Thursday, September 03, 2009

They Learned Nothing

So CNN/Money has this nifty little series called "What I Bought With My $8k Tax Credit." Tune in, and you get seven stories from "first time" homeowners who've recently taken advantage of the fedgov's $8k tax credit. (Which, coincidentally, I was against — before I was against it even more.)

In the interest of trainwreck-gazing, let's take a gander at Homebuying Couple #3, shall we?

They're Noel and Mike, of San Carlos, California. Noel's 30 and a hair stylist; Mike's 31 and a crane operator. Their FHA-backed mortgage tallied at $750k. (We're not told their income, but we can infer that it's less than $150k/year since the tax credit starts phasing out at that joint-income level.)

From the article:

My fiance and I were running around making wedding plans and looking to buy a home in San Carlos — about halfway between San Francisco and San Jose. We finally found the right place on

We get married in November, but we're moving into the house this month. I'm excited because it's the best entertaining house we've ever seen. The house is built around a courtyard, and there's a barbecue. I love to entertain.

Translation: We're big on appearances. And we like to spend money.

We felt like we had to hurry and buy before the end of the year so we wouldn't miss out on the tax credit. That turned out to be truer than we thought: As we got closer to the end, we realized how much closing costs and other fees would add to the purchase price, which was high enough already.

They had to "hurry" to buy the house. They didn't want to "miss out." And they figured out that closing costs and fees would be "high" only when they got "closer to the end."

Anybody else's palms getting sweaty yet?

The $8,000 tax credit is saving us. Wedding, new house, we're tapped out. We're definitely big fans of the tax credit!

Translation: We like to spend money. Our wedding planner, realtor, and mortgage broker made a killing on us, which is great for the economy! Right?

Still, we feel good about the purchase. Even though it's a lot to pay, we feel we got a good buy. The house next door is going for $1.2 million.

Is it just me, or is reading this like eating glass?

What the house next door is "going for" is immaterial, insofar as to whether the Noel/Mike tag team can actually make more than a few years' worth of ~$4,100-per-month payments (not including taxes and insurance) on their newly purchased barbecue-with-a-house-around-it. ($750k minus 3.5% down payment, financed for 30 years at 5.5% = $4,109 P&I monthly payment) I'm sure their realtor, however, highlighted the $1.2 million house next door at every opportunity.

"Aren't these formica shower accents just divine?" she'd observe. "Really, they look just fabulous in this space. You're lucky they're in a house which just happens to be next door to another house — one that's going for one-point-two million! Can you believe it?!"

But who are Noel and Mike gonna believe: me and my silly observations of the recent macroeconomic cratering, or their dashing realtor, who stands to book a sweet five-digit profit from the rushed decisions of two starry-eyed and appearance-conscious newlyweds?

I mean, their realtor's probably perky and outgoing — not a downer, like I am. I'm just a guy with no debt- or bill-payment stress, steadily increasing savings accounts, a mortgage balance that's less than half my annual income, and a positive net worth. Also, I can sleep at night without the aid of pharmaceuticals, which is a bonus.

Although ... I don't have a courtyard.

Maybe that's my problem.

Back to the Noel & Mike show:

Prices have tumbled in this area, so the house is a lot cheaper than it would have sold for a year or two ago, and we got a great rate, about 5.5%, on a FHA loan. We'll use some of the credit money to update some of the home's circa-1950's decor — fake wood beams and chandeliers, textured wallpaper and the like.

Translation: No, really. We like to spend money!

It's at this point, Dear Reader, that I'd like to ask those of you who are praying types to go ahead and include Noel and Mike in your nightly missives. One lost job, one intermediate-term downsizing — heck, one bad ANYTHING — and this couple is sunk.

(Actually, it's the taxpayer who's sunk. But nobody gives a flip about them.)


— Posted by Michael @ 8:27 AM


You're right: Couple 3 is a train wreck happening right in front of us (no "waiting to happen" here). I also like No. 6, specifically, "The interest rate is just 3.5% for the first year and costs about $1,500 a month, with taxes and insurance. The rate goes to 4.5% the second year and caps after that at 5.5%, about $1,900 monthly, which we should be able to swing as our earnings go up." They "should be able to swing" the increased cost of the mortgage as "our earnings go up"? They're counting on an increase that hasn't happened yet? Guess what, lots of people did that a few years ago, and didn't end up so well for them. ugh


I usually agree with you, but I think you're being too harsh here. Maybe the couple you're focusing on is really ridiculous, or maybe they're actually quite wise. They bought a house that is A) not the most expensive in the neighborhood (and therefore more likely to resell for a profit than the $1.2M monster next door) B) fits their lifestyle - and entertaining at home is a heck of a lot cheaper than going out, so you might consider cutting them a little slack C) they waited out the market's peak a few years ago and D) they're buying now instead of a few months from now when the price goes up by $8K.

Sure, it's troubling that they're tapped out. Maybe they should have postponed this for years instead of hurrying to buy now. But once they made the decision to buy a house around the time of their marriage, it sounds like they did pretty well.


Oh wow too funny (in a sad way). I know people like this and it drives me insane.


I live in the same area as Couple 3 (renting), have about twice as much income and a 20% downpayment saved up for a possible house purchase, and am STILL on the fence about whether it is smart to buy a San Carlos area starter home (e.g., $700-$900k) and have a $5k monthly payment (mortgage+taxes+ins). How the heck are they going to make it work???

Thanks for posting this... I've always wondered who the crazy folks are with so much money who can afford to buy houses around here! Apparently they don't have so much money after all!


Anon wrote:

But once they made the decision to buy a house around the time of their marriage, it sounds like they did pretty well.

Let's do some math, shall we?

Let's just guess and say the couple's income is $149k/year. If they paid NO TAXES and had NO OTHER pre- or post-tax deductions from their paychecks, Noel and Mike would be bringing home roughly $12,416 per month. (Isn't Never-Neverland a fun and whimsical place?)

SO a house payment of $4,109 would take up 33 percent of their (completely unrealistic) take-home income, which in Never-Neverland happens to be the same as their gross income. But again: That $4,109 is the P&I payment; it doesn't include taxes or insurance. Do those not exist in Never-Neverland, either?

See where this is going?

In a completely impossible best-case scenario, this house payment is already taking up a third of the couple's pay.

NOW throw taxes (income, property, and all the rest) in there, as well as homeowner's insurance.

Doesn't leave much room for "entertaining," does it? Or car payments? Or health insurance? Or food? Or running water? Or electricity?

Sorry. Unless I've missed something, foreclosure (or begging for a loan mod, with foreclosure simply delayed) and resultant taxpayers on-the-hook seems just a hop/skip/jump away for our smiling newlyweds.


"...they're buying now instead of a few months from now when the price goes up by $8K"

How does the price go "up" when the 1st time home buyer credit goes away? (Not that Congress will let that happen)

And how do you know that the selling price wouldn't have come down by at least $8k if the buyers who were "provided for" by the tax credit weren't there? i.e. the very existence of the tax credit meant that prices were at least $8k higher then they would have been otherwise

Anonymous LookingGlass
, at 12:46 PM, September 07, 2009  
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