Saturday, August 28, 2010

Homeownership - Liability or Lifesaver? A Primer on Economic Fallout Shelters

  If you listen to the "Bubble-Bloggers", you'd be forgiven for coming to the conclusion that home ownership is Bad, BAD!...and that buying a home is, for the less-than-astute, unsophisticated and unwashed proles, something better left to those of means who know what they are doing.  With all due respect to these folks, their apparent owner-phobia might well be justified in the economic deserts of California or areas where home prices still have far to fall, but may be unwarranted, even unwise, in other parts of the country.

  This is, firstly, not to disparage bubble-bloggers or their views.  They make a lot of sense and can back up their assertions with the numbers.  But they also make a lot of assumptions, upon which those assertions depend.  Secondly, this post is not a rent vs. buy article - I'll leave that for another post at another time. There are good arguments for either side of the debate, depending on various factors, but this is not what I wanted to talk about today.

  One of the necessities of human life (and probably most animal life, as well), besides food, is shelter.  You need a place to live, a place to sleep, a place to keep warm in the winter, ect, ect.  It's a necessity, and, unless you consider perma-couch-surfing or living beneath a highway overpass to be an acceptable option, you're gonna need a place to live.  You will ALWAYS need a place to live, just as you will ALWAYS need food and water.  It`s not a luxury.  My own standards are quite low, but I draw the line at living in a van.
Been there, done that. For several months.  And assuming A) You aren't "well-healed", and B) The economy will continue to deteriorate for the foreseeable future, your standards should be low, as well.

  By this, I mean, you should consider purchasing the smallest, cheapest, low-tax home that you (and your family) can comfortably live in, albeit in a good neighborhood and in a good location.  My philosophy is that, in an era where all economic indicators point to some serious hard times ahead, with increasing instability and increasing unemployment, you want to have one of your main and most expensive needs all sewn up.  Housing is most peoples' single biggest monthly expense, but it doesn't have to be that way at all.   In fact, my rent here on Long Island is 30X (3,000%) higher, than the property taxes of a home I own in another State, and that home is 5X the size of where I am now.

  Most peoples' homes, are a liability. They bought more house than they needed, bought more house than they could afford, are mortgaged up to the hilt, and now, with the RE bust, many owe more on their homes than they are worth.  Worse yet, with unemployment rising and showing few signs of abating anytime soon, some of these folks have lost their jobs, making them unable to continue to pay their mortgages, putting them at risk of foreclosure,and eventual eviction.  I won't even get into the HELOC-abuse madness -those tapping into their ethereal "equity" to buy toys, remodel, add in ground pools or take lavish vacations.

  Unless you are in the land lording business, a home is NOT an "investment" - it's a place to live.  Nothing more. Assume it won't go up in value(*especially* nowadays!), and don't concern yourself with "property values", as no matter what your home's present value, no matter how much it may drop, it still provides 100% functionality for the reason you(should have) bought it for in the first place: a place to live.

  Now, many of you (like myself) have little or no  control over our earnings, job security, other cost of living items, and the prospect of reduced hours, incomes and inflation.  Most of us 'little people" are limited in our options for increasing earnings, and ultimately, are at the mercy of forces and circumstance beyond our control as regards how much money we make every week.  Even some small business owners are in the same boat. What you CAN control (or, at least, mitigate), are your costs and spending.  Particularly one of your biggest expenses: housing.

  This is where what I call "Economic Fallout Shelters" come into play.  Note that these are NOT "Doomsteads", as Doomsteads have other properties and characteristics that make them uniquely suited for post-crash survival, when TS has REALLY HTF, but that is a subject for another post and time.  What I'm talking about, are economic fallback properties, that you and your family can buy, on the cheap, and continue to live in, on the cheap, once the economy has us down to subsistence levels, competing with 3rd-world labor, at 3rd-world labor rates, while trying to continue to live in a 1st world country with 1st-world expenses.

  There are parts of the country where you can now buy a home for the price of a good used car.  Obviously, we aren't talking about LA or the immediate vicinity of NYC, or any other high-priced areas where the RE has not yet fully deflated.  Even deflated, many areas of the country are still overpriced and overvalued vs. their real utility.  This is where having a portable income really shows it's value,...nay, pricelessness, as it allows you to disregard the local job-market entirely, and just concentrate on finding the best place to live for yourself and your family.  If I had a portable income, I would've left NY nearly 2 years ago.  Instead, I was waylaid when the economy fell off the cliff, and unemployment more than doubled in the State of my intended relocation, as I'm still dependent on the job-market.

