Why Housing Costs Can Kill Your Retirement Dreams & How Homebuilders Try To Sock it To Consumers

I have been thinking a lot about housing lately. Part of my personal retirement plan had always included moving to a more affordable area where I could get more house for the money. Before retiring, I lived in the Seattle suburbs area where housing was very expensive, I then relocated to Eastern Washington where housing is considerably less expensive. As it turns out, just about everything else is much less expensive there too. Eating out, going to the movies, yard care, handyman work, you name the service, almost everything is at a discount to Seattle prices. When I go back to visit Seattle, I always have to adjust to the sticker shock on everything I buy.

One of my favorite tools on the web is the cost of living calculators. Bankrate.com has a pretty good one. It is not perfect, however. The housing costs in my case specifically were wildly wrong for my move. But the rest of the estimates were closer to the mark.

Relocating to a cheaper area was a good start. But I made the mistake of buying a house that was really way too big. It seemed like a great idea at the time, the house was so much less expensive than my house in Seattle, about half the price. But it is HUGE! Almost 4000 Square Feet, it is beautiful, but it is also a little bit tacky and obnoxious and doesn’t fit my new more frugal lifestyle.

I am NOT complaining! The place is a lot of fun, it has a pool, a really nice outdoor pizza oven, and a huge fenced backyard for my dogs to play in. It’s great, but I absolutely did not NEED the space and could have been equally happy in a smaller place, half the size without all the extras. No scratch that, I think I probably would have been happier in a smaller place that cost half as much, and less than half as much to maintain. For sure I would have been financially freer, and that is what this blog is all about.

I have been thinking even more about housing as of late because the wife and I (along with our two mutts)- have started doing the snowbird thing for our first time this year. We headed down to the Scottsdale Arizona area for a few months while it is bitterly cold back in Washington State. For our first time doing the extended stay down in the desert, we decided to rent a place vs. buy. We had a bunch of good reasons for this, most of all, we were not sure if we would like it yet. Visiting a place is one thing, staying a few months is another, owning a place – now that is a commitment at another level!

As it turns out, we love it down in Scottsdale, the lovely warm sunny weather is awesome! The area is full of hiking, biking, running trails, there are tons of great restaurants, arts, concerts, car shows etc etc. It’s a great place, except it is hotter than hell here in the summer. And it is getting bigger and more crowded every year. All this made me start thinking about should we continue to rent down here next year, or think about buying a place?

Because we have been having such a great time, we decided it wouldn’t hurt to start looking to buy a place. So we started going to a few open houses and checking out a few neighborhoods being built. Long story short, this little odyssey into considering a second home turned out to be a great way to look at the true cost of home ownership without a lot of emotional baggage attached to the decision, and it gave me a very good education on how new homebuilders are really trying to stick it to consumers today in a way I have never seen before.

I am going to first talk about what a total racket new home sales have become primarily because I think it illustrates how housing has become another area where conspicuous consumption can get quickly out of control and leave you with decades of costs that could easily kill your chances of financial independence. Then I am going to go into more detail on what a terrible decision it is to overbuy your housing if you want to be financially independent. Here I will try and put some numbers up to show how bad an “investment” in your home can really be.

Buying a New Home From a Homebuilder Like Toll Brothers is Now More Like Going to New Car Lot – Be Prepared To Get Ripped Off!

I was blown away at what a total racket new home sales have become. We visited two Toll Brothers locations near Scottsdale, they were both essentially the same experience, one that I can only describe as head-scratchingly bizarre. We drove out to a new Toll Brothers neighborhood called Verde River – located in a fancy golf neighborhood called Trilogy at Rio Verde.

Priced from $704,995 – Not so FAST!

