Friday, April 24, 2009

starter house

This morning I learned (from NPR, of course) that more homeowners than ever right now are first time homebuyers currently renting. Rather than looking for jaccuzi tubs and vaulted entryways in McMansions, they're looking for a mortgage that they can afford if a memeber of their household loses their job. Seems reasonable, doesn't it?

In fact, one wonders how homebuyers evolved away from making affordability their #1 criteria.

Which brings me to a story of a young couple who, nearly 15 years ago, decided to buy their first house. We'll call them Green Girl and Mr. D. They were D.I.N.K.s--earning about $70,000 annually between her teacher salary and his sales commission. They'd lived in a modest 2-bedroom apartment for a couple years and had saved a down payment for their first house (in addition to monthly investments in their retirement accounts).

Mr. D had a background in banking and finance and determined that they could afford a mortgage for a house valued between $75,000-$110,000. Bearing that range in mind, our young couple scoured the classifieds. Mostly they found 3-bedroom ranch-style homes which Green Girl did not want. They enlisted a real estate agent and explained their dilemma. They wanted a character home for about $100,000. It had to be within a short drive of their jobs, in a reasonably decent neighborhood, and could not require a lot of work. In other words, they'd settle for a $90,000 home if it needed new carpets and paint because they had to have an allowance for said updates.

The agent took them around. Naturally Green Girl and Mr. D fell hopelessly in love with the first house and predictably they were outbid and lost it to another family. The attractive young couple rallied and continued their quest for their Starter Home.

(Let me pause here and explain the Starter Home. It's a house that is affordable in the short term plan. It's not the Forever House, it's an investment where an equivalent rental payment will go into Home Equity which will build up over 5 or more years enabling one to then sell their Starter Home and move into a Forever House.)

Their grand tour of Wisconsin ranch-style homes ended with an excited phone call. "It's adorable! It's exactly what you want!" the agent enthused. Green Girl and Mr. D agreed to check it out.

On a quiet street, in a regular-sized city lot stood a yellow house with burgundy shutters. The front part was the original house, added on at the back side creating 1,200 square feet. Green Girl walked through the 3-bedroom, 2-bathroom, L-shaped structure with a detatched 2-car garage. The carpet was new, the walls mostly white. The front part of the house (2 bedrooms, kitchen, dining) had wood floors! The basement was unfinished! Sure, the current owners had 2 gigantic dogs and a narsty smelling kennel behind the garage but Green Girl loved this house.

"How much?" asked Mr. D.

The agent told him a number, but he knew there was no point negotiating because his lovely bride failed to conceal her delight and determination to live in this darling house!

A week later, Green Girl and Mr. D went to a bank. They wore their work clothes, presenting their best professional appearance. They nervously waited to hear if the bank would lend them $85,000. They prayed. They hoped. The banker returned and explained that they could borrow up to $400,000 for their Starter Home.

Aghast, the couple felt sure there had been some mistake. No, the banker assured them, they qualified for a loan worth over four times the amount they wanted. Well, they explained, we want to buy some new furniture and go on a vacation once a year. We'd like to go out to eat once a week and keep investing in our retirement accounts. They left the bank taking not a penny more than they'd agreed to borrow and marveled at any fool who'd do differently.

Green Girl and Mr. D moved into their little house--at first whole rooms were empty as they saved for furniture. Eventually they bought more furniture, a lawn mower, a new car. They kept investing in their retirement accounts and paid for Green Girl's graduate degree. After living in their little house for 5 years they had a baby and Green Girl started working part-time. They made their choices based on what they could afford, not on what they wanted or what their friends possessed. In retrospect they see how that banker's offer could cloud one's judgment and make them do foolish things, dare to dream too big and risk losing everything.

Don't borrow what you can't afford to repay. Be smarter than your bank. Know your limits (credit and otherwise). Pay for your needs first, then your wants. Happily, it sounds like first-time homebuyers today understand those basic rules.


