Realtor Confessions: I lost 55% on my first home...

“Prices are skyrocketing. Do you really think it’s a good time to buy a home?” I get this question several times a month from friends and clients. My first response is always “the best time to buy or sell is the time that’s best for you.” That comes from my days as a wealth manager with Vanguard. “Stay the course” & “timing the market is a fool’s errand” founder and industry pioneer, Jack Bogle would tout. These principles apply to both investing in the stock market, and most certainly the real estate market. This is my story as a first-time homebuyer. 

In 2007, at the ambitious young age of 26, I purchased my first home with my wife Jennifer in Mesa, Arizona. We both had fairly entry level corporate jobs and were saving for months for our down payment. We nervously met with 3 different mortgage lenders to discuss the numbers and what we would be approved for, not what we could afford. There is a difference. One loan officer laughed out loud when he saw me running my interest rate at 7%, but hey, I am a financial advisor. I was hedging my bets, anything lower waas gravy. At the time rates were hovering around 5% so anything below 7%, my numbers worked and happy days. This will come back into play shortly. 

Our house hunt started in February of 2007. We searched high and low for something that was move in ready for $225k or less. It wasn’t easy to find and took months, but we finally found it! The home we picked was within 25 miles from my work in Scottsdale, Arizona and right around 10 years old (to keep the cost of ownership down, in theory). The numbers worked and homeownership was slowly turning from a dream into a reality. Then the credit crisis hit! 

If you recall, the real estate market was starting its free fall in 2007 and was leading the stock market in what would be one of the most volatile periods in my lifetime a year later. As real estate values were plummeting, lenders were hitting the pause button on new mortgages as the credit markets began to freeze, but we were already committed. We had an accepted offer on our (then) dream home and we were moving forward regardless what the future held. Besides, we were getting the home for $14,000 below list price!  And no, we didn’t know what we were in store for.  

Our real estate agent/buddy sent our purchase contract to our lender who immediately scheduled an in-person appointment at his office. I thought “this can’t be good”, and it wasn’t. “Okay Mark & Jenn, mortgage rates have gone up since we first ran your file” he said. Keep in mind, this was the mortgage broker that laughed aloud when I ran my numbers at 7% interest. “Your rate is going to be 8%, but here’s the thing. Wait 12 months until the prepayment penalty falls off your loan and refinance. You’re going to have $50k equity by then anyways” he explained. Well, that’s not good at all. We ended up getting a second opinion from one of the large online lenders (usually not my first choice) and they were able to lock us in at 6%. Onward. 

We closed on our new home in July 2007. We had finally made it to home ownership! Then in 2008, the stock market pulled back 37% and the global economy was in deep shit, for lack of a better term. Within 2 short years of owning our first home, it was worth less than half of what we paid for it. It was $220,000 in 2007 and by 2010, our same floor plan sold for $78,000! The FED, Congress and Global Banks were doing everything in their control to stop the hemorrhaging and prevent global collapse of the economy as we know it. Yeah, it was really that bad.  Two of the largest and oldest investment banks, Lehman Brothers and Bear Stearns collapsed literally overnight. 

To really understand what caused the great recession, we have to rewind to the tech bubble in the late 90’s. After the bubble burst in 2000, Congress decided that home ownership needs to be a priority of every American, so what happened? Lending guidelines loosened and anyone that could fog a mirror could get a mortgage. Lenders didn’t need bank statements. “Just tell us how much you make, and we can get you approved.” they would say. Like we were on the Oprah show, “YOU GET A HOUSE, YOU GET A HOUSE, AND YOU GET A HOUSE!”. All sorts of creative lending solutions were introduced, most notably was the Adjustable-Rate Mortgage (ARM). With an ARM, your monthly payment would adjust upwards after usually 3 years, if interest rates rose. This created a huge demand for homes sending prices sky high from 2002 through the end of 2006. Many consumers were already taking out loans at the top of their budget, so when interest rates did start to climb, literally thousands of homeowners could no longer afford their mortgage payments and thousands of people started defaulting on their loans. Analysts could literally see these waves rolling in as tranches of mortgages started to adjust. If you haven’t already watched “The Big Short”, it’s definitely worth it. 

In the end, we held on to our “starter” home for 12 years before we sold it in 2019. During that time, we watched neighbors, friends, and family members buy second homes, then walk away from their first homes that were hundreds of thousands of dollars underwater. It set us back a decade from being able to buy the home we really wanted. But in the end, it wasn’t all bad, as long as we weren’t trying to keep up with the Jones’s. We had a roof over our heads and ended up pocketing $30,000 when all was said and done with our credit scores in tact. Our original investment/down payment was around $7,700, so it all depends what lens we chose to see it through.  

Anyone considering buying a home for the first time should really consider what is manageable now rather than trying to time the real estate market. Don’t overanalyze what prices were or guess where you think they’re going. Yes, a good real estate professional can predict what’s in store for the next year or so if a market is trending strongly in one direction or another, but beyond that, it becomes foggy. So, when the question comes up “Is it really a good time to buy a home”, pull up a chair because the explanation is going to take a minute.