SCOTUS And Responsibility

 
US Supreme CourtThe headline made it sound like homeowners were getting screwed by the Supreme Court. “Supreme Court Hands Defeat to Struggling Homeowners” it said.

Here is how I would have written the same headline: “Supreme Court Says Pay What You Owe.”

In a 9-0 decision the court said that when a homeowner is underwater, secondary loans such as home equity loans and second mortgages, cannot be automatically discharged, simply stripped off, in chapter 7 bankruptcy.

I have written a lot about the housing crash and the people who were reckless, who put instant gratification above security and common sense.

Stupidity, greed, or a lack of knowledge is no excuse. If you sign a document and take the loan, you have an obligation to pay it back.

Bankruptcy exists to help people who get in trouble and is used correctly every day. The court’s decision doesn’t say that these loans can never be discharged, just that it’s not an automatic thing. Why should it be?

Sophisticated financial transactions are available to everyone but too many people don’t take them seriously enough. Too many people don’t give themselves any wiggle room, don’t plan for the unexpected. As I say in What Next, “it’s not the plan for the expected that saves you, it’s the plan for the unexpected that does.”

Here are my rules of thumb:

If you can’t afford 20% down, you can’t afford the house

If you can’t afford the mortgage on one salary, you can’t afford the house

If you take a second mortgage you should be able to pay it off quickly

If you take a a home equity loan it should be related to the house, not for something like a car or boat

Are some of these difficult to get to? Yes, but sticking to these rules will set you up for success down the road.

 


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Home, Investment, or Both

 

I’ve heard it said that your primary home, the place you live, is not an investment but I disagree. I have been very clear that it is not an ATM, a source of cash to be used to finance an unsustainable lifestyle but I do believe it’s an investment. I know I’ll get strong opinions on this from a lot of people but first let me explain.

When people hear the word investment they often think of stocks, bonds, mutual funds, or business ventures but there is a lot more that you can invest in including intangibles. You can invest in time, spending time with family and friends. You can invest in yourself by exercising and taking care of yourself. You can invest in knowledge by being curious and always learning.

When it comes to your home it is an investment in stability, in yourself, in a better future. Handled recklessly buying a home can lead to disaster. Handled properly, like other investments it can provide decent returns. How? Let’s start with a simple example.

Assume you’re 25 years old and are buying your first home. You spend what you can afford and put a proper 20% down payment (crazy right? – it shouldn’t be) on a $100,000 home (keeping the math simple here). You would have liked to buy a bigger $200,000 home but simply couldn’t afford it. Ten years later, assuming “normal” appreciation of 3% per year you sell your home for $135,000 the equity you’ve built up plus your other savings and investments allows you to purchase a $200,000 home.

ToolbeltNow let’s look at two other options. First, you’re a handy person and over the years you make improvements to the house at considerably less cost than if you had hired people to do the work. When you sell the home in ten years it commands more than the “normal” price increase and you sell it for $150,000. Now combined with your other savings and investments you can afford to buy a $250,000 home. Second, let’s assume that you paid extra toward principle each month and were able to build even more equity. When you sell in ten years at $150,000 you can now afford a $300,000 home.

The term investment doesn’t mean you’re going to get rich or that you’re even going to get a positive return, any investment has risk and that goes for housing as well – I think we all know that now.Home Values Chart

People who say it’s better to rent point out facts such as you’re not paying property taxes and insurance but the fact is you are. As a landlord I make sure your rent covers my expenses which include property taxes and insurance. When you leave the rental you have no equity to show for it.

To me a home is a great investment because it serves two purposes; the first is as a place to live and the second is as an asset that gives you more options in the future. Used properly a home is indeed an investment just not a get rich quick scheme.


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A Crisis Isn’t A Crisis For Everyone

 

I read the news today, oh boy!

“Housing Crisis to End in 2012” the headline said. But my question to you is what housing crisis?

I’m not being stupid, I didn’t just crawl out from under a rock, and I didn’t have my head in the sand.

Actually here's my wife under a rock!

A crisis is only a crisis for those affected, for everyone else it’s not. My home lost value as did my rental properties, significant value compared to the overinflated heights of 2006, but is that a crisis? If I had to sell, maybe, but only if I owed more than the mortgage.

There is no doubt that a lot of people were very badly impacted by the housing market, were taken advantage of, made really bad decisions, had bad luck, or a combination of all of those. I’m not going to try to assign blame on a macro level, each situation is different.

Whether the housing crisis was or wasn’t a crisis for you, there are lessons to be learned, lessons in what next.

In yesterday’s post I wrote that there are consequences to every decision and that a What Next approach takes a long term view. That’s why financial planners suggest an emergency fund, liquid savings that can be accessed to pay your expenses in case of, well, an emergency.

BE CONSERVATIVE

The lesson from the housing crisis whether you emerged unscathed or not, is to be a little (or a lot) more conservative in your estimates. If buying a home is out of reach without serious stretching then delay the purchase.

The reality inherent in any major purchase is that you will have to give up one thing to achieve something else. Sometimes in order to afford the house you want, you’ll have to save more aggressively and that might mean foregoing that new car, or the boat you really want but can’t really afford, or the lifestyle that looks good but comes with a steep price.

HAVE A GOOD REASON

The second lesson from the housing crisis is to make decisions for the right reason. A house is a place to live, not a piggy bank and not a lottery ticket. Buy a home to live in. Having a good reason goes for other “assets” like a business, too. I’m on another journey, another scheme my wife calls it, to open a franchised business. She is asking the exact right questions; “for what purpose? How will we benefit and is the trade-off for that benefit worth it?”

STICK WITH YOUR PLAN

I have to admit that I don’t have compelling answers to those questions. We have a plan in place and we’re sticking with it. Sure, it can evolve, but it doesn’t have to. A lot of people got distracted by the ever increasing home prices and altered their plans. Not a smart move without a compelling reason. And prices keep going up isn’t a compelling reason.

LIVE BELOW YOUR MEANS

This really encompasses all of the previous lessons because if you are a little more conservative, wait until there is a good reason before making a move, and stick with your plan, you won’t be impulsive. A lack of discipline in spending is what leads a lot of people to live beyond their means. Living below your means is not a bad thing, it’s not a sacrifice, it’s really what everyone should be doing because it means you’re saving. If you live at your means that indicates to me that you aren’t saving any money.

It’s a shame that it took a crisis for people to learn these lessons, I just hope they stick this time.


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