  So, what is a '"Fallback Property" or "Economic Fallout Shelter"?  My definition is s follows: A fallback property (or "economic fallout shelter") has some unique properties and characteristics: It needs to be cheap enough that you won't be needing to take out a mortgage to buy it.  Ideally, it should be inexpensive enough for you to purchase it with cash-on-hand.  Failing that, it should be cheap enough that you won't need anything much beyond the equivalent of a 3 or 4 year "car-loan" to purchase.  

  You want to avoid debt as much as possible, particularly in these times, as hyperinflation is not guaranteed.  If we slide into a deflationary depression, you may quickly find yourself hard-pressed to continue making payments that used to be modest and comfortable for you, just a few months earlier.  Of course, if you have a fixed-rate loan, and hyperinflation sets in, you'll be a winner, paying back the bank with dollars that are worth far less than the ones they lent you.  Fixed-rate is the key. If you *must* borrow money to buy your home, you do NOT want the lender to be able to raise your interest rate, should hyperinflation set in.  

  I know I'm kind of digressing here, but the WHOLE IDEA of this post, is for you to fast-track yourself into free-and-clear home ownership.  You don't want to be  rent-slave forever, you don't want to be stuck paying market-rate rents the rest of your life.  If hyperinflation sets in, rents will rise as well.  Have fun trying to keep up - bosses will be slow to catch on that you now need an extra "0" in your paycheck to buy what you used to get every month for 90% less, just 6 months earlier.  And if deflation sets in, landlords, being creatures of habit, tend to ignore all market indicators when those market indicators point towards lowering the rent.  And even if/when they do, they are slow and loathe to adjust rents downwards accordingly.  In the meantime, you'll be overpaying.  Heck, it MAY not even be POSSIBLE for a landlord to lower your rent, because he may be heavily leveraged and thus have large and not-very-negotiable payments of his own to make on his properties, so even if he WANTED to, he may not be able to lower your rent without running a net-loss every month.  HIS debt-problem now becomes YOUR problem.  Just one more reason to get off the rent-payer's hamster-wheel.   Soapbox /off.

  Getting back on track, what makes a good EFS(economic fallout shelter)?  What qualities and characteristics should you look for?  Well, I'll start by listing what to AVOID - this will streamline things a bit and make it easier to focus on what we want. 

  First and foremost, you want a property that doesn't "eat".  There is no point in buying a home if it bleeds you to death every month, no matter HOW cheap the initial purchase price may be. No point at all.  You may as well keep renting if you're going to do that - at least you'll retain your mobility.  For this reason, you want to avoid the following types of properties and characteristics:

  Condos, co-ops, townhouses, gated communities, and anything that is part of a Home Owner's Association (HOA) or Property Owner's Association (POA).  The last two are essentially the same thing - they just have different names.  ALL of these types of properties, have monthly or annual fees over and above the property taxes.  "Common Charges", "Maintenance Fees" and HOA/POA dues can easily add HUNDREDS of dollars per MONTH to your ownership costs.  Avoid them like the plague, no matter HOW "nice" or HOW "cheap" they are..  SOME HOAs/POAs are "reasonable", but there are other reasons to avoid them, IMO.

  Now, I'm not saying there aren't some communities with HOAs or POAs that are otherwise-decent places to consider, or that being in a HOA/POA community is without benefits, but HOAs and POAs also generally come with restrictions(some people view this as a Good Thing), some more anal than others.  Perhaps I'm just projecting my own tastes here, but I prefer as few restrictions as possible, on what I can and can't do on my property. And with so many non-HOA/POA homes available, I personally don't bother looking beyond the HOA.  If I see a property is part of a HOA or POA, I automatically move-on and look elsewhere.  Besides, the whole point of an EFS is to "eat" as little as possible. A HOA makes it eat more. We want LESS.

