In the U.S., home ownership is considered essential to achieving the American Dream. It is such a sign of “making it” that people will even ignore other aspects of saving and investing just to get their name on a deed.
I certainly believed home ownership was a natural next step once I got a “real” job. And, after my mom died when I was in my mid-twenties and left me enough money to pay off my remaining undergraduate student loans (about $16,500 at the time), replace my old, unreliable car, and still have enough for a down payment on a small starter home, I began my home search.
However, this post isn’t about that first home I bought for $104,000 in a low cost of living city, but about my second home, the condo I owned from 2005 to 2019. That story is way more interesting.
In 2005, I moved to Georgia for a job that paid more than I had ever made up to that point: $43,000. I decided to look for a place almost immediately, and was realistic about how much I could afford on my salary while still contributing 10% to my workplace retirement account.
I knew that unless I was willing to have a long commute (I wasn’t) or live in a higher crime neighborhood (nope), a single family home was out of reach. So I looked for a condo and found a brand new one in a walkable community. It was small—a 750 sq. ft. one-bedroom—but that was fine. It wasn’t like I was going to live there that long (HAHAHAHA!!).
The price I paid in November 2005 was $157,000 and I had 10% to put down. To avoid paying PMI, I also borrowed $15,700 as a home equity loan so from the standpoint of my primary mortgage holder, I put the full 20% down. [PMI stands for private mortgage insurance and is used to protect the lender when a borrower puts less than 20% down on a property because they are considered at higher risk for default.]
Since I didn’t plan to be there that long, I financed using a 7-year Adjustable Rate Mortgage or ARM at 5.25%. The rate on my home equity loan was much higher—8.12%. At the time, I distinctly remember the mortgage broker offering me an interest-only loan. I found the idea of not paying anything toward principal each month very puzzling, especially when I could afford to do so, and declined. Three years later, when the housing bubble burst, I realized many others had said yes.
My Pleasant Prison
The fourteen years I owned that condo weren’t all drama but there was enough of it that I would often refer to it as “my pleasant prison.” It was nice enough but selling it wasn’t an option (unless I was willing to bring a very large check to the closing).
The Lawsuit and the Special Assessment
The 6-story building was new but had not been well built. From the beginning, there were significant water issues. My unit was okay but in other units, during a hard rain, water would puddle under windows and balcony doors. The 2-story parking deck below the building would also flood. This was not a good situation.
With the approval of a majority of the homeowners, the HOA sued the builder, a lawsuit that dragged on for several years, cost a ton in legal fees, and eventually settled for only about 25% of the costs of the needed repairs. Curious as to why we settled for such a small amount? The builder had nothing to lose by continuing to drag the suit out; the homeowners had everything.
During the lawsuit, banks wouldn’t finance loans for units due to the uncertainty so cash offers were about the only ones people were getting. And because those cash buyers knew how bad things were, these offers were low (one unit similar to mine went for $35,000 during this period!). My job was secure and I had no problem making my mortgage payment, but I also didn’t have $100,000 to bring to closing. I was staying put for the foreseeable future.
After settlement, the HOA worked with engineers to develop a plan to fix the building. Once this was done, they calculated the total costs of repairs (several million dollars) and the special assessment for each unit based on square footage. The assessment for my unit was just under $11,000. I had planned for this expense (it was obvious it was coming) and wrote a check but there were financing options for those owners who couldn’t do so. Throughout all this, the HOA was fabulous and I have no complaints with how everything was handled. It was just a sucky situation.
The Housing Market Crash
The repairs begin around 2011 and took awhile—I think it was about 16 months—but it was nice to see a light at the end of the tunnel. What wasn’t nice was that the housing market had crashed while all this was going on. Banks were finally lending again for units in my building but values were still down.
When I refinanced in early 2013, my unit was valued at $100,000, almost $60,000 less than what I had bought it for and also less than what I still owed on it (although since I had rejected an interest-only loan, I had chipped away at the principal so things weren’t as bad as the could’ve been). I was able to take advantage of one of the mortgage assistance programs at the time for people who were under-water so PMI wasn’t assessed. My new mortgage was a 15-year fixed at 3%.
I sold this condo in August 2019 for $215,000 which, on the surface, seems like an amazing return on my investment. Fifty-eight thousand dollars more than I had paid for it?!? A thirty-seven percent increase?!?
Don’t you believe it: this condo was not a good investment.
But first, a brief discussion of inflation.
Inflation—Don’t Underestimate Its Impact
Inflation is a factor that decreases the purchasing power of money over time. This may seem like a bad thing but based on my limited knowledge of economics, it isn’t. Some level of inflation is, according to economists, a sign of a healthy economy (and its opposite, deflation, is really bad).
But it does mean that for an investment to be a good investment, its return needs to be equal to or higher than the rate of inflation. Otherwise, the amount invested is worth less and less because it will buy you less and less with it as the years go by. You have essentially lost money even if the whole dollar amount stays the same.
To put this into context I have a very long list of things I want to do once I retire, including a lot of travel. If a dollar buys less and less each year, I need my investments to provide a return no lower than the inflation rate. Otherwise, I will either have to scale back my plans or withdraw more and more from my retirement accounts each year until my savings are depleted. Neither of these options sounds great.
