Knowing when to say no

Twice during our house-buying process, I hung up on the people who were ostensibly "helping" us out. This was because hanging up was more polite than what I would have said had I stayed on the line.

The first time was when our real estate agent suggested we forget buying a house and focus more on condos. We were too fussy, she implied, and too unrealistic with our insistence that $515,000 was too much to pay for a one-bedroom house with no driveway, parking space or yard. A condo would be perfect for us, she said, letting the ... you cheapskates linger unsaid.

"We're not getting a condo," I replied. "They tend to lose value more quickly after a market's run-up, and I'm not buying something that doesn't build equity."

The real estate agent suggested that she was the professional here, I replied that I was the one spending the money, and perhaps it was time for us to take a little break while we re-evaluated our working relationship.

My second hang-up happened when our mortgage broker suggested I get over my unreasonable hang-ups about contributing to my 401(k) and wanting a fixed-rate mortgage, and just take out an interest-only mortgage so I could "afford" more house.

"Nope," I said.

"You can always refinance," he suggested.

"With what new equity?" I asked. "This market's not going to keep up the double-digit annual growth forever."

"But you can hang on for two years," he cajoled. "This is an investment."

"No," I replied. "This is where I live. My investments are someplace else. Get back to me when you can find a financing package that fits my needs."

(You might ask why we bothered to stick with these folks after the individual dust-ups. Because breaking in new brokers and real estate agents would have been too much work.)

I will not lie: after each of these calls, I stared at the phone and wondered if I had done the right thing. After all, these people were professionals with experience. All I had going was my research, my innate suspicion of anyone who tries to sell me anything, and a strongly defined set of preferences.

However, I think not automatically genuflecting at the altar of Professional Credentials is what kept us from taking a bath in the real estate market. One of the things that struck me about "Living the American Nightmare" (SF Chron, Jul 29, 07) was how many of the article's subjects were in dire straits because they trusted people in the real estate industry to have the customers' best interests in mind.

The other thing that struck me was how ill-equipped these folks were to make objective financial assessments about residential real estate. (For example, pulling money out of your equity for something other than capital improvements? Tread carefully. If nothing else, read "An ATM That's Out of Money," WaPo, May 29, 07)

This lack of financial literacy is popping up in real estate articles all over the country. Just check out "Little Kid on the Block" (WaPo, Jul 28, 07), which details condo owners' attempts to try and dump their condos in a market where the property management firms are also attempting to do likewise. Or read "Subprime Aftermath: Losing the Family Home" (WSJ, May 30, 07). Or read "For Some Subprime Borrowers, Few Good Choices" (NYT, Mar 22, 07), which begins with:

Myriam Philemond says she knew almost from the start that she and her husband could not afford the nearly $500,000 house they bought in South Boston more than a year ago.

After falling behind on payments in July, she is considering whether to turn the house over to her mortgage company because she cannot refinance and modifying her loan will not help. “We are stuck with a house that we can’t afford,” she said.

The answer to the question "Why didn't people just say 'No' to sketchy loan packages?" is not always simple. For a lot of people, I would suspect they didn't know they should say no.

How to say "no" is not part of the American consumer psyche. Saying "no" means sitting out on an activity that many use to define civic or ideological engagement. And it means that you have the analytical skills that let you assess any financial situation. How do people get those skills? I got mine from my family and from friends' off-handed comments. But we all know that friends and family can be the reason we make stupid money decisions.

I'm in the middle of reading Maxed Out: Hard Times, Easy Credit and the Era of Predatory Lenders, and what's striking to me is not that it's a better time to be a bank than to be a person but rather, how few consumers approach spending critically. I don't mean cutting coupons or stockpiling when CVS has specials -- I mean starting from the default position: Is this really worth it? How or why?

And that brings me to my final link: "I Click, Therefore I Amazon" (WaPo, Jul 28, 07), an essay decrying the fiendish ease with which one can fritter away one's money by utilizing that friendly little "Buy now with 1-Click" button. And I have to admit, my first thought after reading? Nobody makes you click that button. You can turn it off in your account settings. You can say no.

Comments

[drunken monkey]

"Also in the second quarter, DataQuick said 7,696 Bay Area homeowners received notices that they were in default on their mortgage payments -- the first step in the foreclosure process. That was more than double the 2,910 default notices received at the same time last year."

