The thinking goes like this: buy a starter house, fix it up, leverage the improvements and appreciation that have increased your equity stake, sell it, and then sew the proceeds into buying a bigger and better house; repeat those same steps with your new house to secure your next upgrade; repeat until sometime in your mid-thirties to late-forties at the oldest, buy your dream house with terms that insure it will be paid off no later than the day you retire, thus eliminating and in essence “fixing” one of the biggest variable expenses at retirement age, when odds are your income will go down or be eroded by cost of living adjustments.
Even as America got mobile and people cris-crossed the country with moves, the above scenario worked because of a persistent and unrelenting appreciation of home values. A transitional lifestyle might create a few lateral side trails, but the assumed destination has been the same: a home owned free and clear to live in — or to sell in order to pay cash for a downsized home (while pocketing the proceeds) or in a more desired retirement location.
Something quietly shifted in the equation that is a direct corollary to the boom in the use of consumer credit as a way of life. Home prices continued to rise well beyond the inflation rate, thus increasing equity, which is another way of saying, “wealth.” But rather than letting the home nest egg grow, we turned this windfall into a new revenue stream for living expenses, usually by refinancing an entire mortgage with debt added in or by taking a second mortgage(s) to pay off credit debt rather than to do home improvements, another traditional way to increase equity.
It’s been said that retirement should not mean no more work — idleness is bad for your health — but rather it should lead to the ability to do whatever work you want, ranging from volunteerism to a second career.
A few of the potential impacts on our future in light of the subprime crisis and ensuing loss of home values include:
* we may have to work more years full or part-time than we planned because part
of our retirement package has been damaged;* it’s tougher to move — unless a company is guaranteeing the sell of your home (and a lot of companies have been forced to eliminate this program) — and watch your home sit on the market; even if there are great deals where we want to move, most of us can’t afford to buy without first selling;
* with less “wealth” we don’t have as much credit available to spend on those goods and services outside our normal income stream — which will hurt the easy-credit-fueled economy;
* you might not be able to move where you want to at retirement age — not all regions are equally impacted by the subprime crisis in relation to home values; there’s a reason small “ghost towns” in areas of the country that have experienced
population loss for decades are filling back up — cheap mortgages.
Will home values bounce back? I believe the answer is yes. But I think it’s going to take a few years. There seems to be too much inventory with so many people insisting on building new homes. But new house starts are finally going to slow down, which will be one more stressor on an already stressed economy, but which is required to tighten the housing supply and raise prices. How can I be so sure? Simple. If it costs $130 per square foot to build a new home and it costs $90 per square foot to buy an existing home less than 10 years old, home buyers are going to figure ways to freshen up and personalize the existing inventory. The per square foot cost gap is at its highest ever on a national aggregate.
As someone who has benefited tremendously from the appreciation model — and then taken an “equity beating” during a recent move (that included building a new home) — I am realistic but optimistic that owning a home still needs to be a key strategy in securing your best financial future. Obviously, our future, financial and otherwise, is not just up to us, but I’ll throw out a couple modest suggestions:
1. Get on a schedule to pay off your house before retirement. If you aren’t familiar with the simple little secret of making double principal payments, which will allow you to cut your 30-year mortgage in half, visit any reputable financial website to learn how — it’s not nearly as daunting as it sounds. If you’ve elected one of the dreaded interest-only loans, put a principal payment into your monthly automatic payment schedule and start paying down — yesterday.
2. Don’t treat appreciation as a revenue stream but rather a long term investment — retirement. Second mortgages and refinancing as an ongoing strategy to eliminate debt needs to be eliminated.
3. Don’t put your eggs in one basket — your retirement nest egg should be a diversified program with IRAs, 401ks, Social Security, personal savings and investments, company retirement plans, ideas for post-retirement income, AND a home that is paid for!
