All the mistakes leading up to the collapse of the real estate market seem so obviously clear today. Although we live in the present and plan and worry about the future, history provides us the opportunity to learn from our past mistakes and move on with new ones.
In many respects we were all partially responsible for creating the housing bubble. The federal government’s attempt at increasing homeownership was politically correct but had unintended consequences. Wall Street, in partnership with lenders, were, at best, too optimistic about the value of their sub-prime loans and, at worst, corrupted by greed and criminally negligent while Main Street Americans were naive believing property values would continue to rise at historically high levels. Those not directly involved in the real estate market took advantage of its immediate benefits by expanding both the public and private sectors beyond sustainable levels.
Recently I have sat around a few kitchen tables listening to sellers lamenting about how just a few years ago they could have sold their house for nearly twice its current market value. Personal circumstances, not the market, often determine when a house goes up for sale. Many real estate sellers made the mistake of holding out too long for “their” price and got stuck with an over-encumbered property. They forgot an old real estate axiom. “It is better to leave some money on the table and sell while the market is going up than to hold out for every penny while the market is coming down.”
While today’s sellers don’t have the luxury of going back in time and applying the lessons learned, buyers can benefit by understanding the most common mistakes their predecessor made.
Although a home can be a good solid investment over the years it should not be confused with a primary investment vehicle. Too many buyers purchased highly leveraged homes with the sole intent of making a quick profit based upon future appreciation. When the market changed buyers were either unable or unwilling to hold onto their underwater homes.
Another big mistake that many homeowners made was viewing their home as an ATM. After all, why should all that equity be sitting in the family home when it could be used to buy stuff? Homeowners couldn’t resist the temptation of converting equity into cash. Nearly the entire country went on an extended shopping spree.
Extensive remodeling was a favorite place to put newly discovered refinancing cash. Occasionally the costs of a room addition or major remodel may justify a small home improvement loan but rarely will a homeowner recapture the expense of the remodel upon resale. According to the National Association of Realtors’ annual survey, a $20,000 kitchen or bath remodel will typically pay back half upon resale. A $20,000 pool might pay back $5,000. The justification for expensive remodeling was that a homeowner could always get their money back upon resale. Not only was that not true, but in declining markets the recapture percentage for a costly improvement is greatly reduced. Over-improving a home for the neighborhood can be a costly mistake.
We are by nature optimistic — often to our detriment. The expectation level of too many buyers became unrealistic. The typical homebuyer between 2002 and 2006 believed property values would continue going up; they could always sell or refinance their house; they could recoup any money they spent for remodeling and they would always have a better paying job next year. Some of us knew property values could not sustain the double-digit yearly appreciation. We took comfort, however, knowing if property values settled down a bit they would quickly bounce back up. We are still waiting for the bounce.
To a degree, homeownership became an entitlement. Everyone, regardless of financial maturity, deserved the same opportunity to own a home. Housing advocates, special interests and our elected officials endorsed policies that opened ownership opportunities for the “under-served.” Political correctness and greed replaced prudent lending practices.
In July I traveled back to Northeastern Ohio to help my aunt and uncle celebrate their 60th wedding anniversary. After the festivities I asked my uncle what he attributed to such a long and happy marriage. He said, “Well, I just planned on staying around a long time.” He was referring to long-term commitment. Many who purchase a home during the good times walked away when the market turned south.
One character of our society is our high mobility. Nearly 37 million folks moved from one place to another last year. According to the U.S. Census, the median time a homeowner lives in their home is seven years. That’s good for real estate sales but perhaps there is value to remaining in one spot longer.
Exchanging a newly purchased item is nearly a shopping entitlement. If it doesn’t fit, doesn’t look right or is the wrong color, most merchants will gladly exchange the item for another or refund our money. Many home purchases were made with the idea that if it didn’t work out they could easily sell and buy another home or at least get a return of their investment.
I suspect the next round of homebuyers will have a different level of commitment to their home than their predecessor. They will weigh both the advantages and disadvantages of buying a home, refrain from tapping its equity unless necessary and be more prepared for the unexpected. Those are all good things.