Sunday, June 26, 2011

My Grandfather Was Right

There are many reasons for the current situation in the real estate market: greed, unexpected loss or change of employment, health crisis, predatory lending, and bad decision-making are all high on the list. Many homes are now being sold as short sales or foreclosures creating a log-jam of available properties that, as of late, doesn’t seem to make much sense to most economists.

Home prices are presently at an all-time low, while residential mortgage rates also remain aberrantly low-- two things that invariably never happen at the same time. The Wall Street Journal recently published a 15-year conventional mortgage rate at an unbelieveable 3.65%!

So why aren’t people taking advantage of the current real estate market?

Consumers have adopted a “wait and see” attitude, despite the fact that housing prices and mortgage lending is the lowest it’s been in many decades. The fact of the matter is this lack of consumer confidence is feeding off of itself. People are caught in a spiral of fear and have decided to play it safe. Many consumers got burned by a never-fail system. Think about it. What baby-boomer hasn’t heard (and reiterated) these words from the previous generation, “You can’t go wrong with real estate!”

The ironic fact is the pre-boomer generations was absolutely correct. However, when they gave this sage advice, they assumed that we would be like they were: a stationary generation. Planting roots, living simply, and staying in one place, one community, one neighborhood, one home, for the duration of our adult lives just isn't the way most of us live. The “boomers” and the generations that follow, are transient. In this changing postmodern world, many of us move around our home state region and our country in search of better living and better working conditions, or to be closer to our children (and grandchildren) who are also seeking the same.

The secondary issue that plagues the real estate market, is that a large group of Americans in the recent past, have treated real estate like the stock market, and became day-traders. The issue here is obvious: when you’re a day-trader [in the stock market] and you loose your “stake,” you don’t usually loose your home too.

So does that mean residential real estate is a bad bet?

Not at all, as long as you just follow four simple rules:

1. Don’t “gamble” with your home It serves three significant purposes:
a. It is a place to live and nurture family
b. It is a place to shelter money [via the interest deduction from the IRS]
c. It is a place to steadily grow considerable wealth over long periods of time

2. If you don’t think you will live in one place for at least 5-7 years, you should probably rent or (forgive me mom’s and dad’s) stay at home a little while longer and try to save money for a future purchase with a long-term goal.

3. Only buy what you can afford. If the only way you can afford your dream home is to finance it with a risky short-term ARM (Adjustable Rate Mortgage), or by leveraging everything else you own, you probably should wait or reevaluate your expectations. (Greed is partially what got us into this mess.)

4. If you decide to play “real estate investor,” don’t gamble with your primary residence, unless you want to end up living in your car.

The real estate market is on its way back to normalcy. We all must remember that when you look at the real estate market in 10-year chunks, it still remains one of the soundest and safest investments around.

My grandfather was right, “you can’t go wrong with real estate!” Just remember the rules.