This post took 10 years in the making. It has its origins in 2005 when I moved to the Washington DC area during the peak of the real estate bubble. Soon after, I have been recommended, advised, urged and sometimes even warned about my foolish decision to rent.
Mr. and Mrs. TFR rented an older, but renovated and spacious (1200+ sq.ft.), 2 bedroom 2 bath townhome for $1200 per month in 2005. I was elated by what a deal I got when similar places were going for $1600+ rent in most places along the DC Metro line. With just a 45 min. commute to my workplace, it is not easy to do a whole lot better in the DC metro area. In 2005, it was also available for sale at that time and the owner was willing to ‘sacrifice’ it to me for a mere $330,000. I said, no thank you! Since the owner was in a sacrificial mood, I figured that at a rental yield of just 4.4% (1200×12/330,000) when I was making an 8% average return on my financial investments, my renting it will be the true ‘sacrifice’ of the owner!
Soon after my rental decision, my wife and I were subjected to the ‘Joneses’ effect by many of our well-meaning friends and colleagues. We were told that buying a home in the DC metro area (DC, Southern MD, Northern VA) is a ‘no lose’ proposition. Very low unemployment, plenty of high-paying professional jobs, and above all, the security of a stable and expanding federal government in the national capital will ensure real estate will always be in demand in DC. It appeared to be a compelling argument but boy, are we glad we did not succumb to it. When the market started to flatten out in 2006, our friends again warned that by continuing to rent, I was passing up on a ‘rare’ to a ‘once in a lifetime’ opportunity to buy DC area real estate at ‘bargain’ prices.
After the birth of TFR Jr., we moved to a bigger place in mid-2006, also on rent, mainly because the owner of the previous house pressured us to buy it for a special price of $300,000. When asked why she reduced the price by $30K, she said she loved having us as renters who were always prompt and kept the place really well. She repeated $300K was a ‘bargain’ for her place and we were foolish to pass up.
From early 2008, the cracks were evident even in the ‘unshakable’ metropolitan DC real estate market. By end of that year, the bottom fell out. In 2009, there were no buyers and the owners continually dropped prices, but no takers. Many of our friends who bought over-priced town homes and single family homes in 2004-2005 period, were sitting on zero equity or even underwater mortgages. Once you figure in all the costs of selling, many of them were in the red. Of course, they are not selling, but there is one change the sobering market reality has brought to them. All stopped advising us about buying a home. They are busy worrying about their own home values. Some were silently wondering if their jobs will remain stable enough to ride out the downturn. Mind you, these are people with stellar credit histories and stable, professional employment earning around six figure incomes. You can imagine the plight of others.
Despite the improvement of home prices and the relative strength of the DC metro region since 2011, the single family homes recovered far better than the crowded townhouse and condo market. The ‘Houdini act’ pulled by many buyers (what else will you call it when sellers frequently complain “where are the buyers?”) showed the unravelling of the ‘invincible’ DC real estate market even during the broader market recovery.
The End (a decade later)
The homeowner continued to struggle with it and rented it out again in 2010. I heard she lost her job few years ago (unfortunately) and couldn’t keep up with the difference between rent and mortgage. Few months ago, I saw on the county records the house was foreclosed in early 2016 at $210,000 (36% decline from the peak)! I remembered that she told me she had bought it for $240,000 in 2004. With sales commissions, taxes and other maintenance costs (including nice interior renovation she did when we moved in) over the years, what a disaster this ‘no lose’ investment in the nation’s capital has been.
I am not against owning your own home but my advice to owners: Understand what a home mainly is, a place to live. Enjoy the benefits of owning a nice place to live, but don’t buy into the press that your home is an investment that will always payoff. Most of all, don’t advise renters to buy just because you did. Whether I rent or buy or whether my home is 1200 sq. ft. or 5000 sq. ft, it doesn’t change who I am. You don’t see your renter friends advising you to sell your home during market peaks. In a future post, I will write about the biggest benefit of renting while working – it’s not the opportunity cost of locking your down payment in a house instead of an S&P 500 index fund, while that is a good enough reason to rent.
Are you a renter or an owner? Is your experience different and if so, please share.
Raman Venkatesh is the founder of Ten Factorial Rocks. Raman is a ‘Gen X’ corporate executive in his mid 40’s. In addition to having a Ph.D. in engineering, he has worked in almost all continents of the world. Ten Factorial Rocks (TFR) was created to chronicle his journey towards retirement while sharing his views on the absurdities and pitfalls along the way. The name was taken from the mathematical function 10! (ten factorial) which is equal to 10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = 3,628,800.