. Ideally should be 1/3 or less.

Somehow this guy believed that the housing bubble would go on forever and that he would soon make even more money at his job. He took a huge gamble and lost big time!

That $700K home is now worth less than $500K. He didn’t get the big promotion/pay-raise that he expected. Whatever investment he put that $100K+ (net gain from the first house sold) in didn’t pan out either. Thus he’s forced to walk away, letting the house be foreclosed. He’s now living in a rental home that’s smaller than his original house, with his credit totally destroyed, no hope of pay raise anytime soon, wife still a fulltime homemaker and kids growing up (more $$$) fast. He can pretty much forget about owning a place of his own again in the foreseeable future.

I guess a lot of less-educated San Diegans got suckered into this mess (by their realtors, loan agents or simply seeing how their friends/families were all able to live well beyond their means), but smart people are supposed to know better.

Why couldn’t these people just stick to the (above-mentioned) 2 golden rules? Why did they choose to buy home that was clearly out of their affordability index? Why did they choose to believe in the future, rather than examining the “nows”? Why did they think that they can beat the system?

They can blame the economy, the housing bubble, their realtors, loan agents, friends, families…but ultimately they have only themselves to blame.

Looks like even the smartest people can do the stupidest things….

[werewolf34]

The golden rule doesn’t work for most CA real estate. Effective tax is 35%+ for most yuppies
so your mortage pmt should be no more than 33% of gross. If your buddy has a net of 7k then the mortgage should be 2.4K. At 5% rate and 20% down, the max house value is 550K (this ignoring taxes, insurance, HOA). he has a family of 5. What kind of house do you get in SD during the bubble for 550k?

Home values have severely outpaced the salary income for SD residents. Basically the cheap finance available in the US allowed people who
‘weren’t getting ahead’ to make money / take money out of their house(s). But you needed to own not rent. You see your neighbor buying a ski boat / Escalade and then you jump in late and get left holding the bag.

Even with 20% unemployment, homes are still unaffordable b/c govt wants to help irresponsible hmoeowners rather than letting the market do its own thing.

If he had flipped the house for 200K more and got a Cadillac out of it, would you call him stupid?

[werewolf34]

The golden rule doesn’t work for most CA real estate. Effective tax is 35%+ for most yuppies
so your mortage pmt should be no more than 33% of gross. If your buddy has a net of 7k then the mortgage should be 2.4K. At 5% rate and 20% down, the max house value is 550K (this ignoring taxes, insurance, HOA). he has a family of 5. What kind of house do you get in SD during the bubble for 550k?

Home values have severely outpaced the salary income for SD residents. Basically the cheap finance available in the US allowed people who
‘weren’t getting ahead’ to make money / take money out of their house(s). But you needed to own not rent. You see your neighbor buying a ski boat / Escalade and then you jump in late and get left holding the bag.

Even with 20% unemployment, homes are still unaffordable b/c govt wants to help irresponsible hmoeowners rather than letting the market do its own thing.

If he had flipped the house for 200K more and got a Cadillac out of it, would you call him stupid?

[werewolf34]

The golden rule doesn’t work for most CA real estate. Effective tax is 35%+ for most yuppies
so your mortage pmt should be no more than 33% of gross. If your buddy has a net of 7k then the mortgage should be 2.4K. At 5% rate and 20% down, the max house value is 550K (this ignoring taxes, insurance, HOA). he has a family of 5. What kind of house do you get in SD during the bubble for 550k?

Home values have severely outpaced the salary income for SD residents. Basically the cheap finance available in the US allowed people who
‘weren’t getting ahead’ to make money / take money out of their house(s). But you needed to own not rent. You see your neighbor buying a ski boat / Escalade and then you jump in late and get left holding the bag.

Even with 20% unemployment, homes are still unaffordable b/c govt wants to help irresponsible hmoeowners rather than letting the market do its own thing.

If he had flipped the house for 200K more and got a Cadillac out of it, would you call him stupid?

[werewolf34]

The golden rule doesn’t work for most CA real estate. Effective tax is 35%+ for most yuppies
so your mortage pmt should be no more than 33% of gross. If your buddy has a net of 7k then the mortgage should be 2.4K. At 5% rate and 20% down, the max house value is 550K (this ignoring taxes, insurance, HOA). he has a family of 5. What kind of house do you get in SD during the bubble for 550k?

Home values have severely outpaced the salary income for SD residents. Basically the cheap finance available in the US allowed people who
‘weren’t getting ahead’ to make money / take money out of their house(s). But you needed to own not rent. You see your neighbor buying a ski boat / Escalade and then you jump in late and get left holding the bag.

Even with 20% unemployment, homes are still unaffordable b/c govt wants to help irresponsible hmoeowners rather than letting the market do its own thing.

If he had flipped the house for 200K more and got a Cadillac out of it, would you call him stupid?

[werewolf34]

The golden rule doesn’t work for most CA real estate. Effective tax is 35%+ for most yuppies
so your mortage pmt should be no more than 33% of gross. If your buddy has a net of 7k then the mortgage should be 2.4K. At 5% rate and 20% down, the max house value is 550K (this ignoring taxes, insurance, HOA). he has a family of 5. What kind of house do you get in SD during the bubble for 550k?

