Understanding the housing market

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A house I owned was foreclosed in 1996. I blamed the real estate market cycle, I blamed supply and demand, and I blamed the lenders. It took a while for me to realize that I was also to blame for the loss.

This experience leads me to understand and empathize with those who are engulfed under the current real estate doldrums.

Here’s my story.

My wife and I are originally from the Philippines. We immigrated to America in March, 1973.

Renter

The brick, four story building we rented in the Phillips neighborhood is still standing. We just loved the place for all the amenities: location, location and location. It was near to everything my wife prefers – hospital, church, stores and on the bus route. Don’t anybody ask her why proximity to the hospital is preferred. She has the answer: “What if you got into an accident or get sick afar, you’ll be dead before you reach the hospital.” The bus route was first on my preference list because I have to commute all the way to St. Louis Park to work.

It took me six months to buy my first car. I did not know that I could have bought one earlier because car financing was not usually practiced in the Philippines at that time. Our next move was to save for a down payment for a home. The American dream was with us at the outset.

Tough luck. It was hard to save because we were using credit on most purchases. To top it all, we have no health insurance when our only child was born. We paid for all maternity expenses.

I worked nights after the baby was born and continued to do so when my wife went back to work and our kid went to school. It was then that I found a day job with the Minneapolis Public Housing Authority. I held on to the night time job and worked 16 hours per day for the next four to five months to save for the down payment of the house.

Homeowner

We found our (three bedrooms, one and a half bath, two car garage rambler) home in Robbinsdale, near the North Memorial Hospital, Saint Margaret Mary Catholic Church, Montgomery Wards store and the bus route. We were so happy to own a home at only two hundred dollars more than the rent on the old apartment. What we failed to anticipate were the extra expenses on maintenance, appliance repairs, services and other activities in home ownership.

The first appliance to give way was the washer. A broken belt first, followed by an alignment of some kind until it completely stopped working. Next, the water heater leaked because it was simply old. Later the central air conditioner failed two weeks after the garage door opener quit.

No, the stove and the oven did not give us any problem in all twelve years, although these were used almost daily.

Two major activities reserved for homeowners are upkeep of premises and snow removal. In the summer time, I loved to do my lawn on week ends, which gives me justification to barbecue besides. I did not mind snow removal either – I thought it was good exercise. Later, however, I got really tired of snow shoveling. I was not sure whether I was getting old or just being lazy.

Losing My Home

To compensate for the extra expenses associated with homeownership, I sold real estate on weekends. It helped us so much that I bought a new house using my commission for down payment with the intention of selling my older home. The older home, however, did not get sold because there were too many homes for sale in the market. It was the start of a downward cycle. I was not able to make any sales for so long a time. This led into a tight financial situation for me. I applied to borrow funds from my 401K at the office to pay for two mortgages and my share of my daughter’s tuition at the University of Chicago. The application was denied. In panic, I opted to retire early.

Although I went full time into the real estate business after retirement, I made no money because the housing market went from bad to worst. Without a real job and unable to pay for two mortgages, I lost the new house in foreclosure.

Lessons Learned

Although the foreclosure occurred during a severe housing crisis, the loss could have been prevented, had I not made two grave mistakes. The first major error was buying a new house before disposing of the old one. I could have sold the original house contingent on buying a new one. My second, and bigger, mistake was opting for early retirement. I could have exhausted all avenues before quitting on a well paying and stable job.

Sub prime lending

A new financial product called the secondary market (seconds) became popular with lending institutions. Seconds are bundled packages of real estate mortgages accepted into the securities market. The homeowners receive a notice from the original lenders that their mortgage was sold and that next monthly payment will paid to new owners under the same terms and conditions. The value of seconds in the market is determined, in part, by interest rates of the package. Buyers with better credit (as per credit report) pay lower interest than those with bad. The practice of lending to high risk (lower credit score) borrowers is sub prime lending.

Many believe that sub prime lending exacerbated, if it isn’t the major cause of, the current real estate debacle.

Renter, again

Now I live across from the Minneapolis Central Public Library (MPL), where I do my reading and internet access. Sundays and Mondays, the MPL is closed, so I commute to the Southdale library when needed. The apartment does not have enough parking spaces and the continuous rises of the cost of gas were enough reasons to dispose of the car. Luckily, the place is on the bus routes and only a block off the railway transit.

Praise the Lord; I have a roof over my head.

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