Today is the day that we are closing on our retirement house in Kentucky. We won’t be retiring for another five years, but a pretty much fantastic deal just fell into our laps: eight acres, with a sort-of fixer-upper — but nevertheless perfectly livable — house, and 500 feet of frontage on the Kentucky River, for a whopping $75,000.
Our retirement house, photo taken from the back of the property. The house is on the far end of the property, and the hill in the background, which is part of the Daniel Boone National Forest, is not part of our land. Click to enlarge.
Now, we hadn’t really been considering a retirement home until last Thanksgiving. My sister Stacey and her husband bought their retirement home in Powell County, Kentucky, and they got pretty much of a fantastic deal themselves, on a mid 1990s three bedroom house, with an attached two car garage converted into a “man cave,” plus a detached four car garage, plus a small barn, on five board-fenced acres. Mrs Pico and I visited them for the holidays, and were both impressed with what they got, for how little it cost them, and just being back home again, back among family. My wife brought up the idea that we ought to look for a good retirement home back in Kentucky a few months ago.
Now our plan was to take our vacation week in August and look for some land on which to build in five years. We figure that housing and land prices are low there now, and if we bought the land now, we’d have more time to make plans on what and how to build. Our parameters were that we wanted at least a couple of acres, with room for not only a nice house but also a good workshop and garage for me. We also wanted property with water on it, a creek or stream. Looking at land and construction prices, we thought we could do this all in five years, without the need for a mortgage. So, back in July, I was searching through the real estate site Zillow for land, when the property we are buying showed up. It was listed for $89,900, but, after some inquiries, I found out that the sellers’ bottom line was $75,000, which we could do, all cash.
Looking from the front of the property, across the soybean field (a neighboring farmer leases part of the land) toward the Kentucky River. The tree line marks the river. Click to enlarge.
It helped a lot that the house itself does not show well. It’s solid and sound, and clean, but it has an unattractive interior paint and carpet scheme, and the exterior vinyl siding should have been power washed before the house was put on the market.
Now, why do I mention all of this? The channel we watch most often at the Pico household is HGTV, and an episode of the Property Brothers happened to be on Sunday. The format of the Property Brothers’ show is that a couple comes to them, wanting to buy a new home, and with a wish list which greatly exceeds their money. The brothers show them a turnkey property, with everything they want, but well beyond their price range. They then tell the prospective buyers that they can have everything they want, but it will have to be a renovated fixer-upper. They buyers then tour some not so great looking houses, some of which are absolute dumps, but with potential, and then the renovation proceeds and makes decent television. The first two seasons of the show were filmed in Toronto, Canada, and for the third season, half of the episodes were filmed in Austin, Texas and the other half back in Canada. But what always strikes us is the prices for these homes: even the dumps are over a quarter of a million dollars, some over half a million, before the renovations. When we bought our current home in Jim Thorpe, we paid less than $100,000 for it, and it would have cost close to $300,000 had it been in Conshohocken.
Looking across the Kentucky River, from the river bank on our property. I’ll have to do some clearing along the river bank, and build a floating dock, when we move down there; right now, it’s heavily overgrown. My guesstimate is that the river is about 180 yards wide at this point. Click to enlarge.
Loath as I am to ever agree with Paul Krugman, he has noted that the Canadian housing market has continued the housing price rise that was so dramatically torpedoed in the United States. Yet, while the statistics say that US housing prices have come far closer to normal, and home building is rising again, I’m still seeing price differences in urban areas that seem unjustifiably elevated. This row house in Philadelphia lists for the same $89,900 at which our retirement home was listed, and is just 1,080 ft² on a 1,306 ft² lot. This rehabbed duplex, which is smaller than ours, and isn’t in a great neighborhood — it’s near Temple University, and the picture shows security bars on the windows — is listed for $189,999, while this 1,250 ft² single family detached house in Northeast Philadelphia, which looks to be very well kept up, lists for $195,000. Only the very low interest rates make such a home anywhere close to affordable, and any spike in interest rates will spell trouble for the housing market in urban areas.
And some analysts believe that the Federal Reserve Board is on track to start increasing interest rates in the spring of next year. The Fed doesn’t really control interest rates, other than the Federal Funds and Discount rates, but tries to influence private interest rates through open market operations.
Once the Fed begins to raise interest rates I believe that they are likely to use the 2004-2006 timeframe as a blueprint for its tightening program this time around. During this previous time period, the Federal Funds Rate was gradually raised on 17 different occasions over a three year time period–specifically from July 2004–June 2006, in equal increments of 25 basis points (i.e. 0.25%) each time.
That, of course, is the writer’s speculation, but I don’t find it unwarranted. I have long believed that the federal government sees only one real way out of our national debt is to inflate our way out of it. Our debt is denominated in dollars, and if the government triggers greater inflation, the real value of the debt will decrease. That’s good news for the government, and good news for people who owe debts, but bad news for those people who hold US government debt instruments, as well as people who are owed money . . . including mortgage lenders. In other words, if you are going to buy a house, do it sooner rather than later, because both prices and interest rates will (probably) be rising.