  1. Amen to that! That story sounded very much like me and my hubby.

    We are trying to sell our starter home right now and hoping a nice first time homebuyer will get off their butt and buy it already. ;)

  2. Are you channeling Suze Orman? *haha!* What a great story! I am currently renting here in Art City but would OF COURSE love to own a home of my own! I am closer now than ever to doing that but I am so intimidated by "the process" ~ ugh.

  3. You are my financial twin born of different mothers.
    Why don't we teach our children right in High School that all lenders make money off commission? Hearing that right before signing on the dotted line would certainly put their take on our spending power into perspective, wouldn't it?

  4. When we bought our first home, Pete worked for one of the major mortgage companies, so he had a good idea of what we could afford. Lo and behold, our mortgage officer told us we qualified for a whole lot more. We stuck to our original modest number and bought a house in that range.

    For our second mortgage, we again decided what we could afford -- in fact, it was less than our first house cost, but we were down to one salary, as I was staying at home with the baby. We were again told by our mortgage officer that we could go much higher, but we did not.

    For our third house, we spent an amount nearly equal to the value of our second house. We were once again told that we could go higher. This was last summer, when all indications were that the economy was going to go down the drain.


    So, like you, we'll keep living within our means and not getting too ambitious with our spending.

  5. I am SOOOO with you on this. It is better to plan on buying a house that can be afforded with one salary just in case. You just never know, as many people have recently found out.

    I hope there are more common sense bankers out there actually trying to HELP young buyers as opposed to raising their own profits.

  6. Fiscal conservatism is sexy. Am I right, or am I right?

  7. Ahhh...I loved that house! So cozy...adorably decorated by Green Girl, I might add, and lovely place where Nicole was thrown a wonderful baby shower by Green Girl. So many great memories of that house!

  8. Sounds familiar. And we've been in our "starter home" for 13 years. But we're among the lucky ones, for sure.

  9. You made $70,000 pre-kids!! Wowzers!! And looking at homes under $100,000! Again, wowzers!!!!! When we bought our first (and only) home, we figured out not what loan we would qualify for, but what our budget would allow. We could not and would not get anything more than that.

    It is so sad. I have one relative who just doesn't get it and is now foreclosing for the 2nd time in 5 years. Hello???????? Buy something you can actually afford people!

  10. What a wise young couple. Good job.

  11. We are looking for our second house and having heart attack at thinking of spending more than we spent on our first house. When we were making a combined 60K.

  12. Excellent planning and excellent advice!

  13. so simple, so logical, so well put, love your blog

  14. It all makes so much sense. How do so many people not get it?

  15. good for you! your house sounds so charming. and your story echoes mine: we paid $92,000 for this house. a modest house, an old house, a house that constantly needs work but is still livable without it.

    and when we went to apply for the loan, the mortgage officer threw his pencil across his desk and shouted, "you're way under-buying!"

    he made it sound like a crime.
    but really to have borrowed more money would have been the actual crime.

  16. Absolutely. Mr. Hot and I bought our first house together (although we had both had houses with our first spouses) after 15 years of renting just so we weren't overextended.

    There's nothing like the peace of mind it all affords.

  17. What you describe USED to be the way most Americans would react. Then somewhere along the way it seemed everyone was 'entitled' to own a home, whether they could afford it or not, whether they were responsible workers or not, whether they would pay the mortgage or not.
    Amen to being responsible and buying what you can really afford.

  18. Isn't it crazy? Our bank told us we could afford much more than we thought we could. We're glad we stuck to our own estimate! It's nice to hear that financial sanity hasn't gone out of style.

  19. I'm pretty sure the NY Times needs to run this. I sooo agree with you--how can you let your head get so clouded as to overextend the way so many have?

  20. Great story....and with one very similar, I'm 46 and my house on a very desirable street in my town (on a national park battlefield, no less) has been paid off completely for almost two years. We paid for it in ten years and didn't even use the $100,000 we made from our previous house. (I've told the story of the Landcruiser and the stock market before, right?)

    If only they would make you repeat, over and over and over.....just because they will lend you the money, doesn't mean you can afford it.

    I still sometimes go into these monster houses and, how can these people have so much more money than we do?

    Oh wait. They don't.


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