Tales & Trails of a Traveling Wiseguy

One of the narratives in the news the last several months about why the real estate market in the US is so tight is that too many of us are locked in to our current places with cheap mortgages. "Sub-3% Handcuffs," some headlines call it. The gist is that many homeowners have low rates on their mortgages, way lower than we'd get if we sold our house and bought another, so we're not selling. And because people are not selling there's extremely tight supply. That's what finding a house to buy is so hard and so expensive.

The problem with this formulation is that it implies there's something wrong with homeowners not wanting to sell. That we're intransigent, or malicious, or something. Note I'm using "we" here instead of they. I'm part of the sub-3% mortgage owning crowd. And I'm not intransigent or malicious or anything. I'm realistic. I'd be ready to move right now except the costs are unrealistically expensive!

Let's do a quick cost comparison. You can work these numbers out on any mortgage calculator. There are dozens of them online.

Let's say I financed my current loan for $300,000 over 15 years at 2.5%. (I actually financed slightly less and got a slightly lower rate. These figures are for illustration.) The monthly payment for this is $2,000.

But 2.5% is not what mortgages are going for currently. The best rate on 15-year loan today is about 6.5%. (For a 30-year term it's significantly higher at 7.5%!) And let's say that in moving I'm not just trading like-for-like but trading up to a bigger house. Say I want to borrow $500k over 15 years at 6.5%. The monthly payment is $4,356. That's more than double what I pay currently.

These dollar figures look high for some parts of the country, but let me tell you: out here in urban California they are low. We'd be borrowing at least double that amount to trade up to a bigger house. So we're looking at our mortgage going from under $2,000/month to well over $8,000/month. That's 4x!

BTW, these high costs for houses? Real estate has able to inflate so much over the past 10-12 years because for more than half of that time rates have been historically low. With low rates for mortgages, buyers are able to afford higher home prices. Now that rates are high again— though some would say, back to normal— prices really out to come back down.

This past weekend we got the idea to do a bit of casual house-hunting. ...Casual, because we haven't decided on moving; not even close. Our thought process was:

1. Hawk's job is moving to near Fremont and mine is remote
2. Let's reduce her commute
3. Housing is less expensive in Fremont anyway
4. Ooh, Zillow makes it easy to find listings online
5. Hey, it's a nice day and we can spare a few hours, let's pick 3 open houses and visit them.

So we visited 3 open houses on Sunday afternoon. The results were... mixed. Here's what we found.

House 1: The Handyman Special

The first house we visited was advertised as a "handyman special". That's real estate agent code for, "A lot of shit is falling apart and the seller has no desire to fix it." We decided to visit it anyway. The square footage was large and the price was low, very low.
To say the house needs a handyman is an understatement. It needs a bulldozer. Haphazard renovations left it looking weird, with a hugely exaggerated roof, a converted garage full of code violations, and a weird flow through rooms. Plus, while the house was totally empty (everything moved out) one of the rooms was disgustingly dirty. The owners hadn't even paid to clean the house before showing it.

Simply put, the house was a tear-down. ...But that alone isn't a deal killer! For a low purchase price we'd be willing to budget for serious renovations and end up with a house (re)built to our own tastes.The problem with that plan, though, is that the house is in a lower class neighborhood. The houses are close together, not exactly well maintained, and the street has lots of traffic with people driving aggressively because they're trying to get someplace else. It's not worth spending a lot of money to build the nicest house on a crummy block.

House 2: Two Living Rooms, Two Dining Rooms?

The next open house we visited was about 1/2 mile away from the first one, in the same town. Short distances can mean a lot in terms of real estate location. Here, the house was on a wider, tree-lined street that was clearly more of a middle class neighborhood. The houses were modestly sized but generally well maintained.

This house was built in the 1960s, as were many houses in the area. And, as is the case with many of these houses, it was added on to at some point. Additions can be a good thing, because many houses from that era are small compared to modern sensibilities. But additions can also be a bad thing when done poorly/cheaply, like with that Handyman Special.

Here the addition was mostly positive. A past owner added a "great room" on at the back of the house. They opened up the original kitchen/dining room into a large eat-in kitchen, which flowed into the open greatroom with a fireplace, a sitting area with a huge TV, and... another dining room. Oh, and there was also still the original, small living room up at the front of the house.

We liked the great room. The large space with open flow fits with how we live. The enlarged kitchen was nice, too. But one thing I hate in real estate is wasted space. Why have a second living room nobody uses? Why have two dining areas? Why have one dining area plus a former dining area that's now basically an overly large hall to the back of the house? Especially in the Bay Area, where space costs $1,000 per square foot even in middle-class towns, paying for gobs of wasted space due to poor design is a deal killer.

Oh, and as part of the not-quite-thought-through redesign, the tiny bathroom connected to the master bedroom was given a second door that opens into it from the great room. Hard no.

House 3: Almost Ideal. Almost....

Popularity telegraphed that the 3rd house we visited would be the nicest of the bunch. Driving through a quieter, middle class neighborhood suggested that; arriving and seeing multiple other families visiting it already (we were alone at the first two houses) confirmed it.

One thing about this house that caught our interest was the lot size. At nearly 1/4 acre (about 10,000 square feet) it is huge by Bay Area standards. And the owners had done beautiful landscaping... in part of the yard. In the part near the house was a huge and elegant patio. Then there was a fence to a side portion of the back hard with scraggly grass. I'm guessing they kept dogs out there. Maybe a goat.

Inside, the house also had an addition. A bonus room was tacked on behind the master bedroom. It was decorated as an office/sitting room. That would actually work great for us... except that we'd be fighting over who gets to use it! 😅

The house showed other signs of renovation. It, too, is from the 1960s, so again, it's par for the course. But again, these renovations were not all that well designed. The house had two living rooms and a tiny eat-in kitchen. There were two bathrooms, with the "main" one having a weird, S-shaped design and the master bath being just too small. I stood in the shower, closed the door, and brushed both elbows on the walls even standing stall.

Bottom Line

Each of the houses had pluses and minuses. The third was the closest to being one we'd say "Yes!' to. We liked the size of the yard, the outdoor entertaining space, and the office/workshop connected to the master bedroom. We didn't like the poorly laid out bathrooms or the undersized kitchen— even though it had nice, modern cabinets.

I remarked above that a house needing renovation does not make it a "No". The problem, though, with renovating a house that's already had renovations is that you're paying a premium for someone else's poor taste that you're just going to rip out. And fixing problems with bathroom and kitchen design are notoriously expensive. It's one thing to buy a tear-down at 20% below market and rebuilt it. It's another thing to pay full market and then have to spend 6 figures to turn it into the house we really want to live in.

All in all, though, visiting these three open houses was a good experience. We learned what to expect in the market around Fremont. If we become serious about making a move we'll shop for houses like #3 and look carefully for good design... or find a house like #1 that's a tear-down but in a better neighborhood.