Is It Time To Be House Poor or Is The Crash Around The Corner?

Most of my life I have chosen to be house poor. The Answer is easy.

One of the rules that my Grandfather taught me at a very young age is be where you want to be. What he meant by that was live in a place that makes you happy. For the truly poor of the world, that normally means the same village that their family has been in for generations. It’s hard to be house poor when you are poor.

Just in case you aren’t sure what I mean by “House Poor”, I’ll tell you. House Poor means every time I move I get the biggest loan I can afford and buy in the best area I can afford. Throughout my life this has been everything from a studio condo to the beach house I live in now. Being house poor means that you don’t have money for the fancy cars and lavish vacations. Your kids go to public school and wear hand me downs. This is how my family has lived until recently.

Is It Time To Buy or Cash Out?

Two of my friends are M.D.’s They both make a lot more money than I do. One paid about the same for his house as I did, but his kid goes to private schools and they drive the finest new cars and take four big vacations a year. As a kid we got one vacation every four years and my dad always had two or three year old cars. This is how I learned to live.

My dad always seamed to time the market wrong. That is one thing we don’t have in common. He always bought just before the peak, spent every dime he could fixing up the house and then the market would tank. Twice he went bankrupt doing it. Sort of like the college kids that started buying GameStop just before it peaked at about $350 to watch it start a rapid slide below $50. I bet it will head back where it belongs in the under $30 range. I would say it is worth $5 after looking at the financials, but I am a conservative investor.

The Gamestop Gamble. House Poor is Easy!

One of the doctors recently asked about cashing out, renting a house and then buying back into the market. This is a tough question because the peak is very hard to predict. Bottoms are pretty easy. When the 2006 crash occurred it wasn’t everywhere. I was lucky that I bought in the right place. In 2004 I incorrectly predicted the peak, sold a house on a great piece of land for what I thought was a crazy high price. Just two years later that house doubled. When the market fell, it only dropped 30%.

If you do the math you can see that by getting out too early, I couldn’t buy back in. That house is way out of my league now. I should have never moved, and that is why it is so hard for me to advise anyone on the peaks. I did buy it at the bottom of the market just 6 years earlier.

Fast Forward to Being House Poor (Again).

I purchased my current home at the bottom of the market in 2009. I bought it at a price just slightly above it’s 2004 value. The difference is that this house was days away from foreclosure and the resident was destroying the place. I didn’t care because I am not afraid of shopping at Home Depot or hard work. Plus it was all I could afford in the area I wanted to live in.

I bought this house because it was near family, friends and the things I liked to do. Most importantly it was near the beach. Being taught to live where you want to live by my grandfather was one thing. Living around the world seeing how different people lived added to my core belief. The Covid Pandemic cemented it. I used to get anxious and move every 5 years. I’ve been in this house 11 and I am no longer house poor. A little time, patience (and a 3.0% refinance) helped so that I could take a vacation every other year.

Moving Has A Big Cost

Moving every five years has a big cost. It takes a toll on your family, your business, and your friends. Never mind the actual cash spent renting trucks, buying boxes and all the other headaches of moving. I moved every five years because I always thought the grass was greener somewhere else. It is a bad habit I got from my dad. My grandparents have had their homes since the 1950’s and my in-laws have had the same home since the 1971. The house I sold in 2004 is the only one that I wish I had kept. It was in a great area and I had good customers and great friends that are still there. Like I said I can’t afford to move back.

Cleanup After a Move

Now that I have been in the same house for 11 years, I must say I cheated a little. When we reached our fifth year, instead of stretching again and becoming house poor, I split the difference and went back to work on this house. I hired a builder to do a “shell remodel”. He bulldozed half of the house, poured a new foundation and framed it. He also did the stucco and roof. My wife and I finished the interior.

This way I got closer to the house on my Whiteboard, without being completely house poor. Honestly at the five year point I couldn’t find anything I wanted to move to that was any where near what I could get a loan on anyway. Even now I look once in a while to find that there isn’t anything out there. Of the many homes that I have owned, this is one of only two that I can say I wouldn’t mind retiring in.

The Benefit of Staying Put

We now have two new cars, take one big vacation and two or three shorter ones every year. It wasn’t this sunny in a financial sense when I bought the house, but it is now. Or so I thought until the pandemic.

At the time we bought this house, my wife and I had eight year old cars that were paid off. Buying this house meant we were keeping them at least a couple of years longer. The Clampetts didn’t move into Beverly Hills, they moved to Huntington Beach. At first neighbors were put off. Eventually they realized I was taking better care of the house than the previous owner and became friendly. Over time a couple of the neighbors became customers of my marketing business, and that helped move finances in the right direction.

As the market turned around, every dollar I put into fixing the house, including my pizza oven, was worth $3 or more if I wanted to flip and run. This is the appeal of flipping. This is also the problem. Flippers see this as a gold mine, and when you add speculators to any market you create bigger swings. Gamestop went from $9 to over $300 and back in less than a year. This is speculation with some juice. All those fixer shows on TV are the “juice” in the housing market. Low interest rates help to drive prices up. The political power or the National Association of Realtors is a big factor too. The more houses flip, the more realtors make.

Right now when I drive around my neighborhood, my grandparents neighborhood or my in laws, I see the same thing. Flippers gutting houses. At some point just like Gamestop, the music will stop and economics will kick in.

The big question of course is Buy, Sell or hold? My answer after seeing the dictators of the world rise and fall, and the covid pandemic controlling a big part of our lives is simply this; Be where you want to be, just make sure you can afford to stay even if the market crashes.

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