I don't understand how you can 'outgrow' your house in a couple of years, unless you have a child and the house becomes too small. Sorry, I don't have any solutions for you, only to advise prospective buyers to purchase with the primary goal of having a nice place to live, rather than seeing the property as an investment.

Great topic! This is my life. We also bought in 2006 - a condo in a nice neighborhood. We looked at single family homes, but everything was either too expensive, or in a rough neighborhood too far from work. So, we went the condo route... thinking we were being responsible by staying within our budget, and figured we'd move in about 4 or 5 years, when we wanted kids.

Well, almost 7 years later, we're still here with one 3 year old and a baby on the way. Not sure how we're all going to cram into the condo, but we're making it work. Basically, I deal by counting my blessings every day. We live in a fantastic neighborhood, we have wonderful neighbors, it's quiet, and our condo unit is relatively spacious at 1200 square feet, 2 bedrooms, 2 baths. And we can easily afford our payment. We probably pay less to own this place than we would to rent a similarly sized apartment. But I'm not going to lie... when I look at the real estate listings and see a 2100 square foot house with a huge yard 2 blocks away is on the market for the same price we paid, it stings a lot. But, we're making the best of it, and trying to maximize the space the best we can. I blogged about this for awhile a couple years ago at www.underwatercondo.blogspot.com, but petered out when I finally started feeling at peace with where we are now.

I think you can "outgrow" an apartment without having children by making the switch to working from home, especially if it is more than one person working from home.

Oh yes, this sounds familiar. Bought home in early 2008, nothing fancy or expensive. Laid off several months later. Foreclosures and short sales throughout my neighborhood as the economy tanked through 2009/2010. BUT - was able to hang in and keep a roof over my head, and know that monthly mortgage is less than what it would cost to now rent 3 bedrooms, workshop, 1 acre for gardens & fenced in yard for dogs. Finally have a job, working from home, and hope that within 2 - 3 years I can sell and move to an area where I want to be, rather than where I'm forced (more or less) to stay.

Bought in '03, and got a year or two of increase before I saw a 25 - 30% decrease. One home equity loan in '06, and there you go - underwater, and unlikely to be otherwise in the near future.

But, on the other hand, I bought my previous condo in '01, and it magically increased in value by 30% in two years - so it's kind of like I bought this place with monopoly money. A lot of us who are underwater are also in that fortunate situation. (Imaginary gain! Imaginary loss!)

What I do is remember that every month I pay my mortgage and HEL is a few hundred dollars closer to being ABOVE WATER AGAIN! Woo hoo! Every extra bit I put on the HEL moves me closer to owing only what my house is worth. And then at some point, I'll owe much less than the house is worth. It's a mental victory for me, twelve times a year.

Also, consider that if you had been renting all this time - rents being higher around here than my mortgage is! - you would have nothing to show for tossing that money at a landlord. Even if, in 30 years, your house is only worth what you paid, you've been paying rent to yourself all this time. :)

a pertinent topic, but it would be nice if you had advice other than "just deal with it" and "it could be worse."

take your money out of banks and put it into credit unions. they offer the same ATM services and online banking but it will increase your savings and you won't be paying interest to the very entities that screwed over the housing and financial markets in the first place.

hold off on cosmetic renovations. if something's falling apart, fix it. if you just want a new kitchen, don't do it even if you have the money. you'll over-improve your home for the neighbourhood and the market and it will be even more difficult to sell. keep your place nice, just don't sink tens of thousands of dollars into renos that are totally elective.

go back to renting. new polls find that the majority of people under 30 don't think they'll ever own a home. sounds scary, but these people also won't invest into properties that become worth less and less as the years go on. yes, the experts say the housing market will recover eventually. they also said that the bubble would never burst in the first place. oh, and that they weren't doing anything illegal with your mortgages (they were). so if you can swing it, move to your dream neighbourhood now, but rent there. rent out your old place to cover that mortgage until you can put it on the market without resorting to a short sale. it may take a decade for the market to recover, and you don't want to spend the next 10 years in a place that was only supposed to be a stepping stone just because you can't sell. move on, rent, rent out your current pad. you may even draw a few hundred dollars in extra income from renting it out.

