Owner Pride but No Renter Envy

Friends, this has been tugging at my heart for a long time. Ever since I moved to the Washingon DC area during the peak of the real estate bubble in 2005, I have been recommended, advised, urged and sometimes even warned about my foolish decision to rent.

My wife and I rented an older, but renovated and spacious (1200 sq.ft.) 2 bedroom condo for $1200 per month in 2005. I was elated by what a deal I got when similar condos were going for $1600+ in most places along the DC Metro line. With just a 45 min. commute, you can't do a whole lot better in the DC metro area. The condo was also available for sale at that time and the owner was willing to 'sacrifice' it to me for a mere $330,000. I said, no thank you!
Since the owner was in a sacrificial mood, I figured that at a rental yield of just 4.4% (1200x12/330,000), my renting the condo will be the true 'sacrifice' of the owner!

While I was feeling pretty good about my rental decision, my wife and I were subjected to the "Joneses" effect by many of our well-meaning friends and colleagues. We were told that buying a home in the DC metro area (DC, Southern MD, Northern VA) is a "no lose" proposition. What, with very low unemployment, plenty of high paying professional jobs, and above all, the security of a stable and expanding federal government will ensure real estate will always be in demand in DC. It appeared to be a compelling argument but boy, are we glad we did not succumb to it. When the market started to turn south in 2006, our friends again warned that by continuing to rent, I was passing up on a "rare" to a "once in a lifetime" opportunity to buy DC area real estate at 'bargain' prices.

My wife and I moved to a bigger condo in mid-2006, also on rent, because the owner of the previous condo pressured us to buy it for a special price of $300,000. The owner was clearly worried that she will be stuck with a condo she cannot sell in a down market but was adamant that $300K was a 'bargain'.

Fast forward to March 2007. Many of our friends who bought over-priced townhomes and single family homes in 2004-2005 period, are now sitting on essentially flat to declining home values compared to their purchase price. Once you figure in all the costs of selling, many of them are in the red. Of course, they are not selling, but there is one change the sobering market reality has brought to them. None of them now advise us about buying a home; I figure they are busy worrying about their own home values. Some are silently wondering if their jobs will remain stable enough to ride out the downturn. Others are hoping that this month will be the bottom of the market and the turn is just on the horizon. This is what I have been hearing for the last 6 months but the bottom is nowhere to be seen. The sub-prime mortgage craziness combined with higher interest rates and the 'Houdini act' pulled by many buyers (what else will you call it when sellers frequently complain "where are the buyers?") has started to unravel the 'invincible' DC real estate market. I was tempted to quote a Titanic analogy to my friends. Titanic had another name, frequently used by its builders and upper-deck patrons - "the unsinkable ship".

Unfortunately, for those who bought homes in 2004 and later, the story is getting worse. Not only did they buy near the market peak, the so-called 'bottom' is far away. Nearly a million mortgages will re-set their interest rates in 2008, meaning the true impact of higher monthly mortgage payments is yet to be seen. Imagine an already-stretched family having bought a home they can barely afford having to suddenly fork over an additional $300-$800 per month. I feel sad for them but the real estate sharks are getting ready as they are starting to smell blood here....a long time real estate investor I know is starting to salivate over the upcoming defaults, bankruptcies, repossessions, tax lien sales, auctions and all the ugliness that accompanies a painful real estate crash.

Those who bought DC area homes in 2003 and earlier may do fine because they are sitting on a mountain of gains, which is a nice cushion to ride out the continuing value erosion. But real estate madness is the same as stock market madness. A large number of real estate buying occurred in 2004 or later, when there was fear of missing the real estate party. When everybody is buying, that is precisely the wrong time to buy. So, renters who want to put down roots in the national capital region, hold on but get ready. You will have your pick in 2008!

My advice to owners: Understand what a home really is, a place to live. Enjoy the benefits of owning a nice place to live. But don't buy into the press that your home is an investment that will always payoff. Most of all, don't advise renters to buy just because you did. You don't see renters advising you to sell your home during market peaks.

To those who are interested: My previous condo owner is still struggling to sell her condo. I saw yesterday that the condo is now priced at $265,000 (20% decline from the peak) and is still going down! She had bought it for $240,000 in 2004. With sales commissions, taxes and other maintenance costs (including nice interior renovation - must have cost in the neighborhood of $10K), can you guess if she will make any profit even if she sold it at $265,000?