Go figure. Really, go ahead and try to figure out your net worth. It is something surprisingly few people do. Go ahead and figure out your living expenses. More folks have done so, or are at least aware of whether they have a growing or shrinking bank account. Add up your assets. Subtract your liabilities. Total your income. Take away your expenses. Few do all four. Welcome to personal finance. Lately, I’ve been watching my net worth improve; though in a very illiquid, intangible way. My house sits on the periphery of one of the busiest real estate markets in the US, and a couple of hours from one of the busiest markets in the world. Having Seattle and Vancouver as neighbors is causing confusion in my calculations. Luckily, I know something about the numbers, and have a sense of humor.
“We’re glad you got to keep your house.” That’s one of the most common comments I hear. For the longer story, start with My Mortgage Modification Chronology. The short version is that I was hit by a financial Triple Whammy, a series of events that some finance professionals have called a perfect storm of bad luck. So much for early retirement. It is sweet that so many cared, and are eager to celebrate my situation. There is a bit of an illusion in play. The main bit of good news was a renegotiated mortgage that basically halved my payments. Thank you government programs and an altruistic non-profit (Parkview Services) that steered me through the process.
A mortgage is not everything. Housing is one of the vitals, but there’s more to living, or even just surviving, today’s society. Thanks to a temporarily accelerated pension, I’m able to make the mortgage payment. Thanks to two reasonably steady clients, I can cover all of my expenses except for health insurance and income tax. Thanks to a lot of scrambling, some months I’m able to pay for both. For the rest of the time, there’s a well-worn credit card. And yet, I celebrate my situation. As I type this, the Seattle area probably just set a record for the wettest October – and I’m aware of people with leaky houses, or no shelter except a plastic tarp. I’m not making enough, but at least I am warm, dry, and eating well (thanks to some frugal cooking that I enjoy.)
Of all the assets, liabilities, income, and expenses, the biggest number in most people’s life is the value of their house. If you own a house (with or without a mortgage), you control an asset that can appreciate and depreciate. The return on investment is usually much smaller than stocks or bonds. But, the good news is that number is so large that small percentage gains can generate large increases in wealth. The bad news is that, unless you can take out a loan against the house, the main way to access that wealth is to sell – and you usually have to sell the whole thing – and then go buy or rent another.
I was pleased with my timing when I bought my house. The price had dropped from $334,000 to $295,000. I got it for $291,000. That’s a nice $43,000 savings. And then the Great Recession hit. And then my Triple Whammy hit. I put the house back on the market at $291,000 and then lower and lower and lower, but never lower than what I owed plus the selling expenses. If I sold that low, I could walk away debt-free, but I’d be homeless. Business was tough, then.
Tracking a house’s market value is art and science. Houses aren’t identical. Even if they are built from the same blueprint, they sit on different properties. The history of sales in the neighborhood helps, but comps are confused by the details of negotiations, and the motivations of buyers and sellers. Divorces and estate sales can drop prices. Buyers with little price sensitivity can raise them. While it would be handy to get monthly updates from a few realtors who understand the numbers and the psychology of the market, that’s an unrealistic use of their time. (But I understand it’s okay to call occasionally, especially if you want to sell.) It is now possible, however, to get estimates from computers at any time – just without much artistry.
Zillow and Redfin produce estimates for house prices in my area. It is entertaining to watch the numbers bounce, as long as they are going up. It was painful to watch them drop. Their estimates are estimates, attempts to find the right number; but only the market will define the right number, and the market for any house is defined by the seller and whatever buyers show up.
I’ve mentioned Zillow’s Zestimate before (Upscaling Whidbey & Will Zillow Make Me Move.) During the Great Recession (which is arguably continuing for many Americans), my house’s value dropped to $216,000, which dropped my net worth to negative even with the remains of my portfolio.
And then came Seattle’s boom. For years, Seattle’s housing market has been rising faster than most parts of the country. Well-paying jobs in Amazon and several annexes of Silicon Valley firms have meant house price increases that are making Seattle unaffordable for its artists and people with creative lifestyles. And yet, it wasn’t until early in 2016 that housing prices began to rise in my neighborhood. From $216,000 the price rose to $231,000. Then, within the last two months, it began to rise $1,500 to $2,000 per week. When it hit $242,000 I was pleased because that would allow a debt-free sale again, but not enough to convince me to put it on the market. For the fun of it, I tracked it every day. My house was making more money than my business, much more money. If I could hold long enough, and if I had to sell, I finally had something of value that would allow hope – at the expense of having to relocate from the area.
You see, Seattle’s unaffordability is spreading. Whidbey Island is a tourist destination, which is why it is nice to live here, but increasing house prices also means increasing living expenses. Many of the residents who operate the tourism industry can’t afford to live where they work. Wealth is accumulating for homeowners, but if I access mine, I’d have to leave (assuming my business stayed the same.) I’d rather stay, which is one reason I work to improve my consulting and creative pursuits.
To add to the pressure, Vancouver’s unaffordability is also spreading. They did something about it by passing a Foreign Buyers Tax a few months ago. It is too soon to tell if that will make their market more affordable, but there are indications that some of those foreign buyers are now looking and buying in Seattle instead. More demand. No change in supply. Increased prices.
Whidbey sits between them. Maybe that’s why my Zestimate was rising $200-$300 per day.
Ah, but real estate professionals scoff at the lack of artistry in Zillow’s estimates. I didn’t want to subject an agent to a market analysis that wouldn’t result in a listing; so, I checked another algorithm. The person with two watches doesn’t know what time it is, unless they agree. Redfin’s estimate was even higher, $260,000. Artistry or no, something in the data suggested an increase. I like Zillow’s chart; so a few days later I went to check on it. I thought I was dyslexic. Instead of $242,000 it looked more like $422,000. My eyes are tired from working on the computer so much (which they’re reminding me as I type); but I looked away and looked back and there it was, an estimate of over $420,000. As I type, it is now over $430,000. Redfin’s hasn’t changed much. Which is closer to the truth?
Algorithms live in computers. Bits get flipped. Programmers try new code. Bad data happens. Relying on automated analyses can be fun at such times; but some caution critical thinking is necessary.
I’m not a real estate professional. I’ve bought, owned, and sold several houses in the area. I get to write about real estate for Curbed Seattle. I’m even helping agents write their marketing remarks in their listings (give me a call if you want some help.) I’m not a professional, but I do have opinions based on experience and a basic understanding of the type of algorithms in use (thanks to lots of math for my engineering degree.) I’m not going to trust an almost overnight doubling of my house’s value, but I also know that within the artistry and subjective nature of real estate markets there’s always a slim chance that someone with that much money would want a tiny house with a nice view in a neighborhood with a marina within a short drive or sail of Seattle. I also buy lottery tickets.
Such an estimate may be unreasonable today, but consider that I bought this house for $291,000 in 2007. If it appreciated at ~7% for ten years, the price would be $582,000. (A 3% appreciation would be $391,000.) Looking at the recent sales in the neighborhood, that 7% appreciation hasn’t happened. But, it does prompt the thought that, if real estate does continue to increase, if there are additional buying pressures as the region is experiencing, and if my financial situation does not improve sufficiently, then some day I may be faced with that choice. There’s nothing fickle about that.