@SLourdes: it might make you feel better to compare the property taxes you're paying on your condo to those on the big house.

(V) (;,,;) (V) "you'll over-improve your home for the neighbourhood and the market and it will be even more difficult to sell."
This is true is some places, but not in others. The key is to understand the market in your area. I live in an area where there is a mix of 100yo craftsman bungalows and new construction. The nicely renovated bungalows sell for more than the new construction. The unrenovated bungalows sell for far less. I'm even hearing about bidding wars again.

Check zillow for recent sales in your area. Are renovated homes selling for the original listing price? Above? Below?

Here's a nifty tool to give you some hard numbers on break even points & cost differences for renting vs. buying.
http://www.nytimes.com/interactive/business/buy-rent-calculator.html

I think the best lesson to learn from all of this is to buy only those things that you would be happy with forever (and can afford now)...be it a house or a sofa or a pair of jeans. Even if expecting an item to last forever is unrealistic, start thinking that way. Don't buy just to make due.

There is a generation (or two) that are going to be living with the aftershocks of this real estate meltdown. One small bonus is that with very low mortgage rates, you might not wind up in such a bad place after all. If we'd stayed in our first house we bought 14 yrs ago for $130k at 8.375% interest on a 30 year note, and if we paid that mortgage off on schedule, we would have spent $225k on interest, for a total outlay of $355k.

But with freakishly low interest rates we will wind up spending only $94k on interest over the life of the loan on this house. Yes, the house cost more than the first one. And we are spending a lot to update it (though nowhere near what the first house would have cost). However, the interest expense will be a lot less than what we initially signed up for. So it's not SO awful. And hey, at least we're helping support the local construction economy ;)

@(V) (;,,;) (V): what poor advice. Renting out a home is not all sunshine and skittels you know. Some municipalities have very strict rules you'd have to follow, may even need to change stuff in the home. You have to declare that rental income on your taxes, so it will not be easy to even match your mortgage. You run the risk of having your property trashed or a tenant that just stops paying. Ever had to evict someone? It is a horrible, drawn out affair that screws the landlord way more than anyone else.

Just seriously, do your homework first. That should be plan X if anything.

We bought in 2006 too, and are in the same situation. I also feel like a chump and it does make me feel better to know I'm not alone.

One thing we're doing to try to come to peace with the situation (our house has issues.... it's not just that we're upset it's lost value) is do things we'd never do to a house that we intended to sell soon --- like put in a swingset, paint the walls vibrant colors, etc.

I've read two posts on this thread stating "you should have..." blah blah blah. These are pretty ignorant comments and they don't really do anyone reading this blog any good. You are now stating the obvious and the scolding gets a little annoying.

We were told for decades that real estate was a good investment. Unfortunately the banks made some risky deals and practiced some really bad accounting and the market collapsed. Only a few economists saw this coming and they were laughed at before the crash. Thankfully I got out of the market before the crash based on a few real estate bubble articles I had read but I don't scold others for not getting out in time.

For those of you who are underwater, see if you can get a bargain on your next house to offset what you might lose on your current place. You'll be pleasantly surprised at what is out there for a really good deal.

If you keep paying your mortgage you will have equity in your house eventually and house prices will rise again. Good things come to those who wait. It took us 10 years of living in a so-so house until we were finally able to completely remodel it and it turned out nice. The wait was definitely worth it!

I feel your pain. We bought at the wrong time too....summer of 2005. The value of our home has dropped about 35% in the last 7 years. We are okay on living space right now, but will need to get creative if have a second child. I just have to look at this way...the amount that we lost in the last 7 years is about equal to 7 year's rent in our previous apartment....so it's not THAT bad I guess. We just need to hold on and not sell until we at least are even with what we owe. Or the market turns around, whichever comes first.

