“Cautious Buyer” asks this question on my post the other day when I referenced that my first house had a rate of 11% during the comments:
“Do you think a young couple with similar jobs could buy the same place in Tacoma today? How about 1 year ago today?”
Then
My first house was a rambler in northeast Tacoma. It’s a 3 bedroom with 1 bathroom and a galley kitchen.
At barely 1000 square feet, it suited my boyfriend and I just fine. We liked the 7,500 yard with fruit trees and two car garage with RV parking. We purchased the home in the summer of 1988 for about $68,000 using minimum down FHA at 11%.
- 3% down = $2,040
- Estimated mortgage payment (PITI) @ 11% = $765
At the time, we were both 21 years old. I worked at in the title insurance industry as a “home equity title rep” and my boyfriend was a bagger/meat room cleaner for a large grocery store. Our combined income at that time was about $34,000.
- 34,000 /12 months = 2,833 monthly gross incomes x 28% = $793. (We were barely below the recommend “front ratio”).
- 2,833 x 43% = 1218 less our mortgage payment of 765 = $453 for maximum allowed monthly debt.
I didn’t have a company car yet and so I’m sure we were pretty close to using the maximum allowance when we qualified for this mortgage. Plus, I began receiving offers for credit cards at 18 years old. I think I was the first girl in school to get a Nordstroms card (I haven’t had a Nordie’s card in YEARS. I was young and naive when it came to credit. I managed to pay our bills on time but did learn the hard way…I digress).
Now
Current guestimated value of my first house is around $220,000. I verified this with ARDELL and it happens to be fairly close to what Zillow is zestimating as well (Zillow is a little higher). This is assuming it has been updated along with the rest of the neighborhood.
- 220,000 x 3% down payment = $6,600. Assuming the seller is paying closing costs.
- Base loan amount = $213,400 plus upfront mortgage insurance @ 1.75% = $217,134.
- Interest rate of FHA 30 yr @ 6.500% (apr 7.191% per Friday’s rates) = $1,372.44. Plus monthly mortgage insurance of 0.55% = 97.81. 2008 taxes = $2525/12 = $210.43. Total payment (incl. estimated $40 per month home owners insurance) = $1,720.68.
I estimate incomes for both jobs at $67,000. (I have close sources in both the title and grocery industries).
- 67,000 /12 = $5,583 gross monthly income. The total proposed payment of 1,720.68 divided by the monthly gross income = 31%. This is an acceptable front ratio with FHA.
- $5583 x 43% = $2400.69. 2400 less the proposed payment of 1720 = $680 of allowed monthly debt for FHA in order to stay within a 43% total debt ratio.
It’s been twenty years since I bought my first house. The house has tripled in value while the incomes for our jobs have pretty much doubled. I commuted 27 miles one way each day (not even factoring when I made calls on accounts, which at that time my territory was banks and credit unions in King County)…I was thankful once I was promoted to a real “title rep” and had a company car to clunk the miles onto instead of my personal one.
The answer to your question, Cautious Buyer, is: YES. Someone could buy that home today with the same jobs that we had when we purchased it. Last year’s value? Since it’s in NE Tacoma, I would say that it hasn’t experienced the same degree of “appreciation” as the Seattle/Bellevue markets did. According to Zillow, the home is worth 0.9% more now than a year ago and 0.4% less in the last 30 days…so we’re 
splitting hairs.
What I wonder is how many first time home buyers would be willing to commute like I did or to buy a true starter home?
Our agent for our first home did select our loan officer. As I mentioned, we were 21 and were totally green. Even though I had worked for a title company for a few years, it’s completely different to actually go through the process. With our subsequent home purchases, we selected our loan officer first and then the home.
By the way, we did sell that house one year later. There was a bit of a housing panic (at least I had one at the time) and we sold it for $90,000. The proceeds was the down payment on our next home located in Federal Way’s “Affordable Street of Dreams“. Yes, that’s how the new plat was marketed. Affordable dreams (our “affordable dream” was $125k for 1500 square feet in 1990). We were able to move just a little closer to family and jobs (and continued to do so with the next home we purchased together). This photo is from our second home in Madrona Meadows. We lived in my grandparent-in-laws (we were married at this point) basement for a few months until this home was finished since our first home sold in days with back up offers.
Buying at $68k and selling at $90k one year later is pretty amazingly fortunate.
Alan,
True. We did minor upgrades:
New front porch (it’s just wood frame) and we painted the exterior. I don’t think the upgrades are what caused the increase…it was just good timing (luck or fluke on our part).
