How a Financial Pro Lost His House
One night a few years ago, when the value of our home had collapsed, our debt was out of control and my financial planning business was shaky, I went to take out the trash.
There was this enormous window that looked right in on the kitchen table, and through it I could see my wife, Cori, and our four children eating dinner. It was dark outside, so they couldn’t see me, and I just stood there looking at them.
After a while, I pulled up a bucket and I sat on it, just watching my children eat. I found myself wishing that I could get back there, connected to the simple ordinary stuff of my family’s life. And as I sat and watched, filled with longing and guilt, two questions kept arising:
How did I get here?
And how am I going to get out of this?
There are many stories these days of people who lost their financial bearings during the housing boom and the crisis that followed, but my story is a bit different from most.
I’m a financial adviser. I get paid to help people make smart financial choices, and I speak and write about personal finance issues for this publication and others. My first book comes out in January, “The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money” (Portfolio, a Penguin imprint).
The thing that few people know, though, is that I learned a lot of this from experience. I made a bunch of mistakes, the very same ones that I now go around warning people to avoid.
So this is the story of how I lost my home, the profound ethical questions that arose along the way, and what my wife and I learned from the mistakes that led us to that point. It made me better at what I do, but it wasn’t much fun getting there.
Like most financial stories, this one is personal. It starts with me getting into the financial services industry more or less by accident. I answered an ad in 1995 that I thought was for a job related to “security” (as in security guard) but was in fact related to “securities.” That’s how little I knew about the stock market. A few months later I found myself working a phone at a Fidelity Investments call center.
Things went well, and by 1999 I was a Merrill Lynch financial adviser and a certified financial planner. By then, we also owned a house in Salt Lake City. We’d bought it two years earlier, with a $25,000 down payment.
A few years later, an opportunity arose to form a partnership with a successful Merrill adviser in Las Vegas. The place was on our top 10 list of never-move-to cities because we had always associated it with the Strip. But Cori and I were looking for an opportunity to have an experience somewhere else, and we met some great people when we visited the city. I took the job, and we moved down there.
That was May 2003. Housing prices were already crazy, so we rented. But our neighborhood had zero character and lots of cookie-cutter houses. Within a few weeks, we were looking for a place to buy.
I felt we could afford around $350,000. We called a real estate agent named Mitch, who had signs on all the bus stops: Talk to Mitch! He picked us up in a gold Jaguar, and suddenly we were looking at houses that listed at $500,000 or more.
It felt a little crazy to be shopping for houses that cost half a million dollars, but my income was growing rapidly. Everywhere I looked, people were being rewarded for buying as much house as they could possibly afford, and then some. There was this excitement in the air, almost like static. I started to think that if I didn’t buy a house right then, I would never be able to afford one.
At moments during our house hunt, I felt in my gut that something wasn’t right. We’d go to open houses for $400,000 homes and see lines of couples in their late 20s — younger than we were — waiting to get inside. I kept wondering where all the money was coming from. How did all these people make so much?
PRICES KEPT RISING
But prices just kept rising, and when people kept buying, that made it seem safer. I knew from my work as a financial adviser that following the crowd could be costly. But like everyone else, I felt safer in a crowd.
We didn’t find anything we liked with Mitch, but one day in September 2003 Cori spotted a for-sale-by-owner sign in a really nice neighborhood. We ended up buying the house and paid the asking price of $575,000. (When we tried to negotiate on price, the owners were amused; it just wasn’t that kind of market.)
We borrowed 100 percent of the purchase price. In fact, I was told I could borrow even more if I wanted. I had perfect credit and a solid income that was growing. But even so, when the lender approved us at 100 percent, it was more than I had expected. I remember thinking something like “Wow. I guess if they’re willing to lend it to us it must be O.K.”
I should have known better. No matter how well things are going, borrowing 100 percent of the purchase price of a home is not a good idea. I shouldn’t have relied on someone else to make that calculation, let alone the guy who was making money putting me in the loan. I was a financial adviser, and I never sat down to figure out what it would take to make this work. I just wanted to believe him. And it was so easy to believe he had been right, at least at first. We loved living there. The children went to an awesome public school, and we made some great friends. I could ride my bike to Red Rocks, the wilderness area outside of town. And for a time, the real estate market erased any doubt I may have had. It just kept going up.
One evening in 2006 comes to mind. My sister-in-law was thinking of moving to Las Vegas, and a real estate agent told me about an open house for a new Toll Brothers community. This wasn’t a come-by-for-cookies type of open house; it was held at a Las Vegas hotel ballroom. I arrived to find a line that led down a flight of stairs and out of the front door. Before I got to the front of the line, they stopped admitting people. Then people rushed the door, like it was a rock concert.
The market’s continued strength meant we could borrow even more. It was easy. In late 2004, a year after buying the house, we refinanced our mortgage with World Savings Bank, which later ended up in the hands of Wells Fargo, using one of the pick-a-payment loans that let you choose your own payment each month.
We picked the lowest possible payment, the one that added to our balance each month instead of subtracting from it. And we added a line of credit with Wells Fargo.
The extra borrowing power was important, because while my income was growing rapidly it wasn’t enough to support all our expenses. Around that time, I left Merrill Lynch to become an independent financial adviser, so it was easy enough to convince ourselves that we were borrowing to pay for the start-up costs.
There was some truth to that, but we were also borrowing against the house to finance our lifestyle. The line between business expenses and personal ones is sometimes hard to draw when you run your own business, and during those heady times it seemed even harder. But in hindsight it is clear that we were spending more than we should have on things like recreational gear and family trips for ourselves and our four children.
It was extravagant, but it seemed modest compared to what some of our neighbors were doing. Our house was the smallest model in the neighborhood (though at 3,500 square feet it was hardly tiny), and we drove a Chevy and a VW. Cori and I and some of our friends had a lot of conversations comparing our spending habits to those around us. How can so-and-so afford a boat? How are people buying new trucks and four-wheelers and 5,000-square-foot homes? Do they know something we don’t know?
At times, it seemed as if maybe they did. I knew a builder of custom homes who urged me to buy one of his houses for close to $2 million. I told him there were at least a million reasons why I couldn’t do that. He looked at me like I just didn’t get it. He assured me the house was appraised for $200,000 more than the asking price, and that after I lived there I could take out a line of credit to live on while the house went up even further.
The crazy thing is, he was right. The place eventually sold for more than $3 million. When I heard that, I felt a little silly that we hadn’t taken that risk.
FACING A NEW REALITY
As for our spending, we told each other that we’d catch up later, as my income and the value of our home continued to rise. As late as February 2006, a comparable home in our neighborhood sold for $998,000. We made the classic mistake of projecting recent trends — even extreme ones — into the future.
But slowly — and then increasingly — we began to have a different kind of conversation, “When are we going to stop and just get on top of this?” The solution was always making more money, not cutting back. The fact is, it’s much easier to set a goal of making more money in the future than it is to buckle down and cut back today.
We never really worried that things would go to pieces the way they ultimately did. But then came the collapse in the stock market. I had clients calling in tears and breaking down in my office. People who had never worried about their portfolios were calling me from their vacations. It was like talking people in off a ledge virtually every day, maybe three times a day, for maybe 90 days in a row.