On your mark. Get set. Buy! (Or sell. Or build, borrow, or refinance.) And so the real estate market has gone in recent years. With record-low interest rates and record-high new home developments, the question on everyone's mind is: How exactly should you play this market?
The answer: Just don't.
Sure, the housing bubble may burst just days after you close on a new, pricey property. Or it might inflate and continue to strengthen, buoying an investment that your ancestors will celebrate for generations. Rates might skyrocket and housing prices may plummet. Toe-tapping and hand-wringing won't do you any good. If you buy a house (or choose not to) for the right reasons, it won't really matter.
House vs. home
I'm not intentionally glossing over the gravity of this issue. I know that two-thirds of Americans own their homes, and that for the majority, it's their biggest debt and accounts for the lion's share of their lifetime net worth. But a swig of Pepto and a small perspective shift are overdue.
There's a reason that your great-grandmother's needlepoint reads "Home Sweet Home" and not "House Sweet House." The difference between a house and a home is more than semantics.
It's the same reason why real estate agents ask sellers to stow away personal knickknacks during an open house. Family photos and homey touches make clients feel like intruders. Stripping them away makes it easier for prospective buyers to picture themselves making the house their home.
The Barbie Dream House (note that it's called a "house") was just a place for her to park her convertible and change outfits before her dream dates with Ken. Her furnishings were generic and the layout suggested a transient abode. It was more beachside timeshare than Vermont family estate.
A home, on the other hand, is where you lovingly hang great-granny's plaque and record your kids' growth spurts on the kitchen door jamb. It's where you build Saturday morning traditions, find the best hide-and-seek spots, burn the linoleum in your first attempt to make pancakes, and create the comfortable settings that fill your family's memories and photo albums.
I'll stop with the mush. Anyone who owns a home knows that it's not all sugarplums and wall-painting parties. According to Home magazine, homeowners should annually factor in 5% to 7% of their home's value to cover care and handling. (For those scrambling for a calculator, that's $12,500 to $17,500 per year on a $250,000 abode.)
And what about the home as massive piggy bank? Sure, houses historically appreciate in value. Someday yours might even provide a handsome windfall for you or your kin. But it's not an investment. Unless you own a home that you rent out for extra income, you shouldn't consider yourself a home investor.
On the other hand, approaching home ownership with some of the same level-headedness we advise in stock picking is not such a bad idea after all...
Have you been waiting in the wings for home prices to cool down, or perhaps you put in a few bids only to watch the ranch go to a buyer who could offer much more than list price? Maybe you even considered a counter-offer, even though it was well above what you promised yourself was your top price.
Buying a home, particularly in a hot geographical market, is an exercise in emotional restraint and lightning-fast high-dollar decisions. Sounds a little like the stock market, doesn't it?
It's not a bad idea to approach home buying with the attitude of a savvy stock investor. We've long preached the benefits of buy-and-hold investing. The same approach translates well to the home-buying market. First, use only money for your down payment that you do not need (for college, for cars, for cruise vacations) for at least the next five years. You can reduce price risk if you buy a home in which you plan to stay put for at least five years.
Next, do a real-life assessment of what you can really afford (and not what the bank claims you can). You've heard the term "house rich, cash poor," right? Trust me, you don't want it to be used to describe you. Consider a worst-case-scenario: How would you feel if your home's value tanked next year? What if you or a spouse were transferred to a new locale and you had to sell? The ability to answer such questions honestly will help you avoid the stink of market timing and speculation.
A lot of people avoid such considerations and instead base their decision to buy solely on the potential tax savings. Well, think again. Our own tax guru, Roy Lewis, implores readers to buy a home, not a deduction. "Tax savings shouldn't be among the biggest reasons to buy a house," he writes. "While the interest that you pay on your home mortgage likely will reduce your taxable income and your overall taxes, make sure that this deduction is really all it's cracked up to be."
He goes on to correct the old wives' tale upon which too many home buyers base buying decisions: "Many of you (far too many) still believe that if you pay $100 in home mortgage interest, you'll reduce your tax bite by that same amount. That's just not the case. Taxes are a percentage game. If you're in the 25% marginal tax bracket (as are the majority of taxpayers), then that $100 in mortgage interest paid actually reduces your tax liability by only $25... maybe."
Like investing, some considerations are quite personal. My colleague Mathew Emmert and I have considered the rent vs. buy issue, and our reasons for remaining renters are quite different. Mathew suffered housing sticker shock when he moved to the Washington, D.C., area and is still grappling with the rent vs. buy issue. I got a lot of flak from readers when I wrote about why I won't buy.
While some may see my desire to have a cushy emergency stash of cash as ludicrous, it does illustrate another very important investing principle: Your decisions should be guided not by the market but by your personal situation.
For those who own
It's not just buyers feeling lost in today's real estate market. Current homeowners can also benefit from the "do nothing" perspective shift. Again, long-term buyers will most likely be rewarded. What dashes the dreams of the long-term homeowner are short-term catastrophes that drain the bank accounts.
An adequate emergency fund can save you from having to sell at the exact wrong time. What about the ups and downs of home prices on your block? Remember, you don't lose a dime of your investment until you actually sell.
If you're considering taking out a home equity loan, make sure it's for the right reasons. Again, think long term. Using the extra cash to pay for essential expenses that improve your family's future is one thing (think home improvement, college). Borrowing the money for a short-term treat (e.g., vacation, car stereo) is quite the opposite.
Whatever history tells us about this time period, remember that a home is where you live. When you're tempted to somehow play the current market, just don't.