“The gallows humor of this time was brought home to me by a reader who told me he no longer felt badly about having stopped renting and instead buying a home in 2006. Sure the house has lost value, he said, but if he had not bought it, he would have left his money in the stock market and be even worse off now.”
Floyd Norris in the New York Times
Last night I was reviewing a few of the decisions I’ve made over the past two years in light of the latest bad economic news. Within that time I bought a condo in the NYC metro area and left a job at a successful hedge fund to co-found a start-up. My wife and I are also about to have a baby, which puts me in a much more contemplative mood than usual.
Over two years ago I remember our mortgage broker saying to my wife and I, “Wow, you guys are being really conservative. You could qualify for a much larger mortgage.” I don’t think he was trying to up-sell us - we were already working with him on closing on the condo we had chosen. He was surprised we didn’t want to buy a bigger place, but commended us on what I suppose he considered financial prudence. I was shocked because I was looking at what I thought were pretty big numbers on the papers he was preparing for us.
At the time I was still working at the hedge fund and my wife had a job as a Quality Assurance manager at a web site in New York. I didn’t have a good feeling about the housing market - in fact just a few months earlier I had made some slightly profitable trades in the stock market on the expectation that home builders were going see lower earnings.
But, a lot of our friends were buying homes and my wife and I were fortunate to have profited a little from employee stock options we converted and sold after leaving the company we used to work at together. That money was sitting in the stock market. I remember my accountant encouraged me to look at buying a home from the perspective of re-allocating of some of our investments. Take some money out of the stock market and put it into your own home. Your home is an asset, it’s value will likely increase, you’ll build equity and diversify your investments.
My wife and I knew we would be in our home for at least 5 years, hopefully enough time to ride out a likely dip in the housing market. We calculated what our monthly payment would be given our likely mortgage payment, taxes, and maintenance fees. We found a place we liked, obtained a 30 year fixed-rate mortgage and wrote the biggest checks of our lives at our closing.
The monthly mortgage payment and related expenses ended up being about twice what we were paying in monthly rent at our previous place. That felt like a steep increase, but we still had a good cushion given our monthly income. It’s a good thing too. A few months later my wife quit her job and took a steep pay cut to start her own local business. A few months after that I quit my job and took a steep pay cut to co-found a start-up.
So last night I found myself thinking “I wish we hadn’t bought that condo. We’d have so much more cash on hand to face what might be coming down the road with the economy.” But when I woke up this morning and read the quote at the beginning of this blog post I thought a little differently.
The money that we invested in our home in 2006 had not been cash stuffed between the springs of our mattress. It was in the stock market. And since we moved that money out of the stock market and into our home, the S&P has fallen 42%, the Nasdaq 44%, and the Dow 33%. My guess, based on recent home sales, is that the value of our home has fallen about 8%.
Given those numbers, taking money out of the stock market and putting it into a home over the last two years was not a terrible move (unless you need immediate liquidity in which case selling your home is a little harder than selling your stocks). Though I anticipated the housing bubble would eventually burst (as everyone had been predicting for at least a year in 2006) and our home value might go down a little, I certainly did not anticipate the enormity of the credit crisis and the intense impact it would have on the stock market.
As for changing careers, that didn’t turn out so bad either. A few weeks after my wife quit her job the company laid off two-thirds of their employees. As for me, the hedge fund I worked at is still in business and presumably doing well (assuming they are benefiting from the current volatility).
So financially I still can’t say changing careers was a good choice, but it wasn’t a financially motivated decision. When you leave an established company to do the start-up thing, it’s about the experience more than the compensation. And the experience has been extremely good, regardless of what happens to the start-up.