Article By: Jim Porter – February 24, 2023
As interest rates rose again this last week with the yield curve steepened to the biggest spread in something like 40 years with the 10-year bond paying 3.93% and the six-month T-Bill popping over 5%, I was wondering what the heck I should write about today.
My first thought is to remind people who are sitting on tons of cash in the bank to make sure they move their low-rate savings accounts into higher yielding accounts. My second thought is to encourage all the homebuyers to talk to some older people who purchased homes 25 to 50 years ago and ask them if they regret buying their home.
I moved to Solano County in 1989 with my wife and four little kids from San Francisco and had to learn all about first-time homebuyers and payment shock.
First-time homebuyers were leaving the City and San Mateo County and moving to places like Concord, Fairfield and Petaluma for housing affordability. As a loan officer, from 1985 to 1989, all my loans in the Bay Area were 20% down and because fixed rates were over 10%, adjustable-rate loans were popular. With four little kids and no savings in the bank, I had to learn about VA and FHA first-time homebuyer loans fast.
I only knew two people in Vacaville, my sister-in-law and Charlie Manson. The only thing I knew about this town was the pungent smell of onions and the Nut Tree because my parents stopped there with my six brothers and sisters once per year on the way up to Tahoe for a bathroom break, an ice cream, and a TIME-OUT to stop the fighting in the back seat.
Mary and I moved here for a fresh start, better schools, career opportunities and to one day buy a house. We had to rent for almost two years and moved twice before we bought our four-bedroom house in November 1990 for $210,000 in the Meadowlands, where we lived for 28 years. I was able to get into the house with only about $8,000 out of my pocket because the seller offered me some creative financing where I assumed an adjustable-rate mortgage for $160,000 and the seller carried a $45,000 second mortgage loan for me at a 12% rate. My housing cost went from $1,500 rent to $2,150 per month including taxes and insurance.
This is called payment shock in the mortgage business.
I was a little worried, but I was sick of my landlord complaining about my kids and our pets. Home prices went up 26% in 1988 and 16% in 1989 and by 1995 the value of my house had dropped from $210,000 to $180,000 and I still owed over $200,000 on the house. I didn’t care because I really needed a home for all my kids and pets and by 1995, my income was a lot better than it was in 1990. My 401(k) was maxed out each year and I finally had some savings. I soon realized a few years after buying my house that my $2,150 per month house payment was nothing in comparison to the cost of food, clothes, life, health and auto insurance, maximizing my IRA, paying taxes, and paying for four kids in sports. I don’t have an exact number, but I am confident the kids cost me $750,000 since they were born.
The value of my house blasted upward from 1998 to 2001 and then I refinanced the house, paid off the first and second mortgage on a 30-year fixed rate mortgage at 4.5% and my payment came down to $1,700 from $2,150. I refinanced again in 2003 down to 3.5% on a 15-year fixed-rate mortgage.
I convinced hundreds of people to buy houses from 1989 to 1998 at mortgage rates ranging from 6% to 10% and I cannot think of one case where the new house payment wasn’t much higher than their rent or the house payment they had on their departing residence. Some of these people now own their home free and clear and not one of them regrets buying their home. We got spoiled in 2020 and 2021 with government-backed 3.5 % rates where house payments were only $500 or $600 more than the rent would be on the house. Now, things are back to normal, and buyers must be willing to take the payment shock like buyers have had to deal with for 50 years in California.
The time to buy is always now. Just ask anyone who bought a house 25 to 50 years ago.
Jim Porter, NMLS No. 276412, is the branch manager of Solano Mortgage, NMLS No. 1515497, a division of American Pacific Mortgage Corporation, NMLS No. 1850, licensed in California by the Department of Financial Protection and Innovation under the CRMLA / Equal Housing Opportunity. Jim can be reached at 707-449-4777.
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