Pop your own housing bubble

Is it time to downsize?

It feels like a million years ago now, but the massive real estate crash of 2008 was only a few years ago. I saw the collapse up close and personal. Well before the crash, my wife and I bought a fairly large fixer, planning to move in once the bulk of the work was complete. Part-way through, we decided we hated the place and decided to complete the work and sell it. It’s what I call our inadvertent house flip.

Once we put it on the market, we had one (ONE!) interested buyer. No one else had really even given it a serious sniff. The housing market was cooling, but a total meltdown was yet to occur. But I could tell a bomb was about to go off. I just didn’t know how big the bomb was. My heart was racing nearly every day. Even as our buyers got squirrely, we did everything they asked, even suddenly replacing the furnace just days before closing. And we survived! With our asses intact. We didn’t lose any money but didn’t really make any either. All we lost in the end was a year of very hard work. We felt like winners as we watched the house’s Zillow rating drop by $200,000. That was late 2007. I think it was close to a year later that the stock market collapsed and all hell broke loose.

So that’s how I found myself sitting pretty when the big crash finally hit. I still owned a lot of real estate with rapidly declining value, but I had equity in everything and was cashflow-positive on the investment side. Plus I was working at a stable healthcare company. While the company was experiencing a brutal income drop as workers lost their insurance, it was getting through just fine. In fact, the crash may have helped that organization shake itself out of its complacency and begin running a much more lean operation.

Fear and debt

During that time, I talked to many of my coworkers about their finances. And they were SCARED. Scared shitless. One friend had decided to let the bank take his condo back after they announced massive assessments and he realized the value was never coming back. But most folks, many in their 40s and 50s, just had that blank stare of someone who is beyond panic. I had just two words of advice for them: Shed. Debt. These were good people, nurses and techs, who would wipe up your bodily fluids without thinking twice and give you a hug on your way out. Better people than I’ll ever be. They’d worked long, hard careers, but most of them had very little financial security.

That was when I realized just how much debt people were actually carrying. It was stressful for me just talking to them. Massive house payments, car payments, credit cards, school loans and on and on and on. I had just one good friend who was on track to having her house completely paid off and wasn’t even that worried after her husband was laid off. Good for her!

That’s not to imply that I wasn’t freaked out, though. I had three mortgages I was responsible for. Would have been four if I hadn’t unloaded that other home! I had to drop the rent price a few times and had a few periods of vacancies, but really it was not that big of a deal looking back. But, still, I was pretty spooked by the whole thing. That’s why I was so anxious to get mortgage-free as soon as possible and to reach financial independence as soon as possible.

Instead of reinvesting the cash from that home sale like we should have, (DAMNIT!) my wife and I decided to finally buy the house we really wanted, leaving my starter home behind. We also bought way too much house. Too much room, a nicer view than we really should justify given our financial goals and more yard than I can maintain.

That’s not to say we don’t love it. We love our neighbors. The house is wonderful. Our neighborhood cannot be beat. But it was probably well into 2010 before we realized how much this house is holding us back. So as we sit here in our beautiful cage contemplating our pretirement, we’re rethinking things. Hopefully many of you are as well. That fear that so many of us felt was driven by our over-inflated lifestyles. The good news is that we now have a chance to restructure things so we never feel that fear ever again.

Time to pop your own housing bubble?

It occurs to me that that the real estate market has largely recovered (at least here in Seattle), that it may be the right time for quite a few people to make strategic adjustments to their housing situations. Pop your own housing bubble, if you will.

Now on one hand, real estate appreciation could mean we’re in the perfect situation. Just ride up with the market, sell at the right time and be loaded! And that might be where we end up. Our neighborhood could very likely appreciate by 10% a year for the next few years. Don’t scoff, it’s true. Right now, houses are selling on their first day in my neighborhood and prices are rising rapidly.

On the other hand, depending on when a person purchased their home, they may already have significant equity but prices in general are still somewhat deflated, particularly if they were to move to another area. But more importantly, by downsizing, a family could move from being saddled with too much mortgage and back-breaking maintenance to a debt-free lifestyle with a fast-track plan to pretirement!

As always with real estate, whether this is possible for you depends on your situation.

Let’s say a family owes $400,000 on a house valued at $600,000 and are still paying on their original loan. They could dump the giant house, buy a still-very-nice $400,000 home and be paying on a mortgage of just $200,000. And with the low interest rates of today, they could enjoy an additional boost in their savings. And using my patented mortgage payoff acceleration plan, they could be mortgage-free in just a few years! Or they could rent awhile and put all of their equity toward their pretirement funds. That invested money could even generate enough income to pay a good chunk of their rent if they were so inclined. If the house can be rented to cover the mortgage or close to it, you could still pop your bubble by renting our your house and moving yourself to a cheaper place.