Home values have severely outpaced the salary income for SD residents. Basically the cheap finance available in the US allowed people who
‘weren’t getting ahead’ to make money / take money out of their house(s). But you needed to own not rent. You see your neighbor buying a ski boat / Escalade and then you jump in late and get left holding the bag.

Even with 20% unemployment, homes are still unaffordable b/c govt wants to help irresponsible hmoeowners rather than letting the market do its own thing.

If he had flipped the house for 200K more and got a Cadillac out of it, would you call him stupid?

[ybitz]

Looks like he was “smart” enough to mortgage the whole amount; otherwise he would’ve lost his down payment when he walked away.
I think this guy took a risky bet and lost. I certainly wouldn’t have done what this guy did, but I don’t think it was “stupid”. My parents stretched financial to buy their first house (and broke the “golden rules”) when they first got married, and now it’s all paid off and it worked out really well for them. They saved tons of money by not buying a starter home and upgrading later, and bought their dream home right off the bat. I think the golden rules, like all generalizations, are just guideline/suggestions. Only you know your own risk tolerance level best.

[ybitz]

Looks like he was “smart” enough to mortgage the whole amount; otherwise he would’ve lost his down payment when he walked away.
I think this guy took a risky bet and lost. I certainly wouldn’t have done what this guy did, but I don’t think it was “stupid”. My parents stretched financial to buy their first house (and broke the “golden rules”) when they first got married, and now it’s all paid off and it worked out really well for them. They saved tons of money by not buying a starter home and upgrading later, and bought their dream home right off the bat. I think the golden rules, like all generalizations, are just guideline/suggestions. Only you know your own risk tolerance level best.

[ybitz]

Looks like he was “smart” enough to mortgage the whole amount; otherwise he would’ve lost his down payment when he walked away.
I think this guy took a risky bet and lost. I certainly wouldn’t have done what this guy did, but I don’t think it was “stupid”. My parents stretched financial to buy their first house (and broke the “golden rules”) when they first got married, and now it’s all paid off and it worked out really well for them. They saved tons of money by not buying a starter home and upgrading later, and bought their dream home right off the bat. I think the golden rules, like all generalizations, are just guideline/suggestions. Only you know your own risk tolerance level best.

[ybitz]

Looks like he was “smart” enough to mortgage the whole amount; otherwise he would’ve lost his down payment when he walked away.
I think this guy took a risky bet and lost. I certainly wouldn’t have done what this guy did, but I don’t think it was “stupid”. My parents stretched financial to buy their first house (and broke the “golden rules”) when they first got married, and now it’s all paid off and it worked out really well for them. They saved tons of money by not buying a starter home and upgrading later, and bought their dream home right off the bat. I think the golden rules, like all generalizations, are just guideline/suggestions. Only you know your own risk tolerance level best.

[ybitz]

Looks like he was “smart” enough to mortgage the whole amount; otherwise he would’ve lost his down payment when he walked away.
I think this guy took a risky bet and lost. I certainly wouldn’t have done what this guy did, but I don’t think it was “stupid”. My parents stretched financial to buy their first house (and broke the “golden rules”) when they first got married, and now it’s all paid off and it worked out really well for them. They saved tons of money by not buying a starter home and upgrading later, and bought their dream home right off the bat. I think the golden rules, like all generalizations, are just guideline/suggestions. Only you know your own risk tolerance level best.

[PKMAN]

[quote=werewolf34]What kind of house do you get in SD during the bubble for 550k?[/quote]

He should’ve kept his modest home, around 2,200sqft and big enough for family of 5 for many years…bought just before the housing bubble, instead of trying to live beyond his means. If he did and tried to pay down principle as much as he could, he should own that house outright in another 3 years.

I guess he was smart to not put any of his own money down when buying that $700K home but the way I see it, it was very stupid of him to sell a perfectly livable home and buy that $700K home he couldn’t afford with his salary.

[PKMAN]

[quote=werewolf34]What kind of house do you get in SD during the bubble for 550k?[/quote]

He should’ve kept his modest home, around 2,200sqft and big enough for family of 5 for many years…bought just before the housing bubble, instead of trying to live beyond his means. If he did and tried to pay down principle as much as he could, he should own that house outright in another 3 years.

I guess he was smart to not put any of his own money down when buying that $700K home but the way I see it, it was very stupid of him to sell a perfectly livable home and buy that $700K home he couldn’t afford with his salary.

[PKMAN]

[quote=werewolf34]What kind of house do you get in SD during the bubble for 550k?[/quote]

He should’ve kept his modest home, around 2,200sqft and big enough for family of 5 for many years…bought just before the housing bubble, instead of trying to live beyond his means. If he did and tried to pay down principle as much as he could, he should own that house outright in another 3 years.

I guess he was smart to not put any of his own money down when buying that $700K home but the way I see it, it was very stupid of him to sell a perfectly livable home and buy that $700K home he couldn’t afford with his salary.

[PKMAN]

[quote=werewolf34]What kind of house do you get in SD during the bubble for 550k?[/quote]

He should’ve kept his modest home, around 2,200sqft and big enough for family of 5 for many years…bought just before the housing bubble, instead of trying to live beyond his means. If he did and tried to pay down principle as much as he could, he should own that house outright in another 3 years.

I guess he was smart to not put any of his own money down when buying that $700K home but the way I see it, it was very stupid of him to sell a perfectly livable home and buy that $700K home he couldn’t afford with his salary.

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