Surfing the Wave: Chrystel beats the bubble

In 2008, Ramu Dhara bought his first house, fathered his first child, and weathered his first financial crisis.  While Chrystel Garipuy, his partner, had no role to play in the crisis and an equal role in parenthood; she is, as they both readily confess, wholly responsible for the biggest purchase of their lives: A late nineteenth century brownstone currently valued at approximately $825,000. “I was a committed renter,” explains Ramu, a user-interface design consultant who has rented all over New York City for more than 15 years, “She was the one who convinced me to take the plunge.”

At first hearing, Ramu and Chrystel’s story sounds worryingly familiar. Moody’s, estimates that 14.2 per cent of New Yorker who purchased a house in the last five years are “under water” or owing more on a house than it is worth. A range of indices estimate that house prices across the country are grossly overvalued.  The well-regarded Case-Shiller composite index on house prices reached its all time high in June 2006 before dropping almost 21 per cent by July 2008. The last time home value dipped – in April 1991 – it took another twelve years to double in value.  This time around, the index doubled in less than six years – suggesting that house prices still have some way to fall.  Statistics like these, however, do not worry Chrystel unduly; a project manager with a high end architect and designer, she seems to have worked out a strategy to beat the market.
“People always think that buying a house will weigh them down,” she says, “But I learnt how to deal in real estate from my mother.”Chrystel bought her first house in 1999 in Paris. “It was a very nice apartment in a good part of town” but she sold it soon after and moved to New York to study.  “I sold it for twice the price and used the money to pay off my outstanding loans.” In 2005, with $35,000 in her bank account she shopped around for investment advice.  “I thought what can I do with this money?” A financial advisor at HSBC told her to invest in a mutual fund, “but that would be only 10 per cent.”  So, she decided to buy an apartment on the Upper East Side.
At the time of purchase, she had a one year visa, no credit history and insufficient funds for the down payment.  “I was really such a lousy case,” she admits, “But then you need a broker who will work for you, who is more or less ready to play the game with you.”  And work for her, he did.
She started by spending a few hours  day online, looking at property prices across Manhattan, getting estimates and working out budgets until she zeroed in on the one place knew she was getting a great deal on.  “It was only $176,000 dollars for a studio on the upper eastside …very chic…sort of bourgeoisie. High ceilings, two large windows, and it had this feeling of quality.” Evidently a “quality” that she felt would help her get a tidy profit when she chose to sell.  But first, she still needed to buy it.

The broker tried for a ninety percent mortgage, but that didn’t work out. As a fine art photographer and project manager, she showed high expenses to save on tax and so her income statements were rather weak.  They showed the mortgage company copies of her cheques, they emphasised her working credentials, and finally snagged a 30 year mortgage for 80 per cent of the value of the house.  There were still a few hurdles though – most prominently the $50,000 dollars closing fee that she couldn’t afford.  So she borrowed from her friends.  “I took $9000 dollars from Ramu, We had only been together for a few months then” she says, “Perhaps not the best start to a relationship.” Another friend offered offered another $7000 dollars that he would pay in the form of monthly instalments of 300 dollars once the studio was hers. The bank asked where the money had come from; she said it was a gift from her mother.  The lease was signed, a monthly payment of $1,600 was decided upon, after which she moved into Ramu’s apartment, and put her new studio on rent for $2,200 a month. Her visa was soon  approved, and with a nest egg of $35,000 dollars, she now owned a studio in one the best parts of town and had a tenant whose rent more than covered the cost of the mortgage.

In common parlance, a loan like Chrystel’s, is known as a “liar loan” – shorthand for a loan based on limited documentation.  In 2005, two out of every five loans fell into this category.  It was also the year that saw almost 650 billion dollars worth of subprime mortgages enter the market. The combination of vastly increased borrowing power and greatly reduced lending standards drove the house market to sustainably high levels mentioned earlier, leading to the market’s eventual collapse.

By early 2007, Chrystel decided it was time to sell once more.  She had been tempted to sell earlier, but her accountants had warned off the capital gains tax that would wipe out almost 40 per cent of her profits on the sale.  The market however, was showing signs of flattening out.  House prices across the country were falling, foreclosures were gradually making their presence filled.  By February 2008, house prices on the Case-Shiller index (an index that tracks house prices across the US) would lose 18.8 percent of their value since their 2006 peak and continue in free fall.  The coinciding credit crunch would freeze credit markets, raise the interest rates paid on mortgages, make house purchase harder and push prices further down.  But for now, it was still 2007 and the studio, it may be recalled, was in a fairly “chic” part of town.