  Now that we've eliminated the unsuitable types of properties, it's easier to home-in(pun intended) on what you DO want.  Or at least, narrow it down some more.  Let's look at one of the main factors in the cost of home ownership: property taxes.  This is a BIGGIE.  This one factor ALONE can often determine whether a prospective home is, in fact, a EFS or dollar-draining albatross.  Property taxes vary *considerably* - in many areas of the country they are extraordinarily-high.  SO high, in fact, that I often joke about how even if someone were to GIVE me a house for FREE (here on Long Island), I'd have to immediately go out and get a second job, just to pay the taxes.  The Northeast is notorious for high property taxes. 

  For low property taxes, look to the South and the Midwest.  A typical home that here on Long Island would cost you $7,000 a year in property taxes, might cost you only 1/10th of that elsewhere.  And that often goes for home *prices*, as well -  a typical $400k home here on Long Island, could likely be had for around $40k elsewhere. And if $40k is too rich for your blood, fear not!  It's too rich for me, as well, but I didn't start this blog or write this article for a "well-off" or even "comfortable" audience.  I wrote it for us "little people" - those of us who slave away every week for a meager paycheck, and are tired of handing a disproportionately-large part of that paycheck over to a landlord every month, so stick with me - you're in good company!  And that's why we're gonna shoot for ONE QUARTER of that price.

  Remember, the whole point of acquiring an EFS, is to get yourself into a home that you (or soon will) own free and clear, get the landlord and rent-payment off your back, forever. Imagine going from a tiny studio apartment to a 2-3 bdrm home, and going from $500-800 a month rent, to $50 a month "rent".  Sure, there are other expenses - another $50 a month for insurance, another $100 or so a month for basic utilities, but that's still only $200,...let's go crazy, $250 a month.  To OWN.  Yes, you'll have to mow the lawn, but you won't have to ask anyone if you can have a BBQ party in your backyard, either.  Got an extra room?  Got a friend that needs a place to live?  Rent it out for $200-250 a month, and your housing costs are essentially free, or very close.  Even if you decided to keep the whole place to yourself, you'd still be saving a minimum of $250 a month - MORE if you WERE paying more than $500 for rent.  If you WERE paying $600 a month for your studio apt, the $350 (*NET*) a month you'd be saving, could easily finance the entire cost of buying a $10k home, closing costs and all, and pay it off in 36 months.  And that's assuming you put $0 down.

  Or, perhaps better yet, let's say you have a spouse and a kid or two, and were previously renting a house or 2 bdrm apt for $1200 a month(I'm being very conservative here, as small houses and 2 bdrm apts here on Long Island generally now go from a low of $1500 to about $1800-2k a month).  So imagine you and your family now moved into your new EFS and were now saving $1k or more, each and every month, over what you were paying for rent.  Previously, BOTH of you probably had to work, and a job-loss for either of you would've been disastrous.  But NOW?  One of you could probably quit your job and stay home and raise the kids - and work on building a portable income on the side.  Saving an extra $1,000 or so, *net*, every month, opens a lot of doors.

  Home prices are falling, and will likely continue to fall for some time.  Rents, however, don't seem to be following suite (perhaps for the reasons I mentioned earlier in this article), and if and when things ever turn around, rents will go_right_back_up_again, to whatever the market will bear.  Wouldn't you like to be *immune* to this?  And in the event of income-loss, the LAST thing I'd want to be, is a renter.  Even a homeowner who stops paying his mortgage is in a better position than the renter - at least they can probably squat in comfort for a year or so and save up money before the wolf finally comes knocking at the door.  Try THAT with your landlord! 

  Ok, so let's review:  your EFS should be cheap enough that you can buy it for cash outright, or if that's not possible, at least cheap enough that you can comfortably finance it for no more than 36-48 months.  It also must have low property taxes.  Anything with common charges, maintenance fees or HOA/POA dues shouldn't even be considered.  After all, you're NOT buying a vacation home, you're buying what will become your primary residence for riding out the Great Decession.  Consider it a strategic purchase.  Not *necessarily* "Forever", but it COULD be.  At least, now, you have a good idea of the "What".

  In the next installment, we'll talk about the "Where" - LOCATION - where, why, and what factors to consider when deciding   Geography, climate, demographics, proximity to vital and highly-desireable goods and services, income considerations, utility rates and quality of the local school system, .all play a role. Chances are, you're not going to be buying a place a block away, or even a few towns over, so we'll also get into how to research a lot of this stuff online - in many cases, right down to the neighborhood gossip, next-best-thing-to-actually-being-there-level.

Stay tuned.....;-)

                                                                           Scoob

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