Homing in on some painful lessons

Jun 2, 2013 @ 2:01 pm

By Frederick P. Gabriel Jr.

By nearly all accounts, the housing market is back. March home prices were nearly 11% higher than a year earlier, according to the S&P/Case-Shiller home price index released last week. Not only was that gain the largest since 2006, it followed a 9%-plus gain in February.

There are other signs of optimism, such as sharp upticks in building permits, new-home construction and the stock prices of many homebuilding companies.

But here is the biggest sign: My 70-year-old mother had hardwood floors installed in her kitchen and on the stairs leading to her basement — something she had wanted to do for years but hadn't because she couldn't see the sense in investing in an asset that was continuously dropping in value. She is now contemplating having a gas fireplace installed in her living room.

Oh yeah, housing is back.

If history is any guide, it won't be long before cocktail party chatter turns to “investment properties” and we are all bombarded with late-night infomercials trumpeting how anyone can flip a home without putting in a dime of their own money.

With home values on the rise, it makes sense to remind ourselves of the lessons learned after the housing bubble burst in 2009 so we can avoid making the same mistakes again.

Lesson one: If anything defined the previous housing bubble, it was that millions of homeowners dipped into home-equity loans to buy fancy cars, boats or even for down payments on second homes. Although using home equity to pay down more-expensive debt can be a solid strategy, house debt should never be used to live above one's means.

Lesson two: Homeownership isn't for everyone. Like every financial investment, it comes with risk — not the least of which is the fact that home prices go down as well us up. In most cases, people planning to live in a home for less than five years should seriously consider renting rather than buying.

Lesson three: Appraisers lie — or, at least, they used to. Having obtained a couple of home equity loans in the previous decade, I remember full well how the bank would establish a value that the appraisal needed to come in at, give us the name of a “good” appraiser and then we would receive an appraisal within a few thousand dollars of the bank's projection.

I didn't complain, even if my gut told me the appraisal was a little on the high side.

Why would I? I got my money.

Of course, by being quiet I was as complicit as the banks and the appraiser in taking advantage of a system that put homeowners at risk of taking on more debt than they could afford.

Fortunately, the Dodd-Frank Act established better firewalls between appraisers and banks to prevent conflicts of interest.

Lesson four: Potential homeowners should steer clear of mortgage loans they either don't understand or can't afford.

Lesson five: Avoid being “house poor.” In buying my first home back in the mid-1990s, I remember that the banks were encouraging me to buy more home than I felt I could afford, and my mother was encouraging me to buy less.

I followed her advice, and, boy, am I glad I did. There is nothing worse than being house poor — spending too much of one's monthly income on a mortgage.

I am glad the housing market is starting to regain some of its luster. The fact that home values are climbing could offset — or at least minimize — the negative effect on the economy that may come when the Federal Reserve begins to unwind quantitative easing.

But we must not forget the lessons that we learned from the housing bubble.

Frederick P. Gabriel Jr. is the editor of InvestmentNews.

0
Comments

What do you think?

View comments

Recommended for you

Upcoming Event

Oct 23

Conference

Women Adviser Summit - San Francisco

The InvestmentNews Women Adviser Summit, a one-day workshop now held in four cities due to popular demand, is uniquely designed for the sophisticated female adviser who wants to take her personal and professional self to the next level.... Learn more

Featured video

INTV

The bizarro world of DOL and SEC rule supporters

Managing editor Christina Nelson talks with senior reporter Mark Schoeff Jr. about why groups that supported the Labor Department's fiduciary rule oppose much of the SEC advice package, and vice versa.

Latest news & opinion

10 most affordable U.S. cities for renters

Here are the U.S. cities that are most affordable for renters, according to Business Student.com, which compared the cost of rent to average salaries.

9 best - new - financial adviser jokes

Scroll through for nine new financial adviser laughs.

Captrust, prominent 401(k) advice firm, ramps up its wealth management business

Captrust wants to grow annual revenue from wealth management to 50% from 30% over the next five years.

Fidelity CEO says zero-fee funds aimed at expanding its universe

Johnson says way to prosper in financial services is 'by building relationships.'

SEC advice rule contains a huge hole

Jay Clayton aims to clear up investor confusion by drawing a distinction between brokers and advisers in the agency's proposed package of revised standards. But where do dual registrants fit?

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.