I recall that prices were rising (at least in that area–south King/north Pierce) fast and I was afraid that we were going to become “priced in” that home if we didn’t sell it to buy our next one.
I’m impressed!. Thanks for the exhaustive answer.
It seems like 11% rates were killing affordability then and prices are doing the same now.
Around my office, 27 mile commutes are pretty normal for anyone who bought a first home in the last few years. That is about the distance from Seattle to all the new developments in Maple Valley and Federal Way. I do wish it weren’t true though, both for the extra 2 hours a day spent away from the family and for the strain it puts on the roads, traffic, and planet.
Among the younger people, a 1000 sqft newer condo or townhome has replaced the 1000 sqft home on a 7500 sqft lot as a starter home. I think people are seduced by the shiny new appliances:^) I am one of the few who would sacrifice newness for a yard with fruit trees.
Nice picture, by the way. It doesn’t look like you’ve changed much in 18 years.
Cautious buyer, you are too kind. I agree that the definition of “starter home” has become much bigger and glitzier than what I recall. I hope that one of the side effects, or hang-overs, from this past market is that people’s expectations become more realistic. I prequalified more first time home buyers over the past few years with beer budgets and champagne taste…I’d tell them about my house and I might as well have been talking to one of my teens (eyes rolled into the back of their heads).
I wish I had all of my Notes and HUDs from my transactions 20 years ago. I think when I bought my next home in Madrona Meadows/Federal Way, that I had a 30 year fixed rate…and rates, according to this chart: http://www.mortgagenewsdaily.com/mortgage_rates/charts.asp rates did start to drop during 1990.
I have to thank YOU for your question… I didn’t realize that it’s been SO long since I bought my first home!
One point that would make a huge difference is how much debt people carry now verses then. And I actually have less now then I did as someone in their early 20’s.
It’s the “back end” ratio (all monthly debts plus proposed total mortgage payment divided by the gross monthly income) that will make it or break it for home buyers/mortgage borrowers.
Thanks for the thought-provoking comparison, Rhonda.
I’m thinking about that 27 mile commute, too. If you were heading into Seattle for work, I’m betting that the trip takes far longer in 2008 than in 1988.
I’m also ruminating on the definition of “starter home”. 3 br, 1 ba, 1000 sf…my husband and two kids and I aspire to that level of space and luxury. Maybe house #3.
House #3 was the nicest house my son’s dad and I had together. It was stepping stones. My second house I kept for 3 years. The commute was ugly back then… it took forever just to get to I-5 from NE Tacoma. Since then, the roads have been improved (so I would guess that the commute is no worse–but still bad).
My last home in south King County was in West Hill Auburn on North Lake. I liked it because it was private AND I was very close to I-5, 167, Military Road and Pac Hwy…I was still 20 plus miles from Seattle…but at that time, my office was in Federal Way/Renton (when I was in title insurance) and then Kent (for mortgage).
Fabulous picture, Rhonda! You…not the house.
Where I bought my first house there were trains to work. No one lived near work…or mostly no one. One of the advantages of people wanting to live “close in” is the City homes get rehabbed more often, for the most part.
I sold my first house for $20,000 more a year later as well. I bought it from old people. Young people don’t realize how much just making the house your home with minor updates increases the value considerably.
Young people often can’t get past the “old people smell” and similar minor issues. Those that see past that and make the house a nice home for young people often reap huge advantages of doing so. I have done this three times in my life and each time made money quickly simply by changing drapes and carpet and some of the “old stuff” at very little expense.
Just making it look better, withoug major improvements, often has a large monetary return if it was dirt ugly to begin with.
Thanks Ardell…I must have been 22 years old in that photo! I remember on our third house, when I was 25 (we kept the second house for 3 years), the neighbors came by and asked if our parents were home! LOL. We did start on the home buying path pretty young.
Our region is really missing the transportation that other big cities have. That would make commuting much better.
Thanks again for your help in coming up with the value…it’s really tricky trying to pin-point it these days.
Ardell, that’s been our strategy. Or at least we sort of fell into that strategy–my husband and I could only afford a filthy junker of a house when we were first married. I’d had a strong desire to buy a house for years before that, and once we were married the nesting urge hit hard. We got a sorely abused rental house and a rehab loan, and put a ton of sweat equity into that place. Turned it into a sweet little cottage. The first year we lived there people would stop their cars in the street if they saw us outside and praise the impact we were having on the neighborhood. Good times.
