The 80/10/10 loans are back. This seems familiar and means people can buy homes and avoid Primary Mortgage Insurance (PMI) with almost no money down.
When people don’t have very much money in their house, they are less incented to stick it out during the tough times. This really isn’t anything new. I remember looking at “fix and flip” houses in 2011 and 2012 and seeing advertisements for FHA $100-down payment programs. This is great for moving more houses and bolstering the housing market. It’s not so great when that homeowner is fined by his or her HOA, or the furnace goes out. The homeowner might be foreclosed on because he or she doesn’t have the money to pay for the costs of owning a home. Simple as that.
First things first, I live in Colorado and we have seen about 100,000 people a year moving here for a lot of reasons. Some of those reasons include:
- The weather is great here.
- The quality of life here is great – which is in part related to the weather.
- People from California, New York, Chicago, and other cities have figured out numbers 1 and 2, and also the cost of living here is low (relative to where they live.)
- The legalization of marijuana has created a large influx of people. Some are calling this a modern day version of the gold rush.
Depending on what part of the country you are in, the real estate market may be completely different. I would say most places in the US at this time are at least in recovery (see the article below from the Wall Street Journal).
“U.S. Home Price Growth Remained Robust in March” http://on.wsj.com/25wHgZN
What does this all mean to you? My advice, is don’t make any new buying decisions based on your new “equity”.
Is it probable that the housing market will go down to the level of 2008 and 2009? – No it’s not probable. Is it possible? Absolutely.
The circumstances won’t be identical but I can tell you what will be the same… You may have heard Warren Buffet say that what drives the market is fear and greed. This means if you choose to take money out of your house now and spend it on a ___ (fill in the blank), you are potentially being greedy. As a result, when the market goes down the next time, most will be fearful – because their payments on the “equity” which was taken out of the house will still be owed.
Close your eyes and try to remember what it was like the last time the market had a large correction (08′-09′).
Did you turn on the television set to see what was going on?
Did the reporters and other media outlets make you feel confident?
I would assume most people did not feel confident. I recall I was a Private Client Advisor for a large bank when the 2008-2009 crash occurred. The financial sector was amongst the hardest hit. I remember thinking that people are talking as if the walls of the bank might not be there tomorrow.
Remember when they bailed out Lehman Brothers? I had clients who had Lehman Brothers’ bonds and ended up receiving about twelve cents on their dollar invested. And that was after three or four years of court proceedings.
I didn’t write this to scare anyone, however. If anything, I don’t believe that the market is close to “euphoria” or complete “overconfidence” as yet. History has shown us we will go through these stages before everything cycles again. I do think that we are currently in the stage of “optimism”. I like optimism … as long as it’s accompanied by a heavy dose of reasonable expectations. We tend to have short memories when it comes to remembering when times were tough.
The market doesn’t have to fall like it did last time to put people out of work. There are a lot of builders who will struggle and potentially go out of business if the housing market were to fall by as little as 20%. And that is a number I am afraid to tell you is both probable and possible.
My advice – buy a house you can always afford, especially when times are tough (such as when one income earner doesn’t have a job). Buy a place which will accommodate your needs for at least the next ten years. Have you seen how much banks make on 30-year mortgages? Hint: you can almost double the cost of the house by taking 30 years to pay it off. Did you know that most of the interest is paid over the first 10 to 15 years of a 30-year loan?
Lastly, I have witnessed many investment advisers tell people there is no need to pay off your house. They say things like, “the only way to get money out of your house is to sell it or take a loan against it” and “well we can beat that interest rate of your mortgage over the long term”. Those statements may not be wrong. However, when you look at paying off your home from the point of view of retiring and not having to worry about a mortgage payment, doesn’t that feel like a balanced approach? That’s the key to all of this – staying balanced. Leverage is not always a bad thing. Many people have to use leverage (in the form of a business loan, home equity, or a student loan) in order to make money. It’s when we start using leverage to buy $50,000 cars and buy bigger houses than we thought we could (or would) ever afford that we run into danger.
Neil Maxwell CFP®, EA, Founder and CEO