I was chatting with a close friend a few days ago about the housing market. Big surprise right? We know what the median household income is in Seattle ($66,000), and we also know the median sales price of a home in Seattle right now is $380,000. What we don’t know is how the crap people can afford a $380,000 mortgage on a $66,000 annual income! There are only a few logical conclusions…
1. They inherited the property
2. They received a financial windfall
3. They are house poor.
4. They are risk takers.
If they inherited the property, or received a financial windfall, good for them.
If they are house poor, I can’t say I’m jealous of them. Nothing about living paycheck to paycheck appeals to me. I would never want to be in a position where I have to sacrifice traveling, eating out, or skiing just so I can make a mortgage payment. No thank you.
But what about the people who are just willing to take a risk?
Debt has a pretty bad rap. Heck, I even named my blog Punch Debt In The Face because I think it’s so dumb. But reality is, debt can be a powerful tool for building wealth; like when one takes out a line of credit to start a business, or when someone finances a rental property.
Sure it’s risky. If the business fails, or the real estate market crumbles, you could lose everything. But how bad is that really? It’s not like you have to worry about going to jail. Maybe you get sent to collections and settle your debt for less than you owe, maybe you walk away from your house and get foreclosed on. Maybe you have to consider filing bankruptcy. While none of these things are particularly enjoyable, they are solutions.
Maybe I’m too conservative for my own good?
I mean, if we bought a $500,000 house in 2012 we’d have about 15% equity in the thing based on recent market appreciation. That’s a $75,000 gain in less than two years!!!
What did I do?
Oh that’s right. I decided to keep saving money so we could easily afford a 20% down payment on a house priced $150,000 under what we were qualified to borrow. At last check, my savings account earned a paltry 0.75%.
Do you see what I’m saying friends? It seems to me that the risk/reward comparison of using debt to leverage one’s financial position often favors reward. Think about it.
We buy a $500,000 house and sell it a year later for a $50,000 profit (after commissions). Or we buy a $500,000 house, watch the markets tank, and walk away from the property and let the bank deal with it (Washington is a non-recourse state). The system is set up to protect one against their own stupid decisions, so much so, that these stupid decisions are no longer necessarily stupid.
Interest rates are low, and house prices are still lower than pre-bubble days. Why not use the depressed market, and government bailouts (quantitative easing), as an opportunity to make some extra dough?
Oh that’s right, because I’m a wuss.
Being conservative might not make me rich, but I guess it beats the possibility of being poor?