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?
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