Top Three Lessons for Financially Responsible Home Owners.
By: Brad Rachielles
Disclosures: I am a REALTOR(R). I am a member of the National Association of REALTORS(R). I firmly believe the following, WHETHER IT FOSTERS INCREASED SALES OR NOT!
Several days ago, Mr. Ron Phillips, 2012 Immediate Past President of NAR, posted an article in "Voices of Real Estate / Blog" titled.... "10 Lessons to Learn as the Housing Market Recovers.
His list of 10 speaks to the real estate industry as a whole, but three items are especially important for home owners and/or home shoppers preparing to buy a home. The specific items are his. The elaborations are mine.
TOP THREE LESSONS.
"4. Home prices go up and go DOWN"
We were all lulled into security by the meteoric price increases before the bubble burst. Little fluctuations went unnoticed in the confidence that 15% appreciation or more in home values would continue even though reason said that that could not happen forever. The apparent reason for home ownership at the time became the investment value. The other reasons to own were almost forgotten. Comfort, Pride of Ownership, being a Part of the Community, Freedom, Family Security, Better Choices in Education for our children.... these things and more took a second seat to the investment aspect in our minds. Now that the prices HAVE gone DOWN, it is especially important that these other things take their rightful place in our thought processes when thinking of home ownership. If buying is only a financial matter, then you may be suited for being an investor with it's higher risks and unemotional detachment from the property. Maybe you are not material for home ownership.
"7. Home equity should not be used for ordinary living expenses."
There are several aspects to look at here. Pre-2007, the "home-as-investment" theory was strengthened with the thought that it was a piggy bank. People learned that they could refinance willy nilly and have ready cash for luxuries, boats , campers... whatever, thinking that they were safe in the "fact" (NOT) that there would be more home equity next year when the home appreciated even more. Moving up to homes beyond their means was done because they could refinance and get cash to cover higher mortgages. "Why not"... the home can be sold for more to cover our problems if needed.
This is more than likely the reason why there are so many foreclosures and short sales today. They COULD NOT refinance their way out of trouble. The equity was gone because the piggy bank was empty.... VALUES HAD FALLEN. It's safe to say that many would not be in trouble if they had not taken out equity for daily living expenses or luxuries.
"8. Financial reserves for families, companies and countries are necessary."
Of these three groups, only well managed, successful companies seem to understand this concept (no comment on that third group). Home buyers and owners from here forward desperately need a financial plan. Learn what it takes to manage money and prepare for the future. It is well known that a huge portion of the home owners are just one catastrophe away from being delinquent on their mortgage. Illness of a wage earner, a car wreck, loss from natural disaster, major home repairs.... all can spell disaster for the home owner who has less than one month's cash for reserves. I've heard that a SIX MONTH RESERVE is prudent. I'm NOT a financial councilor, so get the facts from a trusted expert in that field. If you have little resistance to catching a "Case of the WANTS", (I want this, or I want that) you may be better off renting, unless you can truly afford the luxuries.
I truly hope that these "Top Three Lessons for Financially Responsible Home Owners" were not learned the hard way. HOME OWNERSHIP DONE THE RIGHT WAY IS WONDERFUL!
Photo credits: all from Flickr and all Creative Commons lic as of 7/27/2012
Broken Piggy Bank: Images of Money Photostream
Nest Egg: 401(K) 2012's photostream