Wow.

I don't know much about the differences in how real estate and mortgage works in the United States versus Canada (except that we don't get a tax deduction with a mortgage here, I don't think), but there's got to be some of this happening in Toronto too. There's this constant pressure to buy, buy, buy, even if all you could sort of afford is a 400-square-foot condo, even if you have no down payment. I don't have a downpayment, and my boyfriend is in school; I know it's an "investment" and renting is a "waste", but I really don't get why I should plunk every penny I have into a condo that is half the size of where I live now and not what I want to come home to every day.

Now, when I can afford a house -- different story. I would love to have a house. I'm just not going to sacrifice the rest of my life and my financial well-being to get one.

[Kerry]

The thing that kills me is that the effects of subprime loans and housing boom of the past 5 years are ricocheting onto people like me who made pretty good decisions--I bought in 2001 before the boom started intending to stay for a long time, had a downpayment, made improvements, never refinanced to take out money, and if I want to sell this house in a reasonable time frame (say 3-4 months as opposed to a year), I can't expect it to sell for more than I paid for it. There are 14 houses for sale on my street out of about 80 dwellings. It's stagnant here in Cleveland, and a big part of that is due to a glut from cheap credit and bad loan foreclosures.

People do not think rationally about houses--a friend was trying to tell me she wanted to buy a place because they'll be here a while, she had no downpayment but her husband could get a VA loan, and she wanted to pay less than her $750 rent. After I stopped laughing, I told her 1) not to do it, especially with the expense of a new baby, and 2) she was smoking crack if she thought it was possible.

[Polly]

I think not automatically genuflecting at the altar of Professional Credentials is what kept us from taking a bath in the real estate market.

My dad is a pretty savvy stock investor, and he has smacked down more Qualified Investment Professionals than I can even count. There is NO substitute for educating yourself and sticking with what you're comfortable with, and even then you have to keep track and make sure they're doing what they are supposed to. A fellow at their church lost his retirement savings because he handed a wad of money to a Qualified Investment Professional and told her that 1. he didn't know anything about money, 2. he didn't want to know anything about money, 3. she should do what she saw fit. (She saw fit to rip him off, of course.) Even the honest ones tend to just be fools for the latest trend ('cuz EVERYONE'S maxing out their credit in THIS market--you'd be an idiot not to!), and all too often they take this one-size-fits-all approach to money management.

[Polly]

Sorry to double-post, but I was thinking about this some more today, and I think the reason perhaps that people don't think to say no when it comes to financial services (including mortgages) is that they don't think of themselves as consumers. They think, "Oh, this person is willing to give me money--sounds great!" not "Oh, this salesperson wants to sell me a loan--do I need that? Can I get it cheaper elsewhere?"

[Lisa S.]

Polly, I think you're right.

It is sort of mind-boggling that we are a nation that will shop at Wal-Mart lest we pay 50 cents more for a jar of spaghetti sauce, yet we don't view mortgages, car loans and credit cards with the same gimlet budgetary eye.

[Polly]

Penny-wise and pound-foolish, eh?

I suppose it's because of the emotions involved, Lisa--no one dreams of buying a can of spaghetti sauce, but people dream of owning a house, or owning a dream house, or doubling their money in five years without having to lift a finger, just hand that sack o' cash over to this trustworthy fellow here and he'll get back to you (my dad actually got that pitch recently). You dangle something in front of someone that they really want, and they're not so likely to ask questions--especially if doing so means that they won't be able to get that thing.

[Amanda]

First of all, "La, la, laaa, I'm not listening to you." Because, we just bought a house and it's scary.

Secondly and obviously, buying a house is far more complicated than buying a can of spaghetti sauce or even buying almost anything else in life. And, unless you regularly buy and sell real estate like so much spaghetti sauce, then you are probably learning about it for the first time and ignoring all the information that we are bombarded with (housing prices soaring! housing prices plummeting! it's a buyer's market! buyer beware!) is near impossible.

We were pushed pretty strongly to consider an interest-only mortgage, fixed-rate. It would improve our cash flow in the short term but that was really the only very strongly positive thing about it. Everywhere we looked we read about how we should never consider this option. But, we considered it (and did the math ourselves). And we decided that it really wasn't necessarily the "Dark Lord" option that others make it out to be (an interest-only, ARM would be). However, ultimately, we would pay more for the loan in the long run and, of course, we wouldn't be building that equity in a progressive way. And very ultimately, my father-in-law was strongly opposed and if we get into deep water financially he's the one who would have the means to bail us out. We told that to our broker and he said, "Well, can't argue with that." So, yet another piece of the puzzle which doesn't have much to do with one's personal financial picture.