Can someone without a ton of equity also pop their housing bubble? Of course! Renting a fancy apartment way bigger than you need? Move! Only have a tiny bit of equity but know you bought too much house? Works for you too! You might want to wait a bit for the market to run up a bit more, but as soon as the timing looks right, sell it off and downsize!

The bottom line is that if you’re a normal American, you are living with way more than you NEED. By downsizing now, while you can, you may be able to greatly accelerate your pretirement. It’s time for a difficult conversation with yourself (and your spouse): How much do you REALLY love your house? I figure that by buying such a luxurious home cost us at least an extra TWO YEARS of working.

What will we do? I don’t know. We’re talking about it now. We’ll be here at least another year or so and then we’ll make the decision. We may rent a cheaper place for a time and pocket the difference (our current house could rent for quite a bit). We may even keep living here awhile. And, who knows, maybe we’ll change our minds and decide to take the hit and just live out our days here. It may be a cage, but it’s a damn nice one.

In the meantime, we’re getting this place ready to sell or rent. Even if we decide to stay here at least we’ll have all these projects done!

What about you? Are you thinking about popping your own housing bubble? 

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33 Thoughts on “Pop your own housing bubble

  1. We are doing something different. We are looking to buy our forever home, which will cost more. We bought the house we have now, knowing that it would be just a started home (it was only $125K).

    However, I do not want to go to crazy. I want it to be affordable!
    Michelle recently posted…$7,641 in May Extra Income – Side Hustles!My Profile

    • Pretired Nick on June 4, 2013 at 9:23 am said:

      Yeah, that is basically how we ended up here. $600k really isn’t that much in Seattle. But we could have bought less and been even happier. Hope you find the perfect place!

  2. Honestly, we are so young I doubt we will ever buy a forever home. I don’t want to stay in one place forever. My hubby and I have both agree when we retire (preretire hopefully) we will live everywhere. Like nomads or gypsies!
    We are going to buy a house in a few months. An affordable house we can live in, build some equity, upgrade through projects, and who knows what else afterwards. In our area renting is almost as much as a mortgage. Price point will be between $125-$150K. We will have $30K down payment.
    Savvy Financial Latina recently posted…Stagnation and Politics at a CorporationMy Profile

    • Pretired Nick on June 4, 2013 at 9:29 am said:

      If you really want to be nomads, maybe you don’t need to buy at all? Although buying a place you can eventually turn into a rental wouldn’t be a bad idea for a nomad. Glad you’re committed to keeping costs down on the buying side. Keep in mind, though, that buying TOO cheap of a place can be very expensive. Get something you know you could easily sell later. In fact, maybe I should write a guest post for your site about what to look for when buying a first place…?

  3. My wife and I are renting a one-bedroom and we have a baby on the way so we definitely want to upsize and not downsize…though I agree that many people don’t need as much room as they have. Here in NYC, the housing prices are still very high and Co-ops are the only affordable option for many. They come with some downsides though. I’ve been debating as to what to do…so we’ll see…
    Andrew recently posted…$1250 and Other Freebies with Little EffortMy Profile

    • Pretired Nick on June 4, 2013 at 11:05 am said:

      Yeah, that’s a tough area. Even if we downsize, we need at least two bedrooms and really we think we need a third room to double as an office and guest room.

  4. We’re still renters. We don’t have a set location where we’d like to settle and I honestly don’t know enough about being a landlord to feel comfortable buying a home now with the intention of renting it later. Renting is working out for us now as our monthly payments are crazy cheap, which leaves us a lot of money for other things, namely savings. When we do buy, our goal will be to get something we can be comfortable in but aim for smaller. I’ve heard so many stories like this about buying too much house and regretting it. Hopefully we’ll be able to avoid that mistake.
    Matt Becker recently posted…My Life Insurance MistakeMy Profile

    • Pretired Nick on June 4, 2013 at 11:04 am said:

      Renting is a great option for a lot of people. So many of us get caught up in the desire to own a house that we lose our perspective. The trick is to figure out what you need, and keep the emotions out of it.

  5. Holy cow, this really hits home as we are in the midst of doing this now. Last year, we sold our lakefront, 700K+ home (a fixer upper too) that had an outrageous property tax bill approaching 15K/year. We moved into a 400K home. Nice, but it is still too big and we never liked the neighborhood. This Friday, we close on the sale of it. We’ll next move into a foreclosed home we bought from Fannie Mae for the princely sum of 176K. It needs a lot of work, but its all stuff that I can do myself and its in a good neighborhood. We may turn it into a rental at some point, but I don’t ever anticipate doing nuts with a big home again.
    Mr. 1500 recently posted…The Titanic and Your RetirementMy Profile

    • Pretired Nick on June 4, 2013 at 11:02 am said:

      Wow, you are like a living example of what I’m talking about! If we downsize by buying something cheaper, I don’t want it to be something that needs a ton of work. I’m so burned out on working on houses.

