The Housing Chronicles Blog: How an L.A. Times writer sold out in 2005

Friday, January 18, 2008

How an L.A. Times writer sold out in 2005

Today there's an article in the L.A Times by writer Peter Hong, detailing his personal experience with selling a condo in 2005 and now renting while waiting for detached home prices to subside.

If you don't know Peter, he's relatively new to the real estate beat, having replaced Annette Haddad and transferring over from the Metro section (such shifting of reporting talent at the Times is pretty common).

For Peter and his family, he thinks he made the right decision:

Our friends said we were crazy. Relatives asked whether we were in financial trouble. But in April 2005, my wife and I bailed out of the American dream. We sold our two-bedroom Pasadena condominium and became renters again.

We got nearly three times what we had paid for the place nine years earlier. It seemed to us like a staggering profit -- and a sign that the market had been pumped up beyond reason.

That's why we decided to rent instead of buying another house right away. We wanted a place with a yard and a third bedroom, but we weren't willing to pay the sky-high price or take out an exotic mortgage to buy something our income did not justify.

So what do the numbers say?

Indeed, though we made a healthy profit on the sale of our home, we've had to pay rent for the last two years and have not had a mortgage interest deduction. And when we buy a new home, we'll have lost the Proposition 13 property tax advantage -- meaning bigger tax bills.

We don't know how much bigger, however, because we don't know what we'll pay for our new house. But had we stayed in the condo, we would also have paid about $14,500 in property taxes and homeowner's fees over the last two years -- money we could have potentially invested...

Any profit, however, must also be weighed against the intangible cost of living in a less-than ideal rental house, one without air-conditioning or a dishwasher and located an additional 20 minutes from my office. I'm pleased with our decision, but suspect many would not want to pay that price.

I sure know I didn't want to take that risk, so instead of selling I did the opposite of Peter, which was an easy decision in part because it would cost me much more to rent than what I currently pay for a mortgage, taxes and insurance (I bought in 2003), plus I like my neighborhood. For a couple of income properties, the cash flow covers all costs and I consider them both long-term investments with considerable advantages for future growth in both rents and, eventually, prices. So instead of parking a windfall in a CD or investing in stocks or bonds (which are far more alien to me than real estate), I'm sitting on some large home equity credit lines that remain unused and will be only be tapped if the cash flow from future investments will more than pay for the debt incurred (and also leave room in case the lender decides to reduce the borrowing limits).

To my mind, leverage is a great thing when used responsibly, and I can personally wait indefinitely for the rebound to occur, although I'm not sure I could've said the same thing had I chosen to rent. Sometimes it's better to remain a homeowner and just not think about paper losses today and the next.

No comments: