Buying a home can be a great financial milestone, and does have a lot of advantages. It's an investment likely to rise in value over the long-term, the mortgage interest is tax deductible, and as equity builds, a home becomes a source of low-cost emergency money in the form of a home equity line of credit.
But there are potential pitfalls:
• It's easy to stretch too far and get a home that's not easy to afford.
• You might have to sell on short notice, when the market is down, or before the house has had time to appreciate in value. It's expensive to sell property, and some sellers do end up owing more money than they get from buyers.
• Plus there is what I call the social cost of home ownership: Projects you'll be tempted to take on to improve the property, especially to make it look as nice as what your friends or neighbors have or what you've seen on the home shows on TV. If you can afford home improvements, great! But first-time buyers, especially, need to factor in the cost of a lifestyle boost as homeowners.
This excerpt shows what can go wrong when getting in too deep.
Chapter 3: Keeping up with the Joneses
At first they were fortunate. And they knew it.
Dan and Tammy grew up in working-class families in the South and were married shortly after high school. He started out at minimum wage on the ground floor of a retail chain store, she worked as a secretary. They lived rent-free with family to save money, then moved into an apartment of their own. Dan wondered, at times, why Tammy was so cautious with their money. Often when he suggested they go out to Olive Garden for dinner, she turned him down and instead went to the Publix grocery store. Her father had worked in manufacturing and her mother was a homemaker skilled at stretching a dollar. For many years, Tammy drove the car her parents had given her when she turned sixteen.
Not until Dan and Tammy made the five years of payments on Dan's car did they invest in a new one for her. Their frugality paid off: in their midtwenties, when most of their friends weren't even married yet, they bought a quarter-acre lot of land and had a house built.
They waited several years before starting a family. Both were working hard, both got promotions, and children seemed like too huge a responsibility. Eventually, though, everything seemed to come together at once. Dan was promoted to a manager position, Tammy was pregnant, and when they were relocated for Dan's job, she stopped working to be a stay-at-home mom.
They lived in a rental close to the beach while having a three-bedroom house built nearby, in a fast-growing coastal community in southern Florida. They spent a pleasantly anguish-filled year deciding on the property, the house's floor plan, then the fixtures and the finishes. They expected to be settled in there for a long time. When it neared completion, Dan considered it the nicest house on the block.
The community was friendly and relaxed, home to many retirees and middle-income families. Among their closest friends, who, like them, were all married with young children–one husband worked as a sales rep for a flooring store, another was a technician at a hospital, and a third was an aviation mechanic. Dan and Tammy had met them all through the local play group. Tammy's days revolved around meeting the other mothers for story hours at the local public library or for play dates at their homes, where the living-room floors were covered with toys.
They hadn't even finished unpacking in their new house when Dan got a call from work: You're being transferred. He was being moved to Orlando, to manage a bigger store. The couple had to sell their brand new house, at a loss, and relocate.
The Realtor in Orlando showed them several houses, but one suburban neighborhood in particular captivated them. It was a fifteen-year-old planned community on the outskirts of the city, still expanding within its gates. Driving in was like entering another world. One turn from a busy street and they were enveloped by a shady, tree-lined entryway. Inside, the lawns were groomed like golf courses, with mounds of impatiens, blooming hibiscus trees, and bushes carved like giant dinner rolls. There were man-made lakes, majestic fountains, bricked lanes, and a low speed limit enforced by speed bumps. On their first drive through, Dan kept thinking, This is so nice! Tammy loved that there were so many families with children. Dan liked the idea that it was so safe, that when he was working late in the evenings he would know that hoodlums couldn't reach their house. When the realtor talked up the barbecues and kids' activities held at the club, Dan had visions of lounging around the pool with his wife and kids on the weekends he didn't have to work.
It would be somewhat of a reach, buying a house in that neighborhood. But they could afford it – something Tammy had to convince Dan of – even though they would have to pay about 15 percent more than what they had planned on paying. They won a bid on a new four-bedroom house, one more bedroom than they had been looking for. It seemed like a lot of money, a lot of money. But Dan's salary would cover it. They had been married for nearly a decade and were often told what great credit they had. They didn't have a car payment or other loans. They used credit cards, but they kept the balances low and would pay them off every time Dan got a bonus payment of a few thousand dollars. Dan had also just started to receive some stock options from his employer. If the company did well, these would become more valuable over time. Their financial situation was only improving. The mortgage would slowly shrink, while Dan got raises and larger bonuses and more options.
Or at least that's how it could have gone.
The Joneses were a crowd Dan and Tammy had hardly encountered before: professionals, entrepreneurs, highly educated people with ambition bordering on aggression. At first the young couple was proud of their new nest. But suddenly, rather than having one of the nicest houses in the neighborhood, they were living on the low end. Surrounding them were people they looked up to, who had done better, gotten farther, had more. The couple they became best friends with owned their own business and lived in a house worth triple the value of Dan and Tammy's. Another friend sold his company and became a multi-millionaire almost overnight. One of Tammy's closest friends was married to a pro sports player.
Dan and Tammy met these friends, as they had their old ones, through the local Mommy & Me group. But this group was different from the one in the old neighborhood. Instead of going to the library, they took morning day trips to Disney World, the Science Center or Universal Studios, where the families all had passes. Dan and Tammy bought passes too. When the mothers did meet in their homes, Tammy stepped into enormous properties, with inground pools and four-car garages. To maintain them and still have free time, the women hired an array of services: professional cleaners, gardeners, and nannies. Tammy painted the inside of their house herself, and she and Dan did their own yard work; but after a while she agreed with her friends that a house-cleaner, at least, was worth the extra expense.
Their new friends seemed especially anxious about their children's development. They sent them to lessons and camps of all sorts, and they talked, even over diapers, of preparation for college. When Dan and Tammy were growing up, she joined sports teams through public school and a youth group through church, and he explored the local woods and canoed and fished with his brother. Now they learned about toys that tutored, birthday parties with petting zoos, and tennis camp for kindergartners that cost $200 per week. Within a year or so of moving to Orlando, they gave in to the peer pressure to join the local country club. At first they invested in a basic-level membership that had the lowest monthly fee and a two-figure monthly minimum on dining service. After their second child was born, they upgraded the membership to one that included the racquet courts and pool. Tammy followed her friends into the ladies tennis league, a circle that required not only court fees and extensive coaching, but skirted white outfits and hours of child care.
Away from the club, a main social activity of Tammy's became shopping with her friends. They spent many afternoons at the mall constructing and reconstructing various wardrobes. Tammy upgraded her clothing, and she outfitted her children in many matching ensembles. At the check-out, she took advantage of the discount given to her when she opened credit accounts. As she returned to the circuit of stores and used the cards, the credit limits grew.
Their social life in the evenings was also transformed. Friends invited Dan and Tammy out to expensive restaurants. The crowd dressed stylishly and ordered bottles of vintage wine from the bottom of the list. To these couples, it was routine to spend on dinner what at first seemed to Dan and Tammy to be a small fortune. But they came to think, This must be how people live.
It wasn't how most people live.
When Dan and Tammy moved into their first apartment, they were making a household income within a few hundred dollars of the national median. So half of everyone else in the country was doing better than they were, and the other half not as well. When they built their first home two years later, they were ahead of most people their age: Only 38 percent of households headed by someone under age 35 owned their home.
The city they moved to in southern Florida, where they started their family, fell into the lower half of the country in terms of prosperity, measured by the income of its residents and home values. Within the town, Dan and Tammy firmly belonged to the upper echelon. Even with Tammy not working, their family brought in about twice the amount of money as those around them. Neither Dan nor Tammy had a college degree, but that didn't set them apart from the vast majority of their neighbors: Only 1 in 6 people in town had graduated from college. (Nationwide, the figure is 1 in 4.) In that environment, they were prospering.
Then came the call to relocate to Orlando. And the decision to move behind the gates.
The community inside the gates looked like a different world to Dan and Tammy, and it was. Dan felt proud that they had really moved up socially. In reality, relative to those around them, their status plummeted.
Most of the people living in their new neighborhood had graduated from college. Income-wise, Dan had far outpaced his peers nationwide who only had high school diplomas. By that time, he was making more money than most people in the country with master's degrees. But he was not, by a long shot, making more money than most of his neighbors. Families in the mid-range of this community made more than double the national median income, and the median home was more than twice as expensive. Dan and Tammy fell into the lower half of the community's pay scale. And the house they bought, although expensive to them, was one of the cheapest inside the gates.
The year after Dan and Tammy moved into the new neighborhood, they bought a used SUV. Instead of financing it with an auto loan, they decided to pay for it by using the home equity line of credit that had been offered to them automatically when they signed their mortgage. Why not take advantage of the lower interest rate and the tax deductibility of the interest, they reasoned; then they would just pay it down like they would have paid an auto loan. They ended up not making as large a monthly payment as they would have on a term loan, however, so the car wasn't getting paid off as quickly.
They had always managed to save, but now for life inside the gates, they started using all of their income. And a little more. Tammy had her hair colored every few weeks. She joined a top health club. It cost a premium over what a more basic gym charged, but she justified it because of how much better their child care was. The kids had a spacious playroom, and the staff kept them occupied with lots of games. Tammy could work out for two hours and take time to shower without ever worrying about them. After her workout, they would often have lunch together at the club's cafe, which was expensive but convenient.
Tammy's friends went one after another to the plastic surgeon for breast implants. Tammy, too, got the $5,000 operation, charged to a credit card.
Dan took up gourmet cooking, hunting down esoteric ingredients that would be used only for a single special recipe. On the weekends, they started accepting invitations to couples getaways to the beach. Instead of going for the day, they checked into oceanfront hotels for one or two nights. Once going on beach vacations became usual, they ventured farther away for annual vacations together. Following tips from their friends and sometimes traveling with them, they scheduled ski trips out West and stayed at trendy resorts. Then they took a different vacation every year with the kids.
No matter how much larger they lived, though, the people around them seemed to have more, be doing more, and generally enjoying a more exciting life. Their houses were more spacious, their cars more impressive, their parties always catered, their furniture made out of unheard-of species of woods. And these people were constantly traveling: to Las Vegas, to the Bahamas, to Latin America, to Europe. Dan and Tammy didn't see themselves as any different, and felt they deserved the same as everyone else. They're no smarter than I am, Dan thought. Their work ethic is no better than mine. So why was everyone else's life more cushioned? Making matters worse was that the friends they met when they first moved in were all moving up, upgrading their lifestyles much more quickly than Dan and Tammy could keep pace. Tammy started to feel anxious about their life: Was she dressing well enough? Did the kids feel inferior when they went over to play at nicer houses? Shouldn't they themselves move into a larger house? Why wasn't Dan more ambitious?
For the first time in years, money got tight. More money than ever before was coming in, but even more was flowing out. Dan started getting larger bonuses, well into five figures. However, the amounts were unpredictable. Tammy, who had handled the household finances since the day they were married, let the balances on the credit cards creep up, always intending to pay everything off with the coming bonus. But once the bonus arrived, it wasn't enough. She asked Dan to cash in some of the stock options. That would make up for the shortfall. Her husband agreed and didn't ask questions.
To conserve the money coming in, Tammy started making minimum payments on the credit card accounts. The balances grew and multiplied. The more of their credit lines they used, the higher their interest rates were raised, from what had been a usual single-digit figure to as high as nearly 25 percent. That pushed the balances up higher and made even the minimum payments more expensive.