There’s nothing inherently wrong with the neighborhood, other than it seemed a bit snooty for my taste. There’s a nice golf course and clubhouse, and pretty views of the surrounding mountains. Things don’t start getting weird until you go into the Toll Brothers model home and sales center. The minute you walk in that door you realize you have entered a bizarre world of bait and switch marketing, with a myriad of overpriced options, confusing multitiered pricing plans, and snazzy salespeople with endless dizzying lingo being thrown at you in every direction. It is exactly like being on a new car lot, only way worse, as the damage can be significantly worse, and there are no good websites like Car Gurus that can help you make sure you are not getting totally ripped off.

In our experience, we were interested in looking at an advertised model listed on the Toll Brothers website as “Priced From $841,995” That was more than we were interested in spending, but we thought why not take a look at it, as it looks fancy on the website and well who knows?! After a somewhat exhausting exchange with the phony salesperson, we found out that the home being advertised was actually for sale for closer to $2.1 MILLION DOLLARS! When I asked the salesperson incredulously, “how do you get from a base price of $840 grand to over $2 Million?” Her glib response was, “well, when you walk through it I think you will see”. Bitch please! I just drove 25 Miles to see a house you Toll Bros are advertising on your website for 840 Grand, now you are telling me that exact same house in the picture is $2.1 Million, and you won’t give me a reason other than, look at it and see!!? I saw already it on your damn website, that is why I am here! 🙂

What I eventually learn, houses are now truly sold like cars. You can get a stripper house sitting on a shitty lot for the “base” price advertised. Or you can load up a house with insane options to reach a ridiculous price point that couldn’t possibly makes sense to anyone.

You can see the particular home I am talking about here. Scroll down to the Rio Verde model.

Or tour it with me here! When you walk into the model home, it is impressive, but not in a way that makes any sense. The first thing that your eye is drawn to is the dining room that features a massive wine rack encased in a huge glass structure. I have no idea how many cases of wine the thing would hold, I can only think of how much time it would take to clean the glass.

Insane Wine Rack – I have no idea what that option costs!
I counted – It holds 280 bottles of wine! Or 40 cases in case your counting…

From there you stumble into the kitchen area where, and I am not making this up, you lay your eyes on a 17 foot loooong kitchen island. At this point, you are wondering if you accidentally took the wrong door and accidentally ended up in the clubhouse kitchen.

Luckily there are 2 dishwashers tucked into that 102 Sq FT Monster Island, because after downing all that wine you’re gonna need them!

Bewildered in the kitchen, you don’t really know which way to turn, the natural reaction is to try and run away or at least get outside where you can start making sense of the world again. But that is when things take a real turn to the overstated straight out of crazy town option pile on. A massive outdoor room with yet another full kitchen area, a huge swimming pool, and an indoor outdoor “game room” complete with 2 kegorators, a pool table, and yet another gigantic kitchen island.. No, again, I am NOT making this up!

In case your mega kitchen is not big enough, you get another one outside next to the pool!
But wait! 2 kitchens not enough for ya! How about another one in the game room!

OK – so I know what you are saying. Toll Brothers did a bait and switch on you, but this is a killer house and you are just jealous or mad you can’t afford it, right? Wrong option breath! Well, actually right about not being able to afford it, but wrong about wanting this monstrosity. The environmental damage done alone would be way more than enough to steer me away from this trophy home. But the thought of taking care of this beast is more than any potential homebuyer should ever have to bare.

So after you have exhausted yourself touring around the Toll McMansion from hell, you are forced to walk back out through their “sales center” where the now somewhat annoying saleslady is honing in on your to get your particulars, name, email, phone number – I think – dear god she is going to start chasing me down with spam mail and follow up cold calls.

In my final attempt to make any sense out of the experience I say, is there really anyway you can get the Rio Verde house model for the advertised price, this is where she tacitly admits, not really. You see there is this thing called a “lot premium” you have to pay, and you pretty much always have at least a few upgrades you will want to do. “Lot Premiums?” I say. “Yes” she says, here is a list of the lot premiums they range from around $20,000 to several hundred thousand dollars. At this point I am ready to be direct. “Lady”, I say, “I can’t for the life of me figure out what a house actually costs here, and I am exhausted from trying to figure this thing out. I am going to go now, thanks for the nice chocolates!” Hint for frugal visitors, sales centers in Arizona often have great free candy and ice cold bottled water. They are a great place to stop by after a hike when you are thirsty and need a treat!

