The Burst Bubble Isn't Enough

One of the reasons that The Wife and I wanted to move to Tennessee was the possibility of buying our own home. Tennessee didn't work out for a variety of reasons, but when you consider what the real estate market looked like back when we did it, you may have a better feel for why we tried our luck out there.

In today's Fish Wrapper, is yet another report on how far housing prices have fallen because of the downtrun in the real estate market. Real estate agents jumping out of windows and things like that. But of particular interest are the pictures of foreclosed houses -- with reports of how much they were bought for, and how much the banks are trying to sell them for.

Illustrative of the kind of market The Wife and I were facing back in 2005 is this gem in north Redondo Beach. "Gem" is not exactly the right word, on further review. But this is pretty typical of what you can get in the area that we were living in. In most parts of Redondo, you get a two-on-a-lot or sometimes even a three-on-a-lot house. You share a common wall with the other house on the lot. Zillow describes it as a 2,290 square foot residence, which is about right for the area (the other house on the lot will be of similar size), with four bedrooms and three bathrooms. The Fish Wrapper adds from the listing: "...sunny south facing private yard. Open floor-plan, hardwood floors, granite counters and tumbled travertine tile on both floors." It was built in 2005 and sold, new, for $929,000.

That's not a misprint, Tennesseans. Nine hundred and twenty-nine thousand dollars. It probably sold at an auction or after a bidding war; we were aware of a similar house near the home we rented (a slightly less desirable area than the one advertised in the Fish Wrapper) that began its bidding war in early 2005 at $800,000 -- and we later learned that the buyer paid cash for it. To share a lot and a common wall with your next-door neighbor. A thirty-year mortgage at the prime rate prevailing at the time would have produced monthly payments of about $5,600.00 a month -- which doesn't count any points or property taxes or anything else. Hell, the bank is still looking for $829,000 for this house today.

The Wife and I weren't making anything close to the kind of money needed to buy a house at those prices. So that's why we left to find somewhere that we could afford to buy. With housing prices in Tennessee being an eighth of what the bubble was at that time, it made the place look mighty attractive. Of course, the job I thought I had lined up fell through and it took a hell of a long time before I was able to get another one, so that made things a challenge even then.

Some of the houses in the Fish Wrapper's feature have lost even more of their height-of-the-bubble value. This house in Redondo Beach seems to have "only" fallen off 10% from its peak price. But it's still way, way, way out of reach of nearly any income-earning family. Which is one reason why we're glad to be where we are; the house we bought was still uncomfortably expensive but we were able to get the kind of house we wanted, in the kind of neighborhood we wanted, for a price that we can afford.

How is anyone in the city supposed to get started? If you don't have a huge helping hand from family wealth -- not just a loan of a ten thousand or so from your parents to help buy the house but I mean hundreds of thousands of dollars to make as a down payment -- then the mortgage payments are going to simply slaughter you.

I'm told that one should spend between a third to 40% of after-tax monthly income on housing payments. So if you took a zero-down loan on this house in Redondo Beach, and assume you had the best possible interest rate you can hope for, your base payment for a thirty-year loan would be five thousand dollars ($5,000) a month. Maybe you don't have credit quite as good as Senator Chris Dodd. So maybe you have to add a basis point or two. You certainly will have to add in closing costs like escrow fees, title insurance, and broker commissions. And there's property taxes to pay, too. Your monthly payment will wind up being something like $6,100 a month. That works out to needing nearly three hundred thousand dollars a year of pre-tax income to be able to make that payment.

Mere mortals simply don't make that kind of money. Very well-paid professionals do. Senior associates at Biglaw firms (but not newly-minted lawyers). Doctors with high-risk specialties. Mid-level accountants at Big Four firms. Stockbrokers and hedge fund managers. And it helps if both spouses do jobs like that, too. For mere mortals -- including the bulk of the professional class, I might add, meaning doctors who are general practicioners, accountants who prepare tax returns, and the 90% of lawyers who don't have blue enough blood or good enough academic credentials to sell themselves into indentured servitude at law firms like Arrogant, Condescending & Overpriced LLP, well, they're ass-out if they want to buy a house in that kind of a market. They should look at, you know, Claremont. Thousand Oaks. Santa Clarita. Redondo Beach -- that's just out of the question.