For generations the conventional wisdom on housing was always to buy the most (or more) house that you can afford. The rationale—which worked for decades—was that a house was the closest thing to a guaranteed investment, and by buying the most expensive property you could afford you were insuring the greatest possible payoff over the long run.
That thinking caused many households to go deep into debt in order to make it happen, which created a vicious circle of greater debt feeding higher property prices.
What a difference a few years can make?
The entire conundrum went full circle, with property prices rising consistent with higher mortgage levels, until the borrowing party stopped. Suddenly John and Jane Q. Homeowner could afford to borrow no more, and the whole property construct has gone into the ditch.
Will we get out of that ditch anytime soon? Maybe…but maybe not, at least not for a long time.
Rather than speculating as to when the long awaited turnaround will occur, it might be better to plant our feet firmly in the ground that is now, accept our new reality and make adjustments in our housing expectations that are consistent with that reality.
Now is the time to reverse the psychology that drove both property prices and debt to dizzying levels and adopt a new strategy: buy LESS house than you can afford! Why?
1. There is no job or career stability
Despite the plethora of no doc and no income verification loans, the fortunes of the housing market have always rested squarely on employment. Since most properties are acquired primarily through debt, employment and career stability have always been the unseen foundation beneath property prices.
Whether through technology or off-shoring of jobs to countries with lower wages, the trend in business is now the reduction in both staffing and payroll levels. This trend has been at work for many years and shows no sign of reversing.
Meanwhile jobs and careers that were once thought to be safe are no longer, and those considered secure today have little in the way of long term certainty. It’s critical then for homebuyers to buy with the assumption that their incomes could be lower in the future than they are at the time of purchase.
2. We can no longer assume property values will rise
If house prices have always been based on employment, then mortgage lending has always been based on house prices. Rising prices not only meant higher mortgage loan amounts, but they also functioned as a borrower fail safe: if you could no longer afford to make the mortgage payments you could usually sell the property for more than you paid for it.
The mortgage would be paid and you’d walk away with a cash windfall, free to go on and make your next move in life. It was a cozy arrangement while it lasted.
But property values in much of the US, the UK and Europe have fallen, often substantially, and continue to do so to varying degrees. This means no more borrower fail safe—rising property values can no longer be counted on to solve mortgage problems. It may be critical that you buy a property for even less than current market value.
3. Selling a property is neither certain nor inexpensive
The same factors that are lowering house prices are also making them difficult to sell. Mortgage lenders, stung by the wave of foreclosures that seem to have no end, have tightened lending standards. Fewer people now qualify for mortgages, and that reduces the pool of potential buyers.
There’s also the issue of cost. Trying to sell a house in a buyers market is not only more difficult, it’s also more expensive. In a strong market you might be able to sell your property without a real estate agent; in this market you almost have to have one, and that mean’s you’ll pay a commission. It may also mean you’ll need to pay part or all of the buyer’s settlement costs, another sales expense that may not have existed in better times.
The time and expense needed to sell a property might make doing so impractical. Be sure to consider this fact when buying a new home.
4. Non-mortgage housing costs are rising
One of the best features of a mortgage—if it’s a fixed rate—is that your payment is locked in at purchase and can never rise. But that can’t be said of other housing expenses. With local governments facing budget shortfalls, property taxes are rising. Homeowner’s insurance premiums are also rising, and utility costs are bouncing all around with the rise and fall of oil prices. Repair and maintenance costs are also increasing now that people are forced to stay in their homes longer than in the past.
The only control a homeowner or buyer has over their housing expenses is with the mortgage itself. For this reason, it’s vitally important to make the best deal on a mortgage that you can.
5. Surprise – you may actually have to pay off your mortgage!
Leverage has been a central component in the real estate market for a very long time, so much that few people questioned its use until the current housing collapse. The idea was to put as little money down as possible, maximize the mortgage financing, and keep rolling the loan over every few years, either to get cash out or consolidate debt. If we’re honest, paying off a mortgage was never the goal—that has a lot to do with the mess we’re in now.
But today is a new day, and the game has changed. In the housing and mortgage environment we’re in now, and will be for the foreseeable future, you need to have a concrete intention and plan for paying off your mortgage! Again, this will mean getting the most favorable mortgage terms possible. Investigate as many lenders as possible, and be sure to get the best deal available.
Do you think the real estate market will improve soon? If not, what advice can you offer that will help both homeowners and buyers cope with a weakened market?