“When you sell an apartment,” says Chrystel, “Buyers are always interested in the ‘spirit’ of the place. When I sold my apartment in Paris, the British couple were so impressed with the way I had done it up, they insisted on buying all the furniture as well.” In the Upper East Side as well, she had been taking good care of her place.  “I found a warehouse in Jersey,” she says excitedly, “They sell high quality Indian and Chinese ‘antiques’ at very reasonable prices. I also realised that hiring a broker would cost me between $10,000 and $20,000, and so I simply put up an ad on craig’s list, and a an additional advertisement in the New York times.”  For a sum total of $600, she found a “very nice French artist” who saw the place, fell in love with the furnishings (he insisted that the curtains and mirrors be part of the deal) and offered her $350,000 dollars in hard cash up front. Ramu got $16,000 dollars, their friend got $14,000 dollars and she kept the rest. The gamble had paid off – a hundred per cent return in two years.
Statistics suggest that Chrystel got out at just the right time.  While she remains convinced that prices never fall in prime areas of big cities, a database compiled by the Wall Street Journal shows that prices in the metropolitan areas of New York have fallen 8.2 per cent since their peak and would need to drop an additional 18.2 percent to return to the average ratio of home prices to household incomes for the period from 1985 to 2000. However, one cannot dismiss her theory entirely.
In an email interview, Steve Milikan, a realtor from Washington D.C., offered his analysis on why the market in D.C. had been relatively stable.  While the number of sales in D.C. is down 20 per cent, relatively high job security in D.C. and its surrounding areas has mean that both buyers and sellers are in the market but are in no hurry. As he points out “prospective buyers are waiting for the market to decline further while prospective sellers have been waiting for the market to improve.” Further, higher value housing tends to attract those with relatively stable jobs and so it is possible that New York and Washington D.C. have not seen fire-sales in the magnitude that other areas in the country have.
This job security however is under threat all over the country.  The fact that the economy continues to lose jobs at an alarming rate – in September 2008 the economy lost 159,000 jobs – suggests that more and more households shall find it hard to meet their monthly instalments. Further, a number of teaser mortgages issued in 2006, with low rates for the first two years followed by a spike for subsequent years, will reset in 2008 -09, resulting in further drops in the market.
Chrystel however is unfazed by such pronouncements.  In early 2008, she convinced Ramu that a Brownstone was a great investment as such buildings were unlikely to depreciate drastically in value.  She returned to shopping around online with renewed zest and finally settled on a building in Bedford-Stuyvesant in Brooklyn – a few stops out on of Manhattan on the express train. This time credit was harder to attain, but their application was boosted by the fact that Chrystel was flush with funds, had resolved her visa issues, and Ramu had all the required paper work. They went back to the same broker they had worked with before and got 80 percent financing once more. Out of a total price of $825,000, they paid a down payment of $150,000 (including closing fees) and pay a monthly instalment of $4200 a month, but have let out the upper storey on rent for $1475 a month.  They also get tax breaks on their mortgage – and so expect to pay about $2800 dollars a month net; a figure that isn’t much higher than the rent Ramu was paying for his duplex in Manhattan.

So does he feel more or less secure, now that he has bought a house? “Well both,” he admits candidly.  “It’s nice to think that the money that I earlier paid as rent – an outright expense – is now going into building equity in the house; but at the same time my savings have taken quite a blow.” The recent turmoil on the stock markets has also taken 40 per cent out of Ramu’s retirement account, forcing him to reconsider his plans for the future.  The couple also have an additional responsibility in the form of Kika, their one month old daughter; she was born on the 15th of September this year – the day that Lehman collapsed, Merrill Lynch was sold and AIG tottered on the brink before it was rescued by the treasury.

As she plays with her child, Chrystel considers her next move.  “It is true that the market is declining now, but I would wait maybe 5 to 7 years before we sell again.”  By then Kika will be old enough for school, and they will probably choose a neighbourhood based on the schooling district.  “We are hoping that Bed-Sty becomes the next Fort Green,” says Ramu, “Then we can walk out of this deal with a significant profit.” In the meantime, Chrystel has begun shopping at her New Jersey warehouse once more, “It’s about an aesthetic vision” she explains, before offering her approach to real estate.  “My friends think buying [a house] means settling down in a very heavy way… it isn’t like that… you have to surf on it …take it as a game … but you have to know what you are doing and not end up bankrupt in 6 months.”

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