When the 2nd kid meant we were truly outgrowing our 700 square feet, we were only able to make the jump to a bigger house by taking on another serious project. (We wanted to do it responsibly, no hinky financing, and lately I’m so glad we did.) This one was mostly cosmetics and you’re right–there had been dozens and dozens of people who’d seen the place, but no one was willing to take on the cleaning and painting. Well, that was 2 years ago. The house has come a long way since then and if the Zestimate means anything (arguable in this day and age) we’re still way, way, way away from hitting the surface of the water, much less going beneath it.
House #1 is a rental paying for itself and more, and House #2 could probably just about break even on the rental market. We’re saving and strategizing and waiting for prices to drop even more to make our move on one of those 3 br, 1000 sf “starters” for house #3. The thought of taking on another fixer sort of makes me want to weep and moan, but I know when it comes down to it the idea of paying top dollar for a picture-perfect place would be even worse.
Angie, this strategie has worked for me for the most part. Out of the houses I’ve bought and sold over my lifetime, most have been older homes that I could make slight adjustments too.
I’ve had 3 homes that were new construction and many would be surprises at the issues I found with those homes (new construction is no guarantee of no headaches).
Good for you, Angie. Putting a piece of yourself in every home is what makes property more than just “an asset”.
I’m very proud of my efforts helping people buy filthy junkers 🙂 They are happy and they improve the neighborhood. I like the idea of everyone leaving a place better than they found it.
I know someone now who bought a new house and put tons of money into upgrades now crying the blues because she’ll never get that money back. But the people who bought filthy junkers and put in a lot of sweat equity and some new windows are happy.
Rhonda, you remember my client “Adrianna” who commented here often. She bought a 1,000sf rambler in North Seattle and I was so happy when she had her first barbecue. Her cute family turned the place into a cute home just by being in it!
I do remember “Adrianna” and I’m glad to hear she’s doing well. Ardell, you bring up a great point, people can make the wrong improvements to a home (if their intentions are increasing value).
When we bought our home, we were planning on keeping it for 5 years at that time. I’m the one who panicked and thought we needed to sell and buy our “move up” home in that market.
Ardell, how do home buyers know which improvements may make the most gain? I do think that we were lucky with our first home. I admit we did paint the exterior based on what I had read/heard had the best resale color at that time (soft creamy yellow with white trim). We didn’t have time to improve the interior since we were just there 1 year (and really didn’t have intentions of re-selling so soon).
“Ardell, how do home buyers know which improvements may make the most gain?”
Old people houses are usually very well maintained and just in need of paint and all the things that will make the new owner happier. A good rule of thumb is make yourself happy with the least amount of money. Those things that make you happy, will likely make others happy too.
It’s a big topic for a comment 🙂 It’s much, much easier to increase the value of an old crappy house than it is to increase the value of a big expensive one.
Do you think it’s “old people” homes or could it be people who’ve owned their home a long time? The last house I purchased on my own was from the original owner (30 years)… let’s just say I saw potential. 😉
“old people homes” are the ones where people put on a new roof at the sign of the first leak. Where they send up a handyman every year to check the flashing round the chimney before the rains come. Where they got new windows to keep their utility bills low. But the gold appliances and “lineoleum” and carpet are original. Sometimes in impeccable condition, but feeling so 30 year ago.
Kim and I saw one in Lochmoor in 2006 for $499,000 like this. It was a fabuous floor plan. Lots of square footage. It just screamed and smelled old, but needed no major systems and was perfectly maintained outside. The woman’s children would send a painter every year to caulk and paint the outside. But our clients couldn’t get past “the old people smell”.
There was another one that “jack” bought from my “Dragnet” post. The owner turned out to be a fairly young guy who collected old stuff. Baseball cards and such. The “old” smell was from his collections and the original carpet. The 25 year old fireplace had never been used…like new. Brand new top of the line heater and roof. Still, sold at a substantial discount to other homes on market in much worse condition. They are great buys in any market.
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That was a cool trip to the past!
My wife and I bought our first home in West Seattle in 1991. $106,500, just at the end of quick run up in prices (we had no idea then). 700 sft, plus a basement.
New paint, linoleum, complete lawn workover, and we sold it 2 yrs later for $127K.
Zillow says it’s worth $450K, and states it has 1,600 sft. Both figures are laughable.
The interest rate was 8.5%, and the payment was about 20% of our combined income. Seemed like a stretch then.
And Rhonda, you can work on my house anytime! Love the picture! 🙂
Roger, those were the days of big hair and tons of mascara! Ahhh…the 80’s. 😉
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Be sure to check out Kris Berg’s story about on of their early homes (link is directly above via the trackback)…they actually camped out!