Financial Failures On The Way To Early Retirement / House Value

2010-05-08 - Spring New House.jpg (3)

While we really love the house we live in right now, financially it certainly falls into the category of financial failures. When we designed and built it, we thought we were being really clever, but I don’t think we could get back for it today what we paid for it almost 7 years ago.  Here’s the story – one of a series of financial failures that I have been posting over the past few weeks based on a reader request …

We got the idea to build a new house about eight years ago.  We had designed and built one in the year 2000, and really enjoy the process of designing a living space and seeing it come to life.  It seemed like the perfect time for us to do so as the housing market was collapsing in 2008 and builders were having a hard time.  Concurrently, since I was working for a food company, our own fortunes were relatively protected from the hurt in the overall economy.  People gotta eat.  While the stock value for 495 companies in the S&P 500 declined in 2008 – by a painful average of -40%  – our company continued to grow and I had stock options that had to be exercised.  What a perfect inflection point I thought!

Our first challenge was to sell our old house.  We put it on the market and it took about 5 months to find a buyer.  We discounted the price a couple times before it sold, but also pressured our builder to come down by the same percentage on the price of our new home.  Since we were buying more than we were selling, that worked out pretty well.  Our old house still sold for more than we had originally paid for it.  It was up maybe 15% once you factor in the cost of improvements we made – including finishing off our lower level.

With that house sold, our focus was now on our new house: much bigger, much higher quality finishes, and much greater cost.  Still, this was truly our dream home and we broke ground in spring 2009 and moved in about Halloween.  It was beautiful and we were quite happy with the overall process that had us moving in on-time and on-budget.  The longer term financial implications of the move were still a bit unclear.

Financially, the hope was that the market had bottomed out at the price that we had paid in 2009.  Unfortunately, 2009 wasn’t the worst of it – especially in the luxury home segment – and the value of the home (on paper) continued to decline.  Looking at comparable properties in our neighborhood, I would say that values dropped 33% over the first 3-4 years we lived in our house.  That’s big money.  Although there has been some recovery, after almost 7 years in the house, prices are still not quite what we had originally paid.  I would say that they are probably still 15% below what we paid.  It is safe to say that this is by far the biggest financial mistake that we ever made.  The mistake is magnified by the opportunity cost of not taking the money we had and investing it in the stock market (with has grown 2.5x since we broke ground).

It would be easy to chalk this up to bad timing alone.  It certainly was bad timing.  At the same time, there are a number of other factors that have worked against us.  First off, building a NEW house is expensive. You pay for the premium of getting everything exactly the way you want it and the next person to move in probably won’t pay that same premium.  Second, demographics are changing real estate dynamics in this country as the boomers get older and downsize, while at the same time Millennials are holding off on getting married and buying a house.  Since ours is a big single family house and there are less people looking for that right now.

There are currently 4 houses for sale in our development (out of ~50 houses).  Several of them have been on the market for quite awhile at this point (5 months+), so I am concerned that they are priced too high for the market.  If they sold for ‘full ask’ they would get the neighborhood back in the range of what we had originally paid, but I am guessing they will have to come down in price first.

The good news is that houses are unlike many other investments in that you get to live in them and enjoy them every day.  Even today there are few things that we would change in the house and we love living in our neighborhood in our city (which has ben featured as one of the best places to live in the USA).  We expect that we will stay in the house at least another 4 years while our son is in college.  I am looking forward to really enjoying our house over that time horizon and maybe home prices will fully recover and we can at least get our price back.

What’s your home situation look like?  Sitting well financially?

Image Credit: (C) MrFireStation.com

32 thoughts on “Financial Failures On The Way To Early Retirement / House Value

  1. I would classify our home as one of our financial mistakes too. Not on the initial purchase, We got a great purchase price, but began to go south with a 2nd mortgage to perform home improvements. I really wish I didn’t do that. We are a bit underwater currently.

    Liked by 1 person

    • We have added some $$$ to our house over the years, too — a screen porch, a lot of built-ins (including a full office), a bar, and a extra couple rooms downstairs. I’m sure that puts us even more upside down.

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  2. We purchased our home in 2010 and the value has remained pretty flat. We’re not to disappointed in that because we’ve always viewed it more as a residence than an investment, and we’re not moving now. And we bought after the bubble burst–for a lot less than the previous owner paid, so at least we didn’t take that hit.