(No) Return on Investment
Now that we’ve got that out of the way, here are the numbers.
The purchasing power of $157,000 in 2005 was equivalent to the purchasing power of $207,000 in 2019, and the purchasing power of $11,000 (the special assessment) in 2011 was equivalent to the purchasing power of $12,600 in 2019. This puts price+assessment at $219,600 in 2019 dollars. This means I effectively sold my condo for a loss. It was a bad investment.
But Wait…There’s More
For simplicity sake, this analysis considers only the purchase price, the assessment, and the sales price but as you know, there are so many more costs to home ownership.
I didn’t have a lot of small repairs over the years but in the latter years I did have to replace the HVAC and the water heater, which weren’t cheap (roughly $8,000). There was also insurance, monthly HOA fees (although I always felt these were reasonable considering the building amenities and the quality of the staff that worked there) and, of course, taxes. In the plus column, there were tax deductions for the interest on the loan and the city and country taxes I paid.
I am not dedicated enough to do the math to account for all these additional expenses (and the small number of credits) but others have done so—check out this post from Go Curry Cracker, as an example.
I’m 99.9% sure I would still be in the red, especially after adding in the cost of the sale, so hunting down all the receipts doesn’t seem worth it.
A Forced Savings Account
Now for the good news. While the condo was not a great investment, it ultimately did allow me to put aside a crap-ton of money. How? Because every month, a portion of my mortgage payment went toward the loan principal so when I finally sold, the amount I owed the bank to cover the balance of the loan was much lower than the initial amount I borrowed.
The refinancing was the real key to paying down the principal. My refinanced mortgage was for $110,700 and was a 15 year fixed at 3%. The first year under that loan I paid off $6,000, almost 2 1/2 times what I had paid off in the last year of the previous loan. By 2019, almost $600 of each payment was going towards principal.
Paying Down Principal Pays Off
By the time I sold my condo in 2019, I owed less than $70,000 on my primary mortgage (I had paid off my home equity loan in 2017). And, while I didn’t walk away with the entire $145,000 difference between the sales price of $215,000 and the balance on my loan because of all the fees associated with the home sale (realtor’s fees, lawyer’s fees, etc.), the proceeds were significant. And used almost immediately as a 20% down payment on a place in the D.C. area.
Given the desirability of the D.C. neighborhood in which I bought, and the overheated nature of the D.C. housing market in general, it’s possible that this place may end up being a good investment (in addition to being a good savings vehicle). Just in case, however, I took advantage of very low mortgage rates in 2020 to refinance to a 15 year fixed at 2.375%. The monthly payment is high but so is the amount going toward principal. And, because I don’t have any other debt and make a good salary, I can afford it.
I’m not sure if I will want to live here after retirement but if I do, I’ll be close to having it paid off. And if I don’t, I will owe very little which means I can use the equity to buy something that works better for me (or, if I don’t want to be a homeowner anymore, I will invest the cash and rent).
Timing Made All The Difference
While I really enjoyed walking away with six-figures in savings when I sold my condo, I can’t stress enough that it was completely a function of timing. Property is no different than anything else for sale—it’s only worth what someone is willing to pay for it.
When I paid $157,000 for the condo in 2005, I thought the unit was competitively priced. A few years later, during the height of the housing crises and in the middle of a lawsuit, as noted above, a similar unit sold for $35,000. When I refinanced it in 2013, it appraised for $100,000. But in 2019, I was able to sell it for $215,000.
Think about this for a second—for a number of the years I owned it, not only would I have walked away with nothing if I had sold it, I would have had to bring a large check to the closing to cover the difference between what I sold it for and what I still owed. That’s scary. And it scared me enough that I stayed put even though I was ready to move on.
This is why for years I referred to my place as my “pleasant prison.” This is a worry a renter doesn’t have.
Should You Rent or Buy?
I can’t answer this question for you. As a single woman, I can tell you that home ownership is totally possible—I’m on my third. But it isn’t for the faint of heart and if you are buying it because you think you will be able to sell it for a giant return in a few years, you may be taking on more risk than you imagine. And not just financially.
Home ownership means you can’t just move cross-country for a better job at a moment’s notice, or if a loved one needs a caretaker. If you have crappy neighbors that move in, with a pack of threatening dogs and who set off fireworks late at night year around, you are basically SOL. If you are in a 100-year flood zone that, due to climate change, is now an annual flood zone, that’s your problem too.
Home ownership can be good but it can also be very, very bad. Pick the wrong place and you too could be living in your very own pleasant prison. (For more on this, check out this post by J.L. Collins)
What’s Been Your Experience?
Generally, I have avoided providing specific numbers in posts but the roller coaster ride of owning that condo was something I thought would really interest my readers. It had a happy ending—thankfully—but it could’ve easily gone a different direction.
What’s been your experience? If you had been in my shoes, would it have turned you into a life-long renter? Let me know below!
P.S. Want to see how inflation has affected your purchasing power over the years? Check out this inflation tool calculator.