While buyers take the bulk of the heat for ballooning up home prices at the peak of the market, homeowners were not entirely innocent, either. During the sub-prime era, the owner/seller-side bad behavior included fatal missteps like over-leveraging their homes, making home and mortgage decisions based on a very short-term horizon, and taking on clearly unsustainable mortgages, with fingers crossed that things would continue to go only up, up and up.
Well, clearly the market has educated us all out of that behavior, now, hasn’t it? Even if this new era of Conspicuous Frugality has been imposed by an uber-tight credit market and upside-down home values, some of the new norms in homeowner behavior are pretty financially fabulous, if you ask me. Hopefully, these four new habits in particular will stick around far after the Great Recession is nothing but a faint, if cringe-inducing memory.
- Not using your home like an ATM or personal bailout. At the top of the market, it was not at all bizarre for people to refinance their homes every year, often pulling cash out to fund their family’s negative monthly cash flow or to “pay their bills off.” Unfortunately, being able to get “out of debt” or tap a seemingly endless cache of cash for discretionary spending without having to make long-term changes to spending habits only perpetuated dysfunctional financial behavior. One study showed that over 70 percent of homeowners who used equity to pay off credit cards were back in the same level of debt as they’d gotten out of within a very short period of time. Epidemic negative equity and tight guidelines for cash-out refis has stopped a lot of this behavior, but even homeowners who have equity are very cautious about ending up underwater because they borrow too much. Nowadays paying your bills off the hard way and not buying things you can’t afford seems to be what all the cool kids are doing.
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- Paying principal. Again, when homes seemed like they’d only ever go up in value, the idea of paying your mortgage off seemed provincial and antiquated — why not simply keep on pulling cash out to buy more and more houses you could keep pulling cash out of? If the bank would give you a negatively amortizing loan and that would let you buy an even bigger, better house that would appreciate even faster, why not? The last four years is why. And with so many Americans having witnessed the fallout of foreclosure, seeing people they know have to move out of their family homes and rent (in the best case scenario), the idea of paying your home off and owning it outright is now en vogue – even though some financial experts advise that it might not be the best financial move.
- Prioritizing efficiency-boosting home improvements over cosmetic ones. At the top of the market, home improvement was all about offering more flash to turn more of a profit, so counters, cupboards, floors and other highly visible, cosmetic house tweaks were favored by home owners. Now, many are planning to stay put for much longer than they expected, because of depressed home values. And given the general scent of frugality in the air, as well as some tax credits for energy efficient home improvements – which do not expire until December 31, 2011, by the way — home owners are starting to prioritize home improvements that can cut down their monthly utility bills and make living in the home more comfortable for the long term – some with the thought that next-gen home buyers will also prefer homes with tankless water heaters, dual-paned windows, better insulation and other energy-efficient features.
- Looking at their homes as a place to live, rather than just an investment. Faced with negative equity, some homeowners took a look at the numbers and decided to walk away from their homes and mortgages. But many, many more took the same look and made the opposite choice, electing to stay in their homes simply because it is their family’s shelter – and not just an investment to be dealt with strictly on the basis of its financial value.
I’m not saying I want us all to go around stuffing bills under the mattress like some of our Depression-scarred ancestors. But I do believe that this Recession will leave us changed, renters and owners alike; our best bet for avoiding a repeat is to make sure the lasting changes are positive ones like these.