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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Trading Up

 
The headline today (May 2012) read “Housing Market Recovery Gains Traction.” I guess that’s a good thing. It’s certainly good for anyone trying to sell a house or hoping that it will at least be worth what they owe on it. I suspect we’ll see more of those stories as time goes on and eventually (probably not for a very long time) we’ll see that home prices have surpassed their 2006 peak.

Don’t get too excited because, human nature being what it is, I’m sure people will fall right back into the trap of bad habits.

I wrote the piece below for a previous blog I ran in March 2006 (before the collapse) about why owning a home is a danger for some people. As long as you don’t get caught in this trap, you’ll be fine.

Trading Up

My parents have owned the same house for more than 30 years. My cousin owned her home for 40 years, raised her children in it and one of those kids will probably live in that house after she’s gone.

Modest HomeHave you ever heard of a mortgage burning party? Well, it used to be that people would buy a house and live in it until they died, working year after year with one goal in mind, paying off the mortgage. When the day finally came and the mortgage was paid off the homeowner would burn the mortgage as a final act of freedom. It was a significant event.

This has become rare these days as people continue trading up to ever larger homes with more amenities that end up costing more to maintain. It’s theBig House common roadblock to wealth – status.

It’s not a conscious thing. We don’t wake up one morning and say “I’m going to put status over saving today.” But when it comes time to buy something major like a car, you probably want the newest model with the most amenities and biggest engine. If you could get a Mercedes or BMW you would.

It’s the same with a home. You’re probably going to stretch to afford the most you can and, in time, when your financial picture brightens and you’ve built up some equity, you’ll want to upgrade. Never mind that you already have rooms that are rarely used or that it will cost more to heat and cool the house. No, you want a bigger house so that you can impress friends and family. Like I said, this might not be a conscious decision but if you would just ask yourself the question “is it really necessary for me to move” you’ll be surprised at the answer.

We do this all the time. Do you really need that new DVD? Do you really need that new grill or would a bit of cleaning work just as well and save you hundreds of dollars?

Yeah little things add up but big things add up quicker. So stay in your current house a bit longer. Keep that car for a few years after you finish the payments. It may be a subconscious thing, seeking status, but you can make a conscious effort to fight that urge and do more by spending less.


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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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