I'm there with you. We bought in 2008 when we moved for a job. It wasn't the perfect house; it was small but it was an investment. Never again. It turned out to be a nightmare. Break-ins as the neighborhood went down, pay cuts on our jobs, inability to afford the mortgage payment...the list goes on. We eventually moved out because we couldn't afford to stay (nor did we want to due to the crime issues) and rented it out. We were extremely lucky to get great tenants who didn't mind the neighborhood. They've been with us for over two years.

Unfortunately, it appears now that we should have just short saled. Our loan bars us from doing that since we don't live in the house anymore (we ended up moving again) and we're stuck with a house that is worth a fraction of what we paid.

So yes, you are right. Count your blessings. If it's a good neighborhood and you enjoy the place for the most part--celebrate! You could have it much worse. :-(

According to the drive by appraisal, our house's value dropped by $50K in two years. While I seriously doubt it, I'm slowly facing the fact that we might not be able to move out of the city in 5 years like I wanted. So we're making small improvements that will up my happiness factor in the short term- ie a countertop upgrade in the kitchen to get rid of truly hideous chunk of laminate - and enjoying what we have. It's a cute house in a neighborhood that gets a little better every year, so I still have hope.

We bought in 07 and when we needed to relocate after a layoff two years later, we were 50k underwater. We decided to short sale.

Three years later, we are renters still. Our credit is recovering, and we are very happy we did it. There are worse things.

We had bought a condo in 2003 we sold to move overseas in 2005. So I have yet to be under water on a mortgage (knock on wood). But I believe you have the same problem I did with that first condo. The market was picking up and you made compromises. I did too with that first place. The one compromise I made, that you should never is : Don't move into/ buy a place that you already don't fit into. It was a very very small one bedroom. When all the two bedrooms in my price range were being snapped up right in front of me I should have folded my hand. Taken a nice rental and saved my money. Even in 2005 it wasnt a huge pay off for a 1bedroom.

I think the commenters striking Jason down are missing the point. He's not really here sharing financial advice, he's talking about how to shake the blues -- to help people feel more confident and content.

I think it is brave to share personal information in such a public forum. Why attack someone for that?

@Duane Hill: Nobody's scolding. Property is always a gamble, so it's worth buying one that you can see yourself living in for a long time if that gamble goes wrong. There are regular posts on AT about property 'must haves' for renters, when the most important one should be affordability. I think that those 'must haves' are even more pertinent for readers of this blog who might be thinking of purchasing their own property in today's market.

I'm with @PEARMELON on this - learn to love what you have. I, too, bought my house at what would be considered the "wrong" time, March 2007. But I bought the house because I liked it and saw it's potential, not solely as an investment. Sure, my house is small and there are days when I wish I had just one more room (I work from home and so does my partner), and the neighborhood is not ideal but suitable. But I do not spend too much time wondering about whether my home is losing value (as it probably is if I only pay attention to the short term outlook) or worrying whether I can afford my mortgage. I bought for the long haul. I bought a house that I could see myself living in for the rest of my life if need be, even though many would call is a "starter" home. We have been slowly fixing it up and gaining good old sweat equity. I was offered all kinds of crazy mortgages when I was looking to get pre-approved and I'll admit they were tempting. I am convinced that I made the right choice by sticking with a good old fashioned 30 year fixed and buying my house. The fact of the matter is, it's what I could/can afford, and that is the greatest comfort of all. Learning to work with what I have has been a valuable lesson for me.

