Sunday, July 10, 2011


I had an interesting conversation with an old acquaintance the other day and it reminded me that people make money related decisions without examining costs and benefits and they never look out farther than a few months.  In addition, I heard a radio program today that reinforced my view of the NAR folks (and their local associates) and realtors in general.  The conversation and the radio program have a lot in common so bear with me. 

While I'm sure writing this post will be therapeutic for me, my hope is that readers will lock in on the absolute concern I have for this economy and the need for us to make meaningful, thoughtful, and hard financial decisions quickly, and now before our options and our cash stores have been wasted.  Before we get too detailed, let's have a little background discussion first.

In the area of the country I live we have been blessed economically.  Despite the US recession, our region suffered very mildly, and now have largely come back to the same employment or even grown since the last set of highs in 2007 and early 2008.  Because this area is in the energy corridor we've have been insulated.  Having said that, the suburban areas in our city did not enjoy such luck.  Lower income areas surrounding the city did get hurt and home values fell some 10% to 20%.  Still, compared to areas like Arizona, Nevada, and Michigan, this is great.  Specifically, the person I had coffee with lamented that their home value had fallen 5% below what they purchased the home for 10 years ago.  In this case, that paper loss is about $10,000 assuming all closing costs and a recent market valuation by a realtor.

As I chatted with my friend I asked a few more questions about their situation and found that the family is really struggling.  After all of their paychecks and bills each month they need about $2,000 additional cash to be able to meet their expenses.  Needless to say, I was shocked.  When I hear that kind of talk and I think of that kind of situation I feel like we should be in crisis or battle mode, not enjoying a coffee at a Starbucks!  It seems that the major issue creating a hole in their finances is their home.  Fortunately for them they had about $70,000 in emergency reserves to draw on to help cover this shortfall.  I was happy to hear that they met with several realtors and had received estimates of their home's value and the found that they would probably end up with a $10,000 loss due to falling home values in their area.

I asked when they were going to list the home for sale and I was met with silence.  It seems like it was a hassle to sell their home right now (during the summer busy season when there are a lot of buyers)  and they were planning on putting the house on the market next June.  I said, "WHAT?" and she mentioned that it was just too much trouble to try to get things ready all the time and next year would be better and they could de-clutter their home between now and then.  Additionally, by waiting another year, the home values would come back a bit. 

I could see how committed to this line of thinking she was so I didn't go much further.  I proposed a couple of scenarios for her about selling earlier and tried to highlight how her cash position might be different yet there was no movement.  This is when I realized that I was not there at the Starbucks as a male Mr. Fix-it goat, I was supposed to be playing the role of the sympathetic "listening only, no fixing" goat.  Like a Phil Jackson having a total Zen moment, this powerful realization hit me and I suddenly found peace.  There was not a chance this person was going to listen to the words she might hear, so I simply stopped, changed the subject, and finished my coffee.  I hugged my old friend goodbye and wished her family well, knowing that she was only deferring her trouble and hurting her family's longer term position.

In my youth I would have pulled out some paper and charted scenarios to try to show and convince my friend that a move now was needed, but I've aged and learned and know better.  So here's the frustration.  Assuming that these guys do put their home on the market next June and their $2000 a month shortfall remains they will be at least $24,000 poorer as their cash reserves will be liquidated. (12 months till listing).

In addition to that, they then must hope that the home actually sells and it is sold in a reasonable time of 90 day or so.  That is another $6,000!  We must also hope that their loss on their home is only $10,000.  As I mentioned in the July update, we are getting indications that banks are not beginning to release underwater inventory and breaking up the log jam of non-foreclosed properties.  In other words, these banks are increasing the flow of supply on the market and that may be bad for future sales prices.  No matter what, let's just assume that they sell the home for a loss next year of $5,000. 

Here's how it could work out;

$5,000 loss on the property
$24,000 income drain for 12 months before listing
$6,000 income drain while waiting to sell the property.
In total, these guys suffered a $35,000 loss but a net cash loss of $30,000 by staying in this home!
They have $70,000 in cash reserves and would end up with $40,000 in remaining emergency funds.  If they were able to trade down to a home that needed only $1,000 additional income from their reserves, they could live a little over 3 years in this situation.

On the flip side, they could list the home this month and face this situation.
$6,000 income drain while waiting to sell the property.
$10,000 loss on the home.
A total of $16,000 in losses but only a $6,000 cash loss. 
Let's assume they buy a home or rent and can drop the out of pocket needs to $1,000 a month to be very conservative. That results in a $9,000 cash drain.
At the beginning they had $70,000 but suffered a $6,000 cash drain and then a $9,000 drop due to still falling short of their expense needs.  Their total cash remaining would be $55,000.  While not optimal, they could still live in this situation for more than 4 years.

The family would probably be better off in the second scenario as well as many of their other expenses like air conditioning and heating would drop because they would be in a much smaller home. 

The point of this is simply that while it would be an inconvenience to move now, it is still going to be a hassle that must be endured.  Why not go through the pain now and come out the other side with a larger war chest for the future?  Why not cut your losses on the home instead of gambling that things work out for the best?  What if things actually get worse and the home value drops? 

In this economic environment with all of the uncertainty isn't it best to attempt to have the smallest amount of debt and largest amount of savings to ensure that you can stay solvent as long as possible?  I love how this family had a pretty big store of savings, I hate how they plan to destroy their cash by taking too long to act on an important decision.

Have you noticed that the "Flip This House" and Carlton Sheets infomercials are no longer on TV?  This is happening because people are still getting killed in real estate.  As home-buyers we need to get rid of the notion that we'll be able to sell our home in 3 year or 5 years for a mint, it just isn't going to happen again.  We need to buy affordable homes that provide for our needs.  We don't need a home or a mortgage that fits the description that my mortgage broker and realtor told me when buying our first residence.  They stated, "Buy a home that is big enough and costs as much as you can possibly get even though it is uncomfortable now, with raises you'll be able to grow into it ."  What happens if you lose your job or those bonuses and raises don't materialize?  What if the economy takes a nasty turn and we enter a double-dip?

When is the last time a realtor told you it was a horrible time to buy?  Exactly.  As I mentioned in the introduction, I heard a radio show here locally that interviewed the local version of the Chairman of NAR.  He explained that home values were increasing and that is might be a good time to get out there a buy a home.  The realtor that was interviewing him continued to hammer home the idea that investment rentals were such a good deal because rents were up and that first home buyers should get out there and buy.  While that all may be true we just don't know and these guys didn't reference once that values could easily go down.  I wonder what my friend's realtor told them 10 years ago?  Probably the same thing they are saying now and everyday..... Buy! Buy! Buy!.

Financial decisions can be tough and they can be scary.  We always need to seek wise counsel and also remember that many times doing nothing is a decision.  Inaction due to fear, uncertainty, or over-analysis can sometimes be very costly.


Goatmug is an investor that cares about you and your family. Goatmug's Blog - Financial Perspectives From The Mountain Top is a collection of thoughts on our economy and how it impacts the lives of investors and average people. While several specific investments are named in many of his posts, these articles are simply invitations for you to do your own research and reference to these securities does not constitute financial advice. Your situation is complex and unique and you should seek professional assistance with your trading and investing. Please visit Goatmug and share your comments at