As we walking out of the sales center and got back into the car, I said to the wife, “wow, I thought Toll Brothers was a good company… I can’t ever see me going back to another one of their neighborhoods, what a head scratcher”.

My takeaway, many homebuilders like Toll Brothers are now in the business of squeezing every last dime out of the consumer. With a myriad of confusing superfluous options and pricing plans, combined with teaser low rate in house financing options, we are seeing an unprecedented predatory new home sales process unfold. All of this will likely end up turning unwitting consumers new dream homes into nightmare purchases they will soon regret. Worse, we will likely end up with similar results to the last mortgage meltdown crisis as people try to bail out of these loans and leave homebuilders and their special financing arms full of bad debt when the next housing bust comes. History doesn’t always repeat, but it rhymes and this all sounds very familiar.

OK – if you are still reading this we are now on to part two of the story. You now know that buying a new home is a confusing expensive process that can almost certainly lead you to buy a ton of shit you don’t need or want and will never really make you happy. So the clear advice from me, don’t do it! If you insist on buying a brand new home, buy one that is already built, and the cost is very clear and can be negotiated.

The best answer may be to not buy a house at all!

For many many people owning a home is mistake. Because this post has already gotten way too long I will summarize why I think home ownership is a terrible idea for many, maybe even most people. In a follow up post I am going to go to math camp to wrap some very specific numbers around how much better the financial decision to rent vs. buy really can be.

The quick summary of why I really don’t like housing as an investment. First, housing is illiquid as hell. You can’t push a button and get your cash. Selling your house can take weeks, sometimes months. To make matters worse, you always have to pay big transaction fees whenever you sell your house. It averages around 8-10% of the selling price. That’s a crazy amount of money and it happens on what is typically the biggest asset people have.

Next, houses always cost way more than you think they will. The sales price of the home and getting locked up into 30 years of mortgage servitude is just the beginning of the financial woes that houses can bring to your life. Add in maintenance costs, renovations, the potential of increased property taxes, liability risks, buying more furnishings and decorations to fill the larger space, and the financial picture of owning vs renting just looks worse and worse. In my next post I will put some realistic numbers against this that I have seen, I promise it will expand your viewpoint on owning vs. renting.

Leverage! Yikes, people are getting leveraged to the hilt in this massive real estate bull market we have been having. I am constantly reading stories of finance companies still allowing people to buy homes with as little as 5% down on adjustable rate mortgages. That is insane leverage. Can you imagine owning any other asset class this way? Think about borrowing 95% of your stock holdings! You would NEVER do it, luckily nobody would let you do it, because that kind of leverage is totally insane! In my next post, I will walk through what a total financial disaster this kind of leverage can result in and why I would never recommend anybody ever get involved in highly leveraged mortgage deals like this.

Owning a house unnecessarily restricts your mobility. That is a BAD thing. In today’s employment environment mobility is of high value. Gone are the days of staying in one town for your entire career and raising your family in one place. Workers now commonly have multiple jobs, they change companies, careers, and locations often. The higher your skill level and specialization, the more likely it is you will have the opportunity to improve your earnings potential by moving your specialized skill set to new growth markets, wherever they happen to pop up. Getting tied down to home, that is illiquid and requires a lot of care and feeding, is a sure fire way to restrict your mobility in a world that really values more not less moving around.

So maybe this is enough to get you thinking twice about rooting down into that American dream, if not, in my next post I will try and convince you with math.

In the meantime, I encourage you to visit a Toll Brothers neighborhood near you, so you can see fist hand, what NOT to buy with your hard earned money, and to pick up some free chocolate and ice cold waters!