Loving your house again
First, let me say this: Of course I have regrets. After all, the purchase of our family home in Hollywood with an adjustable-rate mega-jumbo mortgage closed a mere 119 days before Countrywide Financial Corp. announced that -- whoops! -- it had, uh, run out of money. Of all the financial horror stories of last summer, this was the one that seemed to mark the official start of what is now commonly referred to as the “credit crunch” -- the symptoms of which, if you’re an L.A. homeowner at least, include weeping openly in front of CNN real estate bulletins and waking up three or four times during the night to check the tumbling digits next to the satellite image of your home on Zillow.com.
So yeah, I have regrets. Like wishing I’d borrowed more money and bought a bigger house.
No, there’s no asterisk here, no small print, no catch. And yes, I’m aware that if I tried to sell my house now, I’d probably have to pay the buyer and throw in both my kidneys. Yet, this weekend, as we mark the one-year anniversary of Countrywide’s implosion -- and by extension the end of the era when a real estate agent could add half a million dollars to an asking price just by installing a stainless steel refrigerator (sorry, I mean “chef’s kitchen”) -- it seems appropriate for me to make a rather bold statement: Those of us who purchased nonspeculative property from 2004 to 2007 for the gratuitously self-indulgent purposes of raising a family and investing in our neighborhoods will ultimately have the last laugh.
OK, maybe not the last laugh -- that pleasure is almost certainly reserved for New York hedge fund manager John Paulson, who made a handy 10-digit profit in a matter of months after finding a way to short-sell subprime mortgages.
But if you’re a boom-time buyer who can still pay the mortgage (not only do we exist, we’re in the majority), you have more than you think to feel happy about. You certainly shouldn’t harbor any envy toward the likes of Peter Y. Hong, author of an article in this very newspaper earlier this year with the headline, “How we cashed in before the crash; a Times reporter just couldn’t ignore the warning signs” -- which, it has to be said, set a new standard for the sheer quantity of smugness that can be contained within a mere 2,000 words.
I can tell you’re not convinced, so let’s do some arithmetic. Say a real estate agent with a particularly reassuring grin talked you into buying a home in a decent neighborhood for $1.2 million in 2005, using $200,000 of your own cash and a million-dollar mortgage given to you by some dude you found on Craigslist. This is the higher end of the market, to be sure, but not out of the ordinary during the mortgage mania of the go-go Greenspan years. Now let’s pessimistically assume that the credit crunch has destroyed a third of your home’s value, so it’s now worth a paltry $800,000.
Chances are, you feel like impaling yourself on the three-pointed star on your real estate agent’s Mercedes. Before you do that, however, consider inflation. At its current unbowdlerized rate of 5%, inflation alone will devalue your million-dollar loan over the next decade to the “real money” equivalent of about $600,000, while at the same time causing your home to appreciate to $1.3 million (according to online inflation calculators).
Here’s another reason to pat yourself on the back: You got a mortgage before banks stopped lending to anyone other than the king of Saudi Arabia, which means your interest rate is almost certainly much lower than the rate that will be offered to the likes of Mr. Hong when he tries to get back into the market on the cheap.
Indeed, interest rates are just as important as the asking price in calculating the true cost of a house. When foreclosure vultures whine about how even post-crunch house prices are too high compared with the growth in American wages since the 1970s, they conveniently fail to mention that interest rates have moved in the opposite direction since then and even now are cheap by historical standards. In the darkest hours of the Carter administration, a loan at 20% wasn’t unheard of.
Aha, I can hear you say, but what about the dreaded A-word? Aren’t we all doomed to bankruptcy because our mortgages will adjust? In a word, no. The payments on most pre-2007 adjustable-rate mortgages would go down if they reset today, because the indices on which they’re based remain in the low single digits. Sure, if you have an interest-only loan, the payments will go up when you start paying off the principal -- but by then, inflation almost certainly will have started to work in your favor. Of course, you’ll also have to pay property taxes, but thanks to California’s Proposition 13, your property taxes won’t change dramatically until the house is sold; and as with your loan, inflation will reduce the real-money burden over time. And let’s not forget that property taxes can offset your income tax. Which brings me to my final point: the glorious all-American institution that is the home mortgage interest tax deduction.
Say you’re paying 6% -- fixed for 10 years -- on that eye-watering million-dollar loan. This allows you to deduct $60,000 from your taxable earnings, thus saving about $20,000 a year in the 33% tax bracket. In a decade’s time, that’s a potential saving of $200,000. Throw in another $30,000 of savings from your property tax deduction; the $200,000 you’d be theoretically saving over the same period on the difference between a pre-crunch 6% rate and, say, the 8% rate you might be offered now; and the $700,000 of equity you’ll potentially end up with after inflation’s gone to work on both your loan and the value of your home: Net result? The penalty for having bought at the height of the worst real estate bubble in history adds up to a potential $1.1 million gain.
Feeling better? Thought so. And if you ever meet someone who brags about having gotten out when times were good, ask them what inflation’s doing to their rent, how much tax they’re saving on that home-office deduction (a few hundred bucks, woo-hoo!) and, more important, where they parked all that filthy boom-time lucre they made. If they put it anywhere near the stock market, give them a hug. They’ll need all the sympathy they can get.