I do not know whether the following is any confort to you. IN Spain we have a REALLY bad recession at the moment, with housing bubble included. Houses in Spain, or I should rather say flats in Spain are mostly low to very low quality. People have been paying around 250.000 to 300.000 euro for a 80m2 apartment (with two or three tiny bedrooms). bearing in mind that the average monthly pay in Spain is 14.000 euro per year, you can imagine the kind of drama this is. At the same time, we have a banking system that could not be more cruel to people: in Spain, if you are in debt, houses are taken, but your debt is not cleared. So you loose your home but you still need to pay a huge amount of money to the bank your life long: http://www.nytimes.com/2010/10/28/world/europe/28spain.html?_r=2&pagewanted=all

I mixed it up: Average pay per year in Spain: 14000 €, some 1000 -1400 euro a month.

The media and money managers together sold us on an idea that housing was an investment. They created a ponzi scheme and sold it to us. Think of a house like a coat. A coat will keep you warm but it may go out of fashion and get holes. The better, more classic the coat, the longer you will like it. So renovations are fashion and fashion costs money. Something that is an investment brings you money or pleasure. Depends if you live for your retirement or live for today. If it goes up in value, you think your life starts after you finish work, if it gives you pleasure daily then who cares if it goes up or down in value, you're not selling.
Those people who bought for the first time in the worst market had no money to bring forward from their previous sale and likely they have already lost their houses. Those who had money to bring forward from their previous home, didn't lose as much. Now think though about your ongoing cost of required maintenance and fuel.
I suggest investing in lasting improvements and adding fashion through paint color and Ikea.

I have a love/hate relationship with my fixer-upper that has lost value, but I'll focus on the love: Since buying in 2005, this house has seen us marry, have children, welcome new friends and pets. We have laughed over silly jokes, cried over losing loved ones, hosted guests for wedding and births and funerals. We have run through the sprinklers, fed deer with our annual failure of a garden, blew bubbles, wrote on the patio with chalk, assembled cribs and bunk beds and bookshelves and desks. We have thrown birthday and holiday parties, camped in the yard, camped in the living room, painted pictures. We have worked until well after midnight, watched favorite movies, danced in the living room. I could go on- but you get the point. I hope your houses are also your HOMES. It takes the sting out of it being a 'bad investment'.

Renting out your home and moving to where you want to be is a good option. Yes it is sometimes challenging. But landlords are not in it to lose money; there are tax deductions galore for any losses you may incur and with these you can wind up making money. Eviction is not pleasant for either party but if it's necessary, there are attorneys that specialize in this and some do it quite reasonably (they deal in quantity). Go for it. You could be the dream landlord people are always hoping for!

Nice to see a touch of realism after those "student" apartments. Best of luck to you ... to all of us.

As a couple of other people have said, I feel that purchasing a house should not be viewed as an investment. A home should be purchased as a place to live! You're "investing" in your future, in that you'll have a paid-off place to live when you want to retire... but I don't think you should ever count on a home increasing in value. Granted, in recent years, it didn't just not increase, but it decreased, which is a difficult situation. Because of this, even with all the recent incentives & tax breaks related to buying, my husband & I wont be buying a home until we know we'll be able to stay there for more than a few years.

We bought in the summer of '05 and our house has lost 50% of it's value. Though it sucks that the guy next door who throws parties every weekend is paying half as much for the same floor plan, there are positives:

1. Interest rates are really low, and HARP 2.0 is actually helpful - this month we refinanced at a rate of 3.75% even though we're underwater. Call your bank!

2. It's kept us humble.

3. We've been forced to declutter in order to fit in our small house and made $7000 selling stuff we didn't need anymore.

4. We've learned valuable lessons - like be the seller in a housing bubble, not the buyer.

I really dislike reading folks complaints over their sour grapes. I didn't closely read all the comments, but each one I did is by a person who is extremely fortunate. What makes you think you're somehow entitled always win in life? You took a chance, and now you're jealous that someone else got a better deal than you? Getting what you wanted a couple of years ago means you can't get what you want now? This is life, and there are consequences to your choices and actions. Not everyone gets what they want, not everything turns out as we'd hoped and planned.