  6. This article brings up some great points. Many people view houses as status symbols and it’s costing them a better future trying to prove something to someone right now. My wife and I bought our starter home a few years ago and will probably move soon into something more long-term, but we’ll make sure to buy something well within our means. I want to know that we can pay it off within 15 years and could survive even if one of us lost our jobs (or chose to stay home).
    Jake @ Common Cents Wealth recently posted…Why I Canceled Our Satellite TelevisionMy Profile

    • Pretired Nick on June 4, 2013 at 11:23 am said:

      Thanks, Jake! When you’re ready to buy your next place, remember my 10-year-loan rule: If you can’t afford the payment with a 10-year loan, you’re buying too much house. Doesn’t mean you have to do the 10-year, but that should be the guideline to help you know you’re buying something appropriate for you.

  7. Great post, Nick. Although we were never underwater on our big suburbia house, we watched it drop in value by 100k in 2008, and it was traumatizing. We went from having 100k in equity to having no equity. Our “savings plan” disappeared, almost over night. We often think like you guys do too, about dumping this place for something much cheaper and eliminating all of our debt in one fell swoop. We’ll see.
    Laurie @thefrugalfarmer recently posted…Recipe of the Week: Cheese QuicheMy Profile

    • Pretired Nick on June 4, 2013 at 5:26 pm said:

      Yeah, it’s a lot harder when you do love where you live, but if it’s that or working, I’m likely to vote for the cheaper place.

  8. I think I am in about the right amount of house at the moment. Our next house, which will be our forever home may be where we need to check ourselves. My wife likes to look at very pricey homes online in her spare time and I take a peak at the list prices. As you mention, getting into those could add significant years to the work time frame.
    Greg @ Thriftgenuity.com recently posted…Tips on How to Deal with DebtMy Profile

    • Pretired Nick on June 4, 2013 at 5:29 pm said:

      You raise a really good point, Greg. We typically are pretty smart about our first houses, but when it comes to the dream house or the forever house, all logic flies out the window. Do your best to restrain yourselves and ALL your dreams will come true, not just the housing dreams.

  9. I was just reading something on Yahoo Finance yesterday that was talking about how buyers are starting to buy bigger houses again. We’d love a bigger house that had an extra room as an office, (now that we have 3 little ones) but that is simply just not in the cards for us. We’re content with what we have and will just do upgrades as we can afford them. There’s just no sense to run out and buy more than we need.
    John S @ Frugal Rules recently posted…How I am Paying for FinCon: Barclaycard Arrival World MasterCard ReviewMy Profile

    • Pretired Nick on June 5, 2013 at 8:43 am said:

      Some people do need a somewhat larger house, but most people buy more than they need. Plus it’s amazing what you can get by with. I wonder if people are starting to buy the McMansions again.

  10. Nope – we bought a reasonable sized house we could afford with no worries! 🙂
    Cat recently posted…Free and cheap tips to make your car last longerMy Profile

  11. I’m currently living in a 2 bdrm with a roommate. It’s a nice place, but it’s not luxurious by any means. I could get a few more roommates to really pop my own bubble, or move to a city with a lower cost of living. I’ve thought about it, but I think that would decrease my life satisfaction way more than the money would increase it.
    CashRebel recently posted…May 2013 Goals UpdateMy Profile

    • Pretired Nick on June 5, 2013 at 5:45 pm said:

      Yeah, I’d say you’re doing just fine, Reb. You are plenty optimized so going any farther would be creeping close to being “extreme”.

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  13. I convinced my wife to rent for many years, from before the housing bubble even started, then went up and then back down. After it went down we bought a relatively (for Bellevue, in the greater Seattle area) modest house. We timed it as perfectly as we could have. Still, it’s been a lot more expensive, on average per month, than renting was. One reason is that it’s inevitably a larger place; when you buy, you have to get something that will work longer term, even if it’s more than you need right this second. (Specificially in our case, a third bedroom for a hypothetical second child.) The other reason is that maintenance has been killing us. Problems we knew about when we bought cost more than we estimated to fix; and other problems have cropped up.

    • Pretired Nick on June 6, 2013 at 10:03 am said:

      Wow, your last point sure hits home! So many times I’ve talked myself into buying something thinking this or that would be easy to take care of. Then you get into it and holy crap the money hole just keeps growing! I’m in West Seattle — we’ll have to connect offline sometime!

  14. Good post Nick. I’d say we hit the mark with a tiny mobile home, although it won’t appreciate or depreciate much over the next few years we are in it. We’ve honestly considered buying another one if we move after the PhD. Less is more, my friend.

    • Pretired Nick on June 13, 2013 at 9:14 am said:

      Thanks, Jacob! You guys are much wiser than us, that’s for sure! Kinda sucks you won’t get much appreciation, but on balance, controlling the house-related spending will put you far ahead, I think!

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