I am much more savvy about personal finance than I was even five years ago but I'm no guru and I think buying a house is daunting to say the least. It's hard to know who to trust and if you don't have your ducks in a row then you're going on gut or hope which is a bad footing in real estate. The really scary thing for me is that only time will tell if we bought the right house at the right time and for the right price. And, if our incomes don't rise the way we expect then we'll maybe have wished we did things differently. You can't predict everything.

[Kerry]

It's also because Americans (huge generalization, but hey) don't like to think/confront people that may be ripping them off. I generally assume 2 things moneywise--people can't be trusted and are trying to screw me over AND I can't afford anything over $20. It mostly works as a way to keep me out of trouble.

[Lisa S.]

The really scary thing for me is that only time will tell if we bought the right house at the right time and for the right price.

Oh, no doubt, Amanda. We still get the wiggens over our decision, and that was nearly two years ago. I still check the going house prices/sale prices in the area just to make sure we're not digging ourselves into a hole. And I read articles like this with bated breath before reminding myself that our situation is much different.

I'm not discounting the emotional aspect of home-owning at all. I'm just stricken by how difficult it can be to recognize that sometimes, the only way to make your dream come true is to assess it dispassionately and analyze all the factors and obstacles you'll be dealing with along the way.

[jm]

Oh, amen, amen, amen. Great post. I had these same fights with my agent and broker in 1998 with my condo and in 2003 with this house. Thank goodness I am so stubborn about being cheap and hating to pay interest. I have dear friends who are struggling because they went with the adjustable mortgage...makes me terribly sad.

[Ky Eliza]

One of the reasons I find the mortgage thing so difficult is that, even though I have been reading article after article and information piece after information piece, I STILL don't get the points and rates system. Perhaps this is part of my math block in general, but I really wish I had someone who could sit me down and say, "This, this and this is what needs to happen for this, this and this to be worth it." None of the articles I've read seems to do so; they're all filled with dire predictions and warnings.

I've learned enough to know what NOT to do, but I still haven't a clue what a good deal is and am unsure how to navigate those waters. It sucks that I have to read sentences about percentages and rates and points over and over again to get the basic gist-- and I still don't think I have the basic gist. I'm not a stupid person, so I can see how so many Americans got taken advantage of in that real estate boom. Thankfully, I am learning from that and trying to educate myself on this stuff so it won't happen to me.

[Polly]

Ky Eliza, rates are just the percentage annual interest on the loan. So using the example listed in my Complete Idiot's Guide to Buying and Selling a Home (which I bought along with Home Buying for Dummies before I bought a home--both were helpful in terms of familiarizing me with the basic process), if you had a 30 year, $100,000 loan at an 8% rate, you'd pay $733.76 a month. That same loan at a 13% rate, and you're paying $1,106.20 a month. In short, a high interest rate is bad--it means you're paying the bank more for that loan, and if the rate goes up (which happens with some mortgages), all of a sudden your monthly payments are a lot higher than they used to be.

So what are points? Points are an up-front payment you make on the loan. Each point is equal to 1% of the loan--so in this case of the $100,000 loan, 5 points would mean that you have to come up with $5,000 at closing (which means it's really and truly a $95,000 loan). Typically a loan with more points has a lower rate, but of course you need to do the math to figure out 1. whether or not you can come up with that money up front, 2. whether the lower rate is good enough to make paying points worthwhile, and 3. if it wouldn't be better just to go get a loan for the smaller amount. Also according to the CIG, points are usually tax-deductible, but that's tax law, so you know, it's best to check and make sure it hasn't changed.

[Polly]

And double-posting again--when I said the loan is "really and truly" a $95,000 loan, I mean, that's what you're left with after coughing up $5,000 in points. The loan is still a $100,000 loan, and you still owe the bank $100,000. You're buying down the rate when you pay points, in other words, not paying back the loan.

[Amanda]

And isn't it through the points that your broker (if you're using a mortgage broker) is getting some amount of payment? (Paid for all that wonderful advice!)