April 10, 2008
The Milla Drama on L.A. Land
If you are a reader of the L.A. Times’ great blog, L.A. Land, you may be familiar with the firestorm of comments generated by a young lady named Milla, who posted about her recent home purchase in Highland Park.
The bulk of the commenters felt that Milla, who says she is 31 years old, had overpaid for the house, which she bought for $410,000 in a neighborhood that could be generously described as transitional. Milla fueled the discussion by answering commenters’ comments and contradicting herself numerous times on L.A. Land and on her blog.
It’s interesting reading if you have a spare half-hour or so. But I want to discuss a couple of Milla’s comments.
1) “Owning a home is always a good thing.” 
I agree. However, Milla (and most people) do not own their homes. They own an obligation (the mortgage); the bank owns the home. But if you can actually OWN the house — that is, pay off the mortgage — then Milla is right: Owning a home IS always a good thing. If Milla uses all her spare income to get rid of her bank obligation, she will be in very good shape financially by the time she hits her 50s. (Do I think Milla will do this? No.)
2) “[T]hings aren’t as dire as people think…it is a good time to buy.”
I’ve recently come to the realization that it’s young, naive first-time homebuyers like Milla who keep the housing market going. We all grow up thinking that we must own homes at any cost — even if it means a long commute, a marginal neighborhood, and holding onto high-stress job to pay the mortgage.
By the time you’ve owned a few homes, and a few downcycles, as I have, you’ve learned how stressful — and expensive — homeowning can be, and, like me, you welcome the relative simplicity and cheapness of renting.
A 28-year-old beautician I know and her fiance just bought their first home, a new Pasadena townhouse. He commutes to Huntington Beach every day, and she to West Hollywood. They will need both of their incomes to pay the mortgage for the next 30 years. Yet they want to start a family. If they were renters — perhaps even in Huntington Beach! — or had bought a more modest home, she could more easily afford to stay home and raise their children. As it is, they are in for a very stressful life.
Maybe their parents tried to tell them this, but they didn’t listen. People have to learn for themselves. But I would urge young people NOT to buy at any cost. Buying has to make financial sense. Buying should not stretch your finances to the limit. Ideally, you should be able to make your payment even if only one person in the house works. And you should have enough left over to make extra payments so you can pay off the mortgage.
I doubt they’ll listen.
Recent Redfin posts:
Condo Sales in Playa Vista
Descending in the Hollywood Hills
Dave80 said:
Dear Cindy,
I am glad that Redfin grants its bloggers the autonomy to publish their thoughts on the current RE market, even when those thoughts run counter to Redfin’s goal of facilitating real estate sales. It demonstrates a lot of integrity on their part to let information flow uncensored on the blogs and in the forums. Go Redfin!
As regards to Milla, God help her. We Americans really have a lot to learn about not overspending beyond our means or getting caught up in the hype of the American dream. I am floored at how we have conducted ourselves so irresponsibly and let this thing spiral out of control. And I am disgusted at the NAR, dishonest realtors, etc. who continue to encourage and mislead people into buying in the midst of this crisis (did you see those realtor comments on Milla’s LA Land post?!). Yes they need to eat too, but they should be encouraging the sellers to come back to reality instead of trying to turn the next Milla into a future foreclosure case.
But have some faith in the young and keep imparting wisdom on how we can all manage our money more wisely. You gave sound advice on owning vs. renting and I think more people need to see through the perceived stigma of renting if it makes better sense for their situation.
Keep up the great work!
April 11, 2008 12:55 AM
l.a.guy said:
I think you’re view that the “bank owns the home” is a little simplistic. It’s true that typically the bank owns more of the home than the resident, but that’s not the same as not owning the home at all.
I’m buying a house now and the day I walk in the door I know I own at least 20% of it. (The down payment). By your logic unless you 100% of Google’s stock you don’t “own” it.