They didn't rein in their expenditures. They had a lot of money coming in, a lot of resources to fall back on, so Tammy didn't worry. It was just a matter of managing the cash flow, she thought. Dan consistently got raises, and there always seemed to be a bonus on the horizon. If things were tight, it was only temporary, she assured herself. In the meantime, the home equity line of credit, which had an interest rate now significantly lower than that of the cards, could easily be raised. With a phone call to the bank and a visit to sign the documents, they had several thousand more dollars at their disposal. When the checking account ran short, it was easy to transfer $1,000 or $2,000 from the equity line to the checking account just by tapping out the instruction at the ATM.
They still owned a lot of options, too, which was another easy way to flood the household accounts with cash temporarily. Once they sold some the first time, they saw how easy it was to make a phone call and receive a check in the mail. Then their account balances ran high for a while, and they could shop or go out without worrying about not being able to afford it. They took on home improvement projects – putting in granite counter tops and new appliances, replacing the light fixtures, taking up the carpet and replacing it with hardwood floors – that made their home look more like everyone else's around them. And they were continually in the market for the perfect sofa. My husband has a good job, Tammy told herself. He gets stock and bonuses. We can afford it.
Except one year the bonus was significantly smaller than what they had quickly grown used to. They needed it to pay down the debts that had accumulated, but it wouldn't cover a fraction of them. They needed money to keep up with their monthly expenses, so Tammy didn't put the bonus towards the balances on credit cards or the equity line and instead put the money toward financing their lifestyle. When they ran through the bonus money, she asked Dan to cash more options. A couple of months later, she had to ask again. Then again.
That's when Dan realized something was wrong. And getting worse. He knew they had been living large, and that they hadn't been able to rely on his regular paycheck income for some time. But since Tammy handled the money, he didn't know the details of how the credit balances had grown. We should slow down, he told his wife when she asked him to cash more options. She recoiled. We can afford it, she insisted. You're about to get your bonus.
She was right, the annual bonus was coming. And it was huge. By far the largest bonus they had ever gotten, it totaled nearly $100,000 – much more than Dan's annual salary. Whatever problems they had gotten themselves into financially, this was going to resolve. They would pay everything off, and start over with a clean slate, the way they always used to.
Dan needed to make sure of it, though. Subconsciously he had known they were getting into trouble – otherwise they wouldn't have needed to supplement his income with stock sales – but he had trusted that Tammy was keeping everything under control. Now, with a Big Fix around the corner, he was ready to face up to the problem because he knew he could solve it. For the first time, Dan told his wife to give him all of their account statements. One night after work, he retreated with them into their home office.
He had never handled their personal finances before, and now he realized he needed to be methodical to get the detailed picture. Using the Internet, he figured out how to order a copy of each of their credit reports. He printed them out, not paying much attention to the card balances they listed because he knew those could be a couple of months out of date. What he used the credit reports for was to make sure he knew about each of their open accounts. Then he started going down the list. Using the stack of statements, he wrote down the current balance for each card. For the accounts he didn't have statements for, he called the companies for the up-to-date balances. Then he got out the calculator. As a store manager he was used to tallying up figures, but when he hit the total key he saw at a glance that he had been careless and made an entry error.
He started down the list again: American Express, MasterCard, Visa, another Visa, another MasterCard, Discover, Gap, Dillard's, Macy's, Ann Taylor . . . Again he hit the total key. This time he stared at it in disbelief. It showed the same figure he had seen a couple of minutes before. The one he had been certain was a mistake. A panicky feeling came over him. He felt sick. Overwhelmed. He had been deceived – not necessarily by his wife, but by himself – and uncovering the deception felt almost like finding out his spouse had had an affair. She hadn't shared with him how they had been falling farther and farther behind, and he had been looking the other way for too long. On credit cards alone, the couple owed nearly $100,000.
Excerpted from Green With Envy Copyright 2007 by Shira Boss. Published by Warner Business.