The housing market has taken an amazing journey in the past 15 years or so. In the mid-90s, home prices were reasonable, but they were on the rise. In fact, the value of houses increased over 10% per year in most areas, and showed no indication of slowing down, that is, until the year 2006. Home prices were at an all-time high and investors were still buying in because of the historical rise in value, but suddenly the value began to plummet, leaving many people upside-down in their mortgage (they owed more than the house was worth).
Do you know why this decline happened? Two reasons: The greed of the bank, and the greed of those that were purchasing the homes. The bank was making great money from the loans that they provided, so why not give people more money? And, those that were borrowing either borrowed more than they could pay back, or their jobs were not secure enough to support such a long-term loan. For this reason, some of the loans were not paid back, and the wave of foreclosures and short sales began.
Edmund Burke once said, “Those who don’t know history are destined to repeat it.” Let’s learn from our mistakes in the past so that we can create a much better future.
I have to admit, I love houses. The idea of home ownership just gets my juices flowing. I’ll have the freedom to grow plants in the yard, put holes in the walls for any reason I can conjure up, and I’ll be able to paint the walls any color I please! It’ll be mine, and man, that’s going to feel awesome!
Have you ever watched HGTV? It’s all about houses! Some shows are about home sales, others are about home purchases, and some are just tips to spruce up your home on a small budget. It’s a great network, but I’ve seen a countless number of people become house poor while their cameras were rolling. If you haven’t heard of the term, “house poor”, this is where a homebuyer borrows as much money as possible from the bank in order to buy their fabulous house, and the payments are so large that they need to scale back on their regular spending just so they can make the house payments. They no longer are able to go out to eat on the weekends or go to the local carnival, all because they wanted the best house on the block.
Here’s what happens: The happy couple decides that they are ready for home ownership. They, of course, don’t have enough money to buy the home, so they skip off to their local bank to see how much they can borrow. The bank runs the numbers and decides that the very maximum loan amount that this couple can handle is X dollars (let’s say the amount is $250,000). So, what value homes does the couple start searching for? The $250,000 ones of course! They might look at a few that are a bit cheaper, but once they find that perfect home with stainless steel appliances and a 3-car garage, they simply can’t bring themselves back to that shabby $225,000 house. This is how people become house poor, and it happens all too often.
How do you avoid becoming house poor? The answer is actually pretty simple, live below your means. If the bank thinks you can afford a house that’s $250,000, start looking at homes in the $175,000 range. You’ll have money to make improvements on the house, you can still go out with friends, and you’ll be able to invest for your retirement. If you want to be happy, I suggest you avoid becoming house poor.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.