There’s no question that a lot people abused credit, but credit in and of itself is not evil by definition. I think it’s fair to say the US economy would be a fraction of it’s size today if not for the use of credit. And let’s not forget home loans have been around for years, it’s just the past few years when brokers and lenders got greedy and stupid that the whole thing ran off the rails.
In any case I wouldn’t be so quick to assume Milla blew it. She sounded like she did her homework, and I hope things work out well for her. If not it’s her life and she’ll deal with the consequences.
April 11, 2008 7:30 PM
Cindy Allen said:
Dave80, thanks so much for your comments. I think it’s great that Redfin allows us freedom, too. I’ll pass on your comments.
I do hope people get back to basics and start managing their money more wisely. A kick in the ass worked really well for our grandparents in the form of the Great Depression. Hope the economic downturn isn’t as severe as that, but people need to wake up.
April 11, 2008 7:40 PM
Cindy Allen said:
L.A. Guy, I don’t think my view is simplistic. It’s a fact that you don’t own the home; the bank owns it until you pay it off. As another recent poster pointed out, owning a home is like buying on margin. If it appreciates, you do well; if it falls in value, you’re in trouble. Of course, if you take out a mortgage you can afford and pay down your loan, it doesn’t much matter what happens to the value of the house.
I agree that credit has its place, and I also agree that the whole world depends on it. However, it has been abused, and people (and our country) are just out of control with it. Maybe this economic downturn will teach people the importance of fiscal conservatism.
Regarding you owning 20 percent of your house: If you put $100K down on a $500K house and have to sell tomorrow, you’re out around $25K in sales commission. Your house will have to appreciate for a little more than that amount for you to get your down payment back. I don’t think it’s true that you own 20 percent of your house; you’ve just parted with a big chunk of your money.
If Milla likes her house, can afford the payments without killing herself, and pays down the loan instead of treating the house like an ATM, she will be fine.
April 11, 2008 7:47 PM
l.a.guy said:
“It’s a fact that you don’t own the home; the bank owns it until you pay it off.”
Frankly I’m not an expert in contract law, and I suspect you aren’t either, so I’m not qualified to definitively say whether or not that’s technically true. Even if it were technically true you’re arguing semantics. If a house is worth $1,000,000 and I owe the bank $100K then according to your reasoning I own nothing.
If my equity in the home had no legal standing then I wouldn’t be able to use it for collateral because the bank owns it, and yet that is obviously not the case. So regardless of who technically “owns” it, there is no question the home buyer holds some legal right to the equity.
“Regarding you owning 20 percent of your house: If you put $100K down on a $500K house and have to sell tomorrow, you’re out around $25K in sales commission.”
Thanks for clearing that up. Fortunately we intend to stay in the house for a long time, so I think we’ll be okay.
I think everyone who drinks the cool aid at LA Land is so blinded by the current mortgage mess that they are dead certain that everything on the market is a “falling knife” and anyone who buys is a sucker. No question there is a lot of crap on the market, but there are also fairly priced properties that can be gotten (with good credit) at very attractive interest rates.
If you and your husband don’t want to buy, great, that’s the right decision for you. Just don’t assume everyone who does buy is some rube who doesn’t know what they’re doing.
April 11, 2008 10:03 PM
Cindy Allen said:
L.A. Guy, I don’t need to know contract law to know that you don’t own the house until you pay off the loan. Same goes for the car. That’s why the bank has the right to take the house away from you when you stop making payments, and it won’t care about the $100K you put down. As long as you keep making payments, you get to keep the bank’s house.
I am still convinced that you are either an agent or have some other vested interest in real estate. You are taking all of this way too much to heart not to be.
I, too, have purchased half a dozen homes, and I’m the first to say that every home purchase has to be evaluated on a case-by-case basis. No, not every purchase is a falling knife. And if you’re planning to stay in the house a long time and pay down the mortgage, it doesn’t really matter what the market is doing.