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  3. We are 11 years in and the house is paid for. We put in some major improvements and we’ll get the money back out buy not much appreciation. We’ve enjoyed it though! We are planning on downsizing next year into one of our rentals if all works out. Just getting the planning going now. We live on a dead end street with a huge park in the backyard. We also have an inground pool. That may deter some buyers but we think our position near a school will help too.

    Liked by 1 person

    • We had a similar set-up in our last house. It was on a park at the end of a cul-de-sac. We built it in 2000, could have had it paid off in 2009 (when we moved), and financially should have stayed there. That said, we love our ‘new’ house and reached our FIRE goals early. All’s well that ends well.

      Liked by 1 person

  4. We purchased our home in 1994 as a fixer-upper. Over the next several years we added a second floor and modernized the layout (it was vintage 1958). I know we couldn’t afford our house today (especially since we are retired), but I would say that it was a great investment. We have a lovely view, incredible neighbors, and a home that works for us (at least until we can no longer handle having a master bedroom upstairs – hopefully many years away). We’ve talk about moving to a smaller town but it would be hard to justify it financially – our mortgage and taxes are so low compared to homes bought more recently. Downsizing for us wouldn’t necessarily mean saving money.

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  5. I would say we had a financial failure when we built a house in 2008, we were amongst the first 15 or so houses in our development. Our house looked like a typical ranch from the outside but boasted a lot of upgrades on the inside, plus a 4+ stall garage. We also spent a lot of $$ landscaping it completely. Fast forward 4 years, we sold it b/c my husband got a different job in a different city. Since there were several spec homes that had the same square footage as us, our realtor advised us to list at a certain price (which was below what we had into the house). We sold our house in 5 hours…our financial failure was not sticking to our guns and telling the realtor to shove it (but in a nice way :)). We bought another house in our new town in a great neighborhood, for a great price, however the garage space is small, so we are renting a storage unit for my husband’s old cars. This is financial failure #2, and totally my fault. Needed to get out of my mother-in-law’s house. Now we are looking at adding on, which we probably won’t get back out if we sell, but it will really improve our life. We are completely debt free, so it would make sense to add on with cash, instead of getting another mortgage to buy a bigger house.

    I think if you are staying out then it’s worth the money, sunk costs, and not much you can do about. You’re obviously doing well financially. 🙂

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  6. We just moved into a new home, we took a model and made slight modifications and did a lot of work ourselves to keep the cost down. I don’t know where we are sitting at the moment, the property values around Minneapolis are crazy right now.

    You same situation happened to my parents, the built a few years earlier than you and are just above even up finally.

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  7. I’m in SF Bay Area. Homes go up as fast as the stock market here. I thought they were expensive in the 90’s but they keep going up ~10% a year, every year. My little shack has increased in value more than 2.5x from when I bought about 12 years ago. No way would I buy it at today’s prices.

    I sold some Minicorp stock to buy the house. Minicorp outperformed the stock market many times over. That quantity of sold stock would be worth 15 million today so buying the house was still one of the worst moves (financially speaking of course) for me, even at the ridiculous appreciation rate of 10%.

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    • Wow – those numbers are insane! Both the annual appreciation on your house & the opportunity cost of selling MiniCorp early. I read somewhere that Silicon Valley accounts for two-thirds of all of the wealth creation in the world over the last 25 years.

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      • There has also been a flood of Chinese investor money pushing up real estate prices the last few years.

        I keep wondering if real estate here will come crashing down, but like I said, I’ve been wondering that since the 90s. During that time, we had the dot-com crash and the financial crisis. Hardly registered a blip.

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  8. Oi. Housing is so hard to time! If you love the home, it doesn’t matter because you made it anyway! 🙂 I only plan to purchase another home if it’s something I can see spending a long time in. Until then, we’re sticking to our fairly small house.

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  9. I’m not sure yours were a total financial failure. Yes, compared to stock market investing you may be right, but you’re living there and enjoying the house every day, with no plan to change. Who cares what’s the paper cost of it if you plan on living there forever?

