Smart or Just Lucky?

I've been observing a lot of venom out there these days, from bloggers, cable news pundits, and Op Ed writers, being directed at folks facing foreclosure.

I am aware that there were home buyers out there that were not truthful on their mortgage loan applications.  Others borrowed more than they could really afford, expecting continual increases in home prices to save them in a pinch.  There are also people facing foreclosure that didn't lie on their applications and could afford their homes at the time, but due to a subsequent job loss, a bankrupting health problem, or some other unfortunate turn of events, are struggling now to keep their homes.

I hate to see everyone being painted with the same brush by the media, because the reality is, many of us when buying a home, really stretched our budgets to achieve that dream, and didn't suffer the unfortunate circumstances that many face today.  So we come off looking smart.

I think we were just lucky.

We bought our first house in 1991 in an up-and-coming neighborhood in San Francisco.  We saved and searched for years, and when we found the home of our dreams, we borrowed some money from our parents to get us the rest of the way there.  We put 10% down, borrowed the maximum the bank would allow us, and qualified with an adjustable rate mortgage.

After the first year, when our mortgage was about to reset, the bank contacted us and said we could keep our low teaser rate for another year.  The following year, and every year after that, we adjusted into lower and lower adjustable rates, on occasion even taking money out in the refinance.

Eight years later, we sold that house for double what we paid for it.  We then upsized.  Flush with the cash from the sale of our first home, we were able to put 20% down this time.  Our incomes had grown steadily over those 8 years, so we took out an even larger adjustable rate mortgage.  Over the years we made additional principal payments as we could.  We continued to refinance our lower and lower loan balance whenever the rate made sense.

Five years later, we sold that house for 50% more than we paid for it.  We upsized again, this time putting in a down payment of 60%.  We took out a larger loan, with another variable rate, although this time it was fixed for the first 5 years.  Again, we made additional principal payments as we could.  Our mortgage is now lower than the one we used to purchase our first home.  The value of our house has decreased significantly since we bought it, but our loan balance only represents 17% of the current value of the house.

The rate will adjust later this year and we plan to pay off the remaining balance with money we had invested in a CD which was earning a higher rate than our mortgage interest rate.  The variable rate is tied to the 1-year Treasury, and if it were to adjust today, it would go down even further.

My point in sharing all of this is, we're not all that different from someone that stretched to buy a house in the last few years, and then got burned by the tanking housing market, increasing unemployment, a catastrophic illness, or the stock market's decline.  All the circumstances over the past 18 years:  low interest rates, job security, increasing housing prices, and our increasing income, worked in our favor.

But it just as easily could have gone the other way, and then, Rick Santelli would be saying how stupid and irresponsible we were.  And that's why you won't see me high-fiving Mr. Santelli on the trading room floor, because I know the difference between smart and lucky.

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Comments

[guinness416]

Aye aye, great post. Could have been written by my brother, who bought into the Irish property marke before it went on fire, whereas someone who bought last year looks foolish. And feels it too, to say the least. There are a lot of geniuses (genii?) out there on blogs and newspaper letters pages right now, but pride, fall, all that.

[Mr. GoTo]

You took a risk and it paid off because of your timing. But whether you were smart or lucky has nothing to with the current issue. You didn't ask me or other taxpayers to take a piece of your risk. Nor did you offer to share your gains. What Obama wants me and others to do is to share the risk - after the loss - and I never had the chance to share in the gain. That's why Santelli is upset. That's why lots of others are upset. The rules of risk-taking are being changed after the game has been played and the outcome determined.

Finally, our complaints have nothing to do with the unemployed or those who are sick and disabled. Nor will Obama's plan rescue their mortgages. They have no income. No lender will extend them credit. We all feel sorry for them but they are irrelevant to your argument and mine.

[Retired Syd]

@Mr. GoTo: Whether you agree with Obama's policy for bailing out homeowners is neither here nor there with regard to the point of my post. Media commentators that have a problem with the policy should rightly direct their complaints, and any accompanying venom, to the policy makers.

The issue I have (maybe I didn't voice it very articulately), was with those same commentators vilifying all those folks that are actually facing foreclosure as irresponsible dimwits. (To be fair, Santelli called them "losers" with "bad behavior," not dimwits--I heard that one somewhere else) . I'm sure there are some irresponsible dimwits in the group, but that's nothing new--it's just that in the past, irresponsible dimwits made out like bandits just like the rest of us--and perhaps WE were even some of those irresponsible dimwits that just got away with it because the housing market did so well over the not-too-distant past.

My point bringing up the sick and unemployed is to illustrate that you could possibly have been behaving very responsibly when you purchased a home, but subsequent events such as a sickness or unemployment have now put you in the same basket. I don't think these people deserve the vitriol they have been receiving. (Again, I'm not trying to make a political statement about the Obama housing plan, simply the misplaced anger over it.)

Many smart and reasonable people are having smart and reasonable debates about the wisdom of the various bailout and stimulus plans. But I would sure have a lower blood pressure when I watched those debates if they simply dealt with the merits of the argument rather than the character of the potential beneficiaries.

[Sylvia]

I'm really glad that you wrote about this. I think the details of many of our stories are different but in the end I, too, took some chances and was lucky. My first house I even had to borrow the 10% downpayment money; $3000 from an aunt and $3000 from a friend and that got me into the market. Three years later I sold that house for double what I'd paid (I'd done lots of work inside ... myself) and over the years although I did once lose on a house mostly I've been very lucky. My plan all along was to have a paid-off mortgage by the time I retired and I was able to do that. It could have gone the other way though. Yes, there are those who were foolish and got caught in their mistake. In such tricky times I think we all need to dig deep for compassion for others and be very slow to judge. As they say ... there but for the grace of God ...

[rob]

I like the wisdom and demeanor of this post. It's about acknowledging the blessings and luck we have received in the past. And to not beat ourselves up too much when times are bad.

It's easy to be smart when times are good. The challenge is to remain smart and responsible during the bad times too. But a lot of it is just dumb luck.

Check out the book 'Fooled by Randomness' by Nicholas Taleb. It shares similar observations that you have pointed out in your post.

[LAL]

I had the same sort of luck.
http://www.livingalmostlarge.com/2009/03/05/dumb-luck/

And I don't think it's necessarily the consumers entirely. I think there are a lot of factors at work in the housing market.