I also don’t begrudge anyone homeownership. I would be open to owning a home again, but I have yet to find one around here that is anywhere near what I would dream of buying. Stuff where I want to live — and I’m not that picky — is way, way too expensive, and I think prices will continue to fall. They have to. As someone else recently posted, people should be looking for bank-owned properties, because they have a chance to be priced right, and then offer 10 to 15 percent below asking.
Not everyone who buys now is a rube, but I hope you’ll at least agree that it’s a time to be extremely cautious and very knowledgeable, which the recent group of homeowners were not — at all. So, yes, I still think plenty of mistakes can be made in this market.
April 11, 2008 10:32 PM
l.a.guy said:
“…don’t need to know contract law to know that you don’t own the house until you pay off the loan.”
It doesn’t matter who holds the title; the inference of your comment “But if you can actually OWN the house — that is, pay off the mortgage — then Milla is right: Owning a home IS always a good thing.” is that anything short of owning/paying off the home is a losing proposition for the home buyer, and that’s not true. Whether you pay off the home or not, the equity in the home IS an asset to the home buyer.
“I am still convinced that you are either an agent or have some other vested interest in real estate. You are taking all of this way too much to heart not to be.”
Not at all, I will admit to enjoying a spirited discussion, but beyond that I’m a little annoyed by the broad brush with which many people characterize the current market. Don’t get me wrong, it’s a disaster, but I don’t think it’s quite as bad as many on L.A.Land make it out to be.
“As someone else recently posted, people should be looking for bank-owned properties, because they have a chance to be priced right, and then offer 10 to 15 percent below asking.”
Personally I’m a little wary of REO’s because they’re usually “as is” purchases and I’d be worried about getting stuck with a lemon. But for people who are comfortable with “fixers” then they’re a great way in. Either way the bank owned properties are valuable indicator for what a realistic price point is. The owner of the condo I’m buying in OC had been cutting their prices very aggressively in order to match the bank owned properties in the area. The difference is the condo I’m buying is in “move in” condition where as all of the bank owned properties I saw varied from “need work” to “beyond hope”.
“Not everyone who buys now is a rube, but I hope you’ll at least agree that it’s a time to be extremely cautious and very knowledgeable, which the recent group of homeowners were not — at all.”
I think everyone should always be extremely cautious and very knowledgeable when buying real estate, regardless of the market. Obviously a lot of people who bought in the past 5 years in Los Angeles had no business buying homes. Unfortunately the fall out from it is going to affect a lot of innocent bystanders.
Nice blog by the way. I’ll stop harassing you.
April 12, 2008 12:39 AM
Cindy Allen said:
Thanks, L.A. Guy; glad you like the blog. Hope you’ll keep reading and posting.
I take it you’re making a move from L.A. to OC? Will you be commuting, then?
You’re lucky to have found someone with the price flexibility and wisdom to cut the price. That’s what I did when I was trying to sell our house in San Marcos: slashed the price to close to the short sale in the area. It worked — having put $200K down on the house in the first place made it possible. Enjoy your new home.
April 12, 2008 12:54 AM
l.a.guy said:
“I take it you’re making a move from L.A. to OC?”
No, it’s an investment property/place for some relatives to live. We (my wife and I) are in escrow on a home in the valley. (For which I was roundly criticized on the L.A. Land blog :-))
“That’s what I did when I was trying to sell our house in San Marcos: slashed the price to close to the short sale in the area.”
My experience is that homes will sale when priced appropriately, but from what I’ve seen in the Valley at least 70% of the listings seem to be oblivious to the fact that the bubble has popped. The most realistic listing are short sales, foreclosures and spec builders who just want to get the hell out. (We’re buying a spec home that I know the builder took a loss on)
One thing I don’t see mentioned often is that until people price their homes appropriately they’re not going to close simply because they won’t appraise for the sale price. For most people coming up with the 20% down is tough enough. Very few buyers are going to want or be able to kick in the extra cash to make the loan work.
April 12, 2008 3:07 AM