My Housing Story - Part 3

This is part three in a five or six part series recounting my California home ownership experience. For the first two installments, see:

• Part 1 - The newlyweds and the new house (1989-1992)
• Part 2 - Becoming a renter and a landlord (1993-1994)

Part 3 - The new purchase and the lucky timing (1995)

After a few months as renters in tony Westlake Village, California and one horrifying morning during the 1994 Northridge earthquake, we began looking around to buy another house.

Our home in Palmdale had lost about a quarter of its value by this time - we were upside down by tens of thousands of dollars with a negative monthly cash flow, but we were ready for more.

We had no idea at the time, but, as it turned out, the middle of the 1990s was the bottom of the last Southern California real estate cycle. As a result of the Savings and Loan crisis and layoffs in the aerospace industry, foreclosures had soared and home prices had plunged.

Like most people, we were pretty much clueless about real estate cycles and didn't really wonder why the previous boom had gone bust and what the future might hold for real estate prices.

Like most people, we just wanted our own home again and we were ready, willing, and able to buy - the nesting instinct is very powerful for women and advances in power tool technology had turned an entire generation of young men into Tim "The Tool Man" Taylor wannabees.

In Ventura County, California what used to cost $400,000 back at the peak in 1990-1991 might have went for $300,000 in 1995 and what used to fetch $300,000 might go for only $200,000.

With a combined income far above the household median but still shy of the six figure mark, we were again looking at something priced at about three times our gross income which put us in the mid-$200,000 range.

Sounds quaint, doesn't it? Three times gross income. The mid-$200s.

The down payment options at the time were 5 percent or 10 percent, which translated to about $12.5K or $25k - a large chunk of money at the time. As we quickly found out, if you only put 5 percent down, the interest rate was a little higher and the debt service to income ratios more stringent because the bank was taking on more risk.

There were no such things as piggy-back loans at the time or we surely would have used one - we just wanted out of our rental and back into our own home.

After an hour with a mortgage representative we found out that we just couldn't get the numbers to work for the house that we wanted with the loans that were available. A five-year fixed at 7.75 percent was the most affordable option, but we just couldn't fit our new monthly debt service into the percent of gross income that the loan allowed - 28 percent PITI/42 percent total.

The mortgage rep said, "Sorry, I just can't do it".

That sounds quaint too.

So, we ate hotdogs and some Top Ramen, watching every penny, and came back with a bigger downpayment six months later.

We ended up buying a brand-new, two-story, 2,300 square foot home in a half-completed housing development in North Oxnard near the golf course. There were acres and acres of empty lots on one side of us, acres and acres of two and three year-old homes on the other side of us, and brand new empty houses for sale up and down our street.

The 15 or 20 new houses on our street stayed pretty much empty and for sale for a few years - once every few months, someone would move in.

We still didn't really have a clue, but, we did have our new home.

We had made what would turn out to be the single most important financial decision that would benefit the rest of our lives and we had no idea at the time.

The oldest investment advice in the book is to "buy low and sell high", but, until recently, most homeowners never viewed their home as an investment.

Some people got lucky, others didn't - people bought homes when they got married or when they moved and they sold them when they got divorced or were transferred.

It's probably better that way, given what's happened in the last couple years.

For decades and decades, all throughout the 20th century, when you wanted to buy a house you'd go out and buy the biggest one that the banks would let you buy.

This made the process simple and worked superbly up until about 2002.

Soon after we settled into the new place, our tenant in the Palmdale house informed us that she had been laid off from the bank where she worked and that she and her daughter were moving to Las Vegas in the hope of a better, more secure future.

The negative cash flow for the old house was about to increase sharply.

Next up: Part 4 - The short sale and the lucky tax breaks (1996)