When Is Homeownership Like Playing In The Road?

So, I skimmed “The Single Woman’s Guide To Real Estate” by Donna Raskin this weekend, because, hey, I’m a single woman, and I’m interested in real estate.  Funny thing, though; the book was written in 2006.  Do you know what else happened in 2006?  If you answered “housing bubble burst,” then you get a gold star.*

It’s really interesting to read advice given when the markets going up, up, up, and then thinking about that advice after the bubble burst.  The book has quite a few first-person vignettes about home buying.  Knowing what everyone knows now, with the advantage of hindsight, some of their stories seem frighteningly risky.  At the time, though, the stories were thought to be reasonable enough to include as examples of prudent purchasing.

One of the stories stuck with me.**  In it, the woman talks about how she mistakenly thought that she should pay off all her credit card balances before she bought a home.  She said that it was just too hard to pay off her credit cards, and that she couldn’t make any headway on saving for a down payment.  Then she talked about how she worked with a mortgage specialist, who helped her qualify for a loan and helped her figure out how much house she could afford.  Then she bought a house, which was kind of hard to pay for, but she got a raise that covered the cost, and so everything worked out.

Is anyone else getting the creeping willies?  I wonder what happened to her, and if she still owns her house.

I get the creeping willies for a couple of reasons:

  1. Ok, you don’t have to pay off all your credit card debt, or (at the time) save up that much for a down payment.  But the story talked about how the writer couldn’t pay off the debt, even when she tried, or save up a down payment.  That implies, to me, that there is a cash flow problem in the household.  I don’t know the details, but there was either an income problem, and expense problem, or someone was not a good budgeter.  Buying a house doesn’t solve any of these problems.  Usually, it compounds them.  Why?  Because, if a homeowner can’t diligently save up to pay off credit cards or get a large down payment, is it reasonable to assume that they will suddenly change their behavior and same up a sinking and/or emergency fund for irregular household expenses?  Doubtful.
  2. Talking to a mortgage agent or lender before you know what you want and whether or not you can afford it is pretty risky.  Mortgage lenders are salespeople who get paid when deals close.  Many reps were also paid more (at the time) for putting people in loans that were not as favorable to the borrower.  Trusting the salesperson to sell you the best product for your needs is asking to be taken advantage of.  Sure, some reps would do the right thing, but throwing yourself on the salesperson’s tender mercies isn’t a low-risk strategy.  Instead, it would’ve been wiser to become knowledgeable about the basics of mortgage products, and how to determine a home’s affordability, and do a lot of comparison shopping.  It doesn’t sound like that happened here.
  3. Oh looky there.  It turns out that she really couldn’t afford her house – she needed a raise to make the payments.  What happens if her wages are cut or she loses her job?

Could everything have turned out fine for her?  Maybe.  But the story is risky because she’s put herself in a position that may be difficult to maintain if anything goes wrong – and life has a habit of going wrong from time-to-time.  It’s like teaching a child not to play in the street.  Most of the time, a kid running out into the street doesn’t end badly.  Even so, we teach kids to be careful and not run out into the street, because all it takes is one car to ruin their life.

The vignette is the financial equivalent of darting out into a busy street.  Sure, this story may end well and everything may workout, but it’s still a risky way to live.

* All gold stars are delivered via telepathy.  If you didn’t receive a gold star, then the problem is on the receiving end.

** I’m going from memory here, so I may be conflating a couple of stories.  If so, I beg the reader’s forgiveness, but I also think the point still stands.

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