What Made CSG Believe There is a Housing Bubble

In my earlier housing bubble post I mentioned I’d tell my story about housing and why I came to believe there is a huge housing bubble in the U.S.

In 2001, after 15 years of saving, I bought my first home in Sterling, Virginia.  I was thrilled!  A two bedroom, 2 and 1/2 bath, end-unit townhouse!  I thoroughly checked out the neighborhood, checked with the local police and stalked the place late at night and on the weekends and while it seemed more in the category of lower middle-class it seemed fine to me.  It was very diverse which I’ve always loved.  I’m not comfortable in snotty neighborhoods.  When I lived in NYC I always lived in very diverse neighborhoods and it was terrific.

Things began to change about a year after I moved in.  My immediate next door neighbor moved  and a young family moved in next door.  Three kids at the time and they rented the basement out to a woman and her three teenage kids.  None of it bothered me at first.  People have to find a way to get by, right?  In NYC often 4 young coworkers would share a 500 square foot studio.  It really was no different in my mind.  Slight worry crept in when the wife told me her husband didn’t have a green card but got a loan anyway and they had to rent the basement in order to afford the mortgage payment.  But I thought, whatever, people have to get by.  That’s what I was doing, I was just further along in life then they were, made a little (and I mean a little) more money and had less mouths to feed.  Good enough.  But I did wonder:  how did an illegal immigrant get a loan from the bank?  I practically had to give a DNA sample to get the loan I did a year earlier.  Still I didn’t give it much thought.  More power to them, they were much younger than I and with that house they could get ahead in the game and do well for themselves.  The American dream.

Sadly the neighborhood became overrun by similar financial situations.  Time after time young couples would tell me that their realtors would give them a worksheet that detailed how they could afford the payment:  they could get into an interest only mortgage, rent the basement out and sell in a couple of years for up to 100% profit!!  “Real Estate never declines in price”  they were told.

I must admit I was thrilled when my house increased value.  I figured that with those kind of increases the bad elements of the neighborhood would be weeded out and I would live there forever.  It had everything I needed, most importantly a comfortable room with its own bathroom for my Mom and Dad should they need to come and live with me and I had a bit of equity built up.  Great!

Unfortunately the neighborhood got worse.  To try and get more involved and change things for the better in my community, I became a member of our HOA board.  I found out that a large majority of the town-homes were now owned by investors.  These investors didn’t care who they rented to.  Most of the homes were packed with people.  Again I have no problem with people doing what they need to get by, but when you pack a home with people who don’t know one and other and the place is just a place to crash and take a shower, you can imagine the care that is not taken as far as cleanliness and general regard for the overall environment.

What is worse the notorious gang MS-13 moved into my neighborhood.  We had a horrendous situation with the county zoning board when they moved into a rental on my cul-de-sac.  It took eight months to get them evicted.

Back to my immediate neighbors who I mentioned earlier.  What a nightmare.  I’m not going to go into too much detail except to say that when you can’t afford to pay the monthly nut on your own financially that puts you in the position of compromising in one way or another.  In their case it was not fixing the broken down AC (not a big problem if you are clean and take care not to let mold build up in your house) or the broken sump pump in your basement (which will lead to further mold and structural problems because of moisture build-up.)  This couple was young and had a bunch of kids (a fourth was born during their tenure there) and really hated one and other in the first place.  The fights were non-stop and after about three months of their living there the cockroaches came.  I had to have my house sprayed monthly to keep them out.  The neighbor on the other side of them experienced the same problem.  I paid for them to have their house sprayed.  My bug guy (Bill the bug guy) told me that the filth in their house was so horrific that he would have to spray their house every two weeks for a year to kill off the bugs.  I would have to have my house sprayed every two weeks for the first two months (to prevent the bugs from flocking to my house because of him spraying in the neighbor’s house) and then monthly after that.  I paid for their first three months and told them they would have to pay for it after that.  They didn’t follow through.  Bill the bug guy advised me to get out.  But I kept thinking that prices were going up and the neighborhood would get back at least to the state it was in when I moved in.  I also thought for sure that my neighbors where not long for home-ownership as they were constantly in trouble with the HOA for not paying their dues.  I figured they would be out sooner rather than later.  It only came to a head shortly after I put my house on the market in ‘05.  The big fight occurred and he kicked her out.  His mother is very religious, an Evangelical, and a realtor from her Church floated him the $$ to clean-up the house.  They had to use bug bombs that required me and the neighbor on the other side of them to get out of the house for two days.  They had to do this THREE times!  He told me there was urine, feces and blood everywhere in the carpets and on the walls.  We could all smell the stench emanating from the house.  It really was the most horrible situation you can imagine.  This realtor was an answer to MY prayers.

So how does all of that relate to my epiphany about the housing bubble?  My neighborhood became one of the worst in Northern Virginia because of loose lending standards.  That first dawned on me with my immediate neighbors.  They never should have been given a loan because he was not a legal resident and she didn’t work.  They were raked over the coals by a gross interest rate so they couldn’t even afford the mortgage in the first place.  Thus neglect (although I think their problems were bigger than just that) of the property.  This happened all over my ex-neighborhood and was not the only reason for the real estate run up.  Investors flipping homes were part of it also.  They would buy, rent for a year, and flip for a huge profit.

This was confirmed to me not only by dealing with my neighbors but by being on the HOA board.  I knew how many people were behind on their dues and what the sales and turnover rate was.  I saw a majority of homes bought and sold three times during my time on the board; all for a new coat of paint, some new appliances and a promise of bigger profit.  It was unreal.

In early 2005 my Dad really pushed me to sell.  He has seen real estate bubbles before and had witnessed the state of my neighborhood deteriorate yet the prices skyrocket.  It didn’t pass the smell test for him and he put strong pressure on me to sell.  The neighbor/neighborhood situation became so unbearable I finally did.

Prices in that neighborhood, shitty as it became, went up 200%.  Does that make any sense at all? 

Further, the house that I am renting, based on what I am paying to rent it, would have to be priced at 1/2 of the price that my landlord purchased it for last year for the mortgage to be equal to what I rent if for.  Does that make any sense at all?  Fundamentals are completely out of whack and affordability is at an all time low.

My Dad has always said that you should never spend more than 30% of your income on your rent or mortgage payment.  In D.C. you’d have to be making 150k to live in my old, crappy neighborhood.  Believe me, no one there including myself made even half of that, not even close to half of that in my case.  Does that make any sense at all?

This is just my take based on what I’ve learned.  Do your own thinking CSGs but I’d recommend a couple of sites to follow, here, here and here (this one especially for DC people.)

CSG

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