    Anyway, on a smaller scale I did a housing mistake too (here’s documented: http://retireinprogress.com/mystory6/) in year 2010. After housing market collapsed and apartments in the area where I was looking for lost ~30% of their value, I managed to buy a property that lost another 50% in last 6 years…

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  10. I’m not sure yours were a total financial failure. Yes, compared to stock market investing you may be right, but you’re living there and enjoying the house every day, with no plan to change. Who cares what’s the paper cost of it if you plan on living there forever?

    Anyway, on a smaller scale I did a housing mistake too (here’s documented: http://retireinprogress.com/mystory6/) in year 2010. After housing market collapsed and apartments in the area where I was looking for lost ~30% of their value, I managed to buy a property that lost another 50% in last 6 years…

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  11. I’m not sure yours were a total financial failure. Yes, compared to stock market investing you may be right, but you’re living there and enjoying the house every day, with no plan to change. Who cares what’s the paper cost of it if you plan on living there forever?

    Anyway, on a smaller scale I did a housing mistake too (here’s documented: http://retireinprogress.com/mystory6/) in year 2010. After housing market collapsed and apartments in the area where I was looking for lost ~30% of their value, I managed to buy a property that lost another 50% in last 6 years…

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  12. I blog often about how much I hate my mortgage (I do, I do!), but our home hasn’t been a bad investment entirely. We got in at the right time and found a really motivated seller. He was in the middle of a divorce, raising two teens, and his first deal fell through the day of the closing. Turns out, that’s the recipe for getting a good deal. We bought in an area known for its school district, and the property values keep going up, up, and up. So do my taxes. Ooof. Your home is lovely! I can only imagine the inside!

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  13. Probably reasonable. We bought in 1999 just before things started to really take off and get completely out of hand. We have not done major upgrades other than the necessaries but keep on top of all things maintenance wise. Valuations are hard to gauge until you get an appraisal, which we are not at just yet. I would imagine based on Zillow, other sales in the neighborhood that our home would sell at 50-60% higher than the price we purchased. Not great given the time span but not a move in the wrong direction either. Of course we have a small mortgage now given the time we have been in it.

    When we hit FIRE, we move to our mountain home which has no mortgage and is valued at 10% more than we purchased 3 years ago. That home will be our family home for some time, based on our current FIRE plan.

    Liked by 1 person

  14. You might consider your housing situation a financial failure but at least you didn’t make any bad decisions. If only we could time the market and predict the future!

    In our development they’re still building. Our phase should be completed by the time we sell. And our model is desirable, but no longer being built which is a plus. Still, we’re just looking to break even. If we do better than that we’ll be pleasantly surprised.

    Liked by 1 person

    • Well, we did decide to move when we didn’t have to. On top of that, we thought we were being so SMART and timing the market effectively. As they say, “Man plans. God laughs.” Or, maybe the Devil. 🙂

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  15. Having lost about a quarter million dollars overbuilding at the peak, then selling after a hospital bankruptcy left the town with few potential buyers, I know the pain.

    Most people I know who built their “dream home” eventually wishes they hadn’t dreamt so big. I sure do. It was an expensive, but important lesson to learn.

    Best,
    -PoF

    Liked by 1 person

    • Yes – dreams are expensive, aren’t they. We still enjoy living in our white elephant- and many of our friends wish they had our problem: a giant luxury home for two people to live in.

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  16. I really like that you shared your thoughts on your home/wasted financial opportunities because you chose to put that money towards a nicer home. Thankfully you haven’t solidified any losses unless you sell – there is still plenty of opportunities/potential in your housing investment!

    I’m hesitant to think of a home as a “waste” of money, the specifications that you picked for your home you’ve enjoyed every single day.. Money cannot buy certain experiences, but if you can spend a little bit of money to make your home work the best it can for your life and be a “happy place” for you, well maybe it wasn’t the best financial investment but it was an investment in the enjoyment of your life – I think that might be more precious at the end of the day. Considering you guys have some other fantastic financial choices up your sleeve, you’re definitely allowed to enjoy a higher expense on your home.

    Though on the other hand the points you’ve outlined here are some of the reasons why we haven’t yet bought a house, having a huge chunk of cash sitting idle on the place we live wouldn’t be working very hard for our future.

    Jasmin

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  17. Pingback: Financial Analysis: The Single Decision That Keeps People From Retiring Early | Mr.FireStation

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