In early 2004, I moved away from my home in Long Island, NY to Phoenix, AZ with the girl who is now my wife. Times were good. We both found employment relatively quickly. Shortly after that we were in our own apartment. We were staying at a family member’s house for a month prior to moving out.
After working for AIG for about 2 years, a family member suggested we start looking to purchase a house. My wife Dani and I laughed it off. People our age don’t own houses. At the time I was 26, Dani was 24. After shopping around for several months, we decided that we would have our own home built. Compared to the resale market at the time, it was the smarter choice. For equal or less money, we could purchase a new build.
At the time, we didn’t realize is that there was something terrible happening right in front us.
In 2006, the housing market in Phoenix, AZ basically worked like this. You had resale homes, tons of land, lenders willing to lend and builders willing to build. At the time, there was such demand, the builders, banks and others artificially inflated the price of the housing market. You couldn’t just go buy a new house. You would often have to attend an auction to see if you were chosen to get a house. If they picked your name, you were in business. If not, no reason to be upset. Just come back next week – at a price. You see, when you lost and would have to come back next week, you basically lost on two fronts. One, you had to spend your Saturday morning at an auction to buy your house. Number 2, now your going to pay more for that same house. Price increases ran anywhere from $5,000 to $10,000 per week. This alone should have been an indicator as to what was going to happen in the future.
After we were in the house for about a year, we decided to refinance into a conventional loan. We purchased our house does or $211,000. A year later it appraised at $300,000. We refinanced and all was well. Amazing investment. $90,000 increase in equity in one year! The best part is that when I am ready, I am going to sell this house at a profit, of course, pay off debt, if the is any and buy a bigger house. Everyone that bought around this time and earlier struck it rich.
Fast forward one and a half years or so.
We decided to sell our house and move back to NY. When we first decided to sell, we found out we were slightly underwater on our mortgage. How could this be? At the rate the market was going, I should have had $200,000 in equity. Unfortunately this wasn’t the case. What could we do? Wait.
We waited. And waited. And waited.
At this point we were beyond under water on our mortgage. We figured we could rent it out, downsize and save some money. When we looked at the rental market in our area, that was out of the question. The same house down the road was renting for $900/month. Our mortgage payment was $1,800. How is that possible? Could it be be that the owners of the home down the road purchased thier home before they had to go to the auctions where they were artificially inflating the housing market? Could it be that a decline in home prices were a correction of an overinflated housing bubble?
We ultimately decided to foreclose, or as some put it “strategically default”. It’s not that we couldn’t afford the payment, it was more of the decision to 1. Not dump any more money into a rapidly depreciating asset and 2. To move on with our lives and move back to NY, where our family was and where we wanted to be.
Looking back, it was the best decision we made. Today we are where we want to be. Financially, we are better off. I’ll explain more on that in later posts.
We were lucky. We were able to be flexible enough to do something like this. Others weren’t so fortunate. For others, they pulled back. Way back. This coupled with an already depressed economy could –and would– only further depress the economy.
The question is: How do we go about fixing the problem?