Reasonably enough, Americans hate almost everything about the real estate recession. Underwater owners hate that they can neither sell nor refinance, distressed homeowners and consumer advocates hate robo-signing, and just about everyone hates plummeting home values. They even strike fear in the hearts of the buyers who are taking advantage of them.
So, it might surprise you to hear that there is a list — true, a short list — of real estate trends the recession has triggered that we hope will stick around.
- Buying for less than you are approved for. A few years ago, mortgage money was easy to come by, and the norm was to buy at or very near the maximum price you were approved for. The theory was that with prices on the rise, it made sense to buy as much house as you could, as soon as you could. Even if you didn’t need the space, you wanted to get as much appreciation as you could for your home buying dollar. Clearly, those tides have dramatically turned, and many home buyers are buying very conservatively when it comes to price. It has become very commonplace for buyers to tell their agents and mortgage brokers how much (or how little, rather) they are willing to spend, regardless of whether their income, assets and credit qualify them for a much higher price range. And buyers now stick within their self-imposed financial bounds when they make offers on homes. In addition to aspiring to a mortgage payment that is sustainable, even in the face of a temporary job loss, buyers are also conscious of the energy and maintenance costs associated with buying “too much” home for their needs.
- Buying for the long-term. At the peak of the market, people bought homes and took on adjustable rate mortgages (ARMs) with very short-term introductory payments they could just barely afford, expecting to be able to flip that house in sometimes as little as three or four months at a steep profit. We all know how that turned out. And as a result, today’s buyers seem much more committed to their homes, most buying with the expectation that they might need to stay put in those homes for at least seven to 10 years before they can break even. For some, this means they buy in a great school district even before they have kids, and they make sure they have enough space for the family they plan to have five or 10 years in the future. For others, this means not buying at all because their job or career requires mobility. The harder hit your area was by the foreclosure crisis, the longer you should expect it to take break even; conversely, in areas like San Francisco and Manhattan, a shorter, 5-year rule might make sense.
- Saving up, keeping a steady income, and polishing credit before buying. Obviously, buyers have to do a lot more work to qualify for a mortgage today than they did when subprime lending obliterated all good sense in mortgage lending. Today’s lending guidelines require that buyers document ample, consistent income to afford the mortgage payment, document a strong credit history and put their own skin in the game in the form of down payment money. Are these standards too tight? Arguably. But what no one can dispute is that the buyers who are tightening their belts to save for down payments, taking on mortgages that fall reasonably within their monthly income, and doing the work of paying every bill on time every time — or even paying debt down or off — in order to qualify for a mortgage on today’s market are creating strong financial habits in the process. And those habits will stand them in good stead throughout their tenure as homeowners.
- Reading your loan docs. Before you roll your eyes, understand this — foreclosed homeowners tend to fall into two categories: those who had crazy ARMs that reset to insane payments they could never afford without refinancing, and those that lost their jobs and couldn’t make the payments as a result. Some fall into both. But the fact is, the first group is full of folks who claim to have never read or understood their loan documents before signing them. Many of those buying into today’s volatile market got the memo and are meticulously scrutinizing the line items and terms of their notes, deeds of trusts and loan disclosures — and they ask questions when they don’t understand. Fancy that!
We’re happy to see most of these buyer-behavior trends and hopeful they will become the norm and stay there — even after home values have recovered.