Wednesday, May 26, 2010

House Envy

Driving to work or coming home offers glimpses of nice neighborhoods with great looking houses. I am often envious that I had decided to purchase a 2 bedroom townhouse last year instead of a 3 bedroom house. The possible price difference is about $ 40 to 50 thousand dollars. Of course it would not be a good deal because I ended up getting an interest rate of 7.5 % in an adjustable mortgage loan because I did not have a credit history. My first thought when deciding to buy that townhouse was that it was the cheapest property I could find at the time. Looking at current prices, I was able to buy at a discount perhaps of about $ 5 to $15 thousand dollars lower than current market prices.

Recently I decided to buy another house with a purchase price of $175 thousand dollars. At the last minute, the deal failed because my loan was not approved. It was a mix up because I did want to change my primary residence indicated in my loan documents. I would have lost the $ 8 thousand tax credit. At that time I wanted to purchase another home because I felt that property prices would rise incoming months. But newspapers today predict a further decline. I had thought so as well because I felt that the tax credit was artificially driving recent purchases. Despite my forecast though, I persisted in trying to buy this second home because it was a particular property I found attractive plus due to house envy.

But considering my present situation, i.e. kids going to college, single income household, wife with medical issues, it seems to be the wisest decision to buy a reasonably priced townhouse. Hence, using reason and effortful thinking plus analysis, I have made the right decision. But using intuition and effortless associative thinking, then I made the wrong decision. I guess it’s the different thinking styles mentioned in the book ‘Nudge’ explicitly seen in action in my case. The market is also showing me that I made the right decision at least for the short to medium term. At the moment, real estate prices are declining as well as mortgage rates.

The market is expected to go lower later this year once banks put foreclosed properties for sale. The supply of houses is expected to increase but demand is still not there due to the employment rate and slow job market. Some experts project that the oversupply of houses will be cleared within 6 to 8 months. The economy seemed to be picking up but recent events like the Greece bailout and economic weaknesses in the European economy had made the stock market jittery. The economy is recovering but it will take a while to become robust. Meanwhile, legislation like finance reform and health care increased government participation in the economy. The deficit is also projected to be about 90% of GDP which is a mind boggling amount.

There is a sense that the ship is in uncharted waters. Similar to the way people thought at the advent of the First World War when all the familiar guidepost or buoys have been swept away and no familiar signs exist for guidance. It’s a strange new world where reactionaries and conservatives are up in arms calling for a return to old truths that no longer work and new groups organizing like the tea party movement trying to find order in the new world. But it seems that the unending march of reform and change is so far unhampered, though with some occasional roadblocks now and again. The next reform task concerns immigration which I think can help the economy once those who are legitimized would invest in the community with more confidence. The reform may help the real estate industry in the long term.

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