I disagree that cosmetic renovations are a bad idea. Improving my cosmetic fixer is the only thing I can do to increase its value. And as long as I'm spending more time than money, doing DIY projects, and taking advantage of resources like free plants on Craigslist, bartering, architectural salvage, etc., I'm not out that much. Plus, being proactive beats out ennui anyday.

As rents have skyrocketed, I am spending less on a 2 bedroom house with a yard than I would on a tiny studio apartment (after itemizing tax deductions for interest & property taxes). And I embraced the small house movement when I bought, so I'm not pining away for a McMansion somewhere. Counting your blessings is a good way to beat the blues!

I too am in the same boat and wish this article had real advice on how to make it work, I bought my 1 bedroom when I was single, now I have a husband who came with a 100 lb dog, a 16a month old and a baby on the way. I'd like tips on how to share a single room with 4 people, sources for bunk cribs, how to entertain guests in small spaces, items you can live without in the kitchen or bathroom like microwave etc.

SARAH H ........ What a lovely post ! I agree, absolutely, "Home is where the heart is" !

i'm currently in this situation and tho i have felt despair, i try to look on the bright side as well as harbor some hope. i'm in a less than ideal neighborhood that is slowly but surely improving (it's not moving as fast as i thought it would when i purchased in 2006).

another thing that my live in boyfriend has taught me to do: participate in the neighborhood, be a part of the improvement rather than wait for it to change. we have plans to hopefully plant a tree in front of our building, and we've signed up to run the neighborhood 5K race in a few weeks. it's not much but it's giving me a warmer/fuzzier feeling about the area. we're making some minor home improvements and planning to paint soon. i'm thankful to be able to revel in the positives!

thank you for this post, it's very informative.

I am so glad you wrote this article! I can totally relate. My husband and I bought a vacant lot to build our dream home 3 years ago and have not been able to sell our current home that is "too small and too far away." And we just found out that we cannot get a construction loan because the cost to build is larger then the predicted value of the finished house. So we are stuck. Our plan B is to stay where we are and make our current space work for us and save, save, save. It's good to know we are not alone.

@CLEVER NEW HOME: My grandparents home was built in stages of 1: make some money 2: buy some bricks 3: make some more money because there wasn't enough left to buy mortar. This was 60 years ago and granted people had a different mindset then post WW2 My grandfather didn't believe in borrowing money so that was the only way to do it. It took a really long time and the house is effectively 2 houses on top of each other. This is not a suggestion but a story to get you to think outside the box. Try looking into eco building. I know the price of build a straw house (no not the 3 little piggy kind) is much less compared to conventional types of building processes. Some of my favourite diy design tvprograms was about a group of people that moved into a field in the country and effectively built a whole town on the principals of eco building. Some insulated with the shells of clams, some with news paper and others with straw but all did it at a fraction of the cost of a conventionally built house. And yes they had all kinds of experts come out and test the different styles and materials and none of them fell short of conventional building materials in terms of ability to insulate. In fact the house had better in door climates because there was no chemicals used. They have a website but it's in danish so crank up google translate: http://www.friland.org/

that is a great summary of the 'love' of home ownership. it's not the house you bought, but the 'home' you've created.

sorry - the post was for @Sarah H

I want to point out the flip side of this not to be negative because you can have a good experience being a landlord but it's tough in a bad economy and being a landlord from a remote location. I suggest getting a book on being a landlord. I have been one for 25 years and because I did the work myself and also tenant selection and eviction, I kept costs under control. BUT, I had a friend who couldn't make her house payments, so rented the place out and moved into a smaller place. She chose people who could pay what she needed to cover the mortgage. Bad idea. Her payments were more than the market rate, so she got people who pretended they could afford it but didn't pay her. She got a lawyer to evict. Then she got another tenant after the place was sort of destroyed by the first tenant. The second tenant complained about problems with the house and she got no rent while she was also having to make repairs and the tenants lived there free. Another eviction at a cost of $10k and she was done with the property. All the equity she had was gone.