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10 Housing Lessons Still to Learn

The Housing Bubble began in the Bay Area around 1996. That’s when home prices starting growing faster than inflation and faster than rents. By the late 90’s, people really took notice. By 2002, the movement took hold. By 2004, housing mania had become a full-blown religion.

Many things that were accepted as true in the bubble-times are no longer so . But for a generation that came of age during the bubble, these bubble-truths are the only real estate truths we know. Tearing them down is to tear at the core of our economic value system, directly challenging the reasons we’ve chosen to live the lives that we have. Losing one’s religion is a painful process.

A Necessary Education

“We need to go through this in order to get through this.” – Todd Harrison

And that’s the difference: knowing the answer is different that learning the answer. Learning is a process, a rewiring of our minds that helps us look at things differently moving forward. We might now know that housing prices don’t always go up, but we haven’t really learned it yet in a way that will change our behavior in the coming decades.

As the housing bust is about to enter it’s second phase, the education process will resume with full-force. When housing finally does bottom, perhaps 3-4 years from now, we will have learned – just as children of the Great Depression and children of the Vietnam eras – a new set of core values and beliefs going forward.

Here are 10 things we know, but have not yet learned:

1. Home prices do not always go up.

Okay…maybe we’ve learned this one.

2. Home prices to not go up faster than inflation.

Home prices do not outpace inflation over time. In the short-term there can be bubbles, but the long-term cost of shelter cannot go up more than someone’s ability to pay for it. Consider this chart of home prices since 1890, adjusted for inflation. You can clearly see that home prices to no better.

3. Investing is different than speculating.

Long-term value lies in the forced-savings of slowly paying down the principal over time, coupled with the benefits of rents that should pace inflation.

Expectations of anything less is speculating, not investing.

4. Wherever you live is not different.

There is no real estate decoupling. A higher-priced area is worth more, on a relative basis, than a nearby lower-priced one. But the relationship is still relative. If the lower-priced area sees an increase in demand, rising prices there will push up the entry-level prices in the higher-priced community. And vise-versa. And in reverse, which is happening now.

These adjustments take time…years in fact. But all market are effected by each other.

5. There is nothing wrong with renting.

Renters are not second-class citizens. They enjoy more mobility, less risk, and more liquidity. Across the Bay Area and most of the country, renters are also saving money each month.

If someone is going to be in the same house for decades, and slowly pay off the loan, and the price-to-rent ratio made sense at the time of purchase, then buying makes sense. Otherwise, renting is often the smartest, most financially-prudent decision a would-be homeowner can make.

6. You probably can’t afford to live in that big fancy house.

During the boom, anyone with a pulse could live in a big, new, fancy house. The man with the tie Mercedes said you were “qualified”…so it must have been true!

But, actually affording a home is different than qualifying for one, even with today’s stricter standards.

Affordability means different things in different income brackets. Here is one reasonable metric to consider: Home prices, in any given area, have historically averaged about 3.5 times that area’s median income. What you can afford is probably no more than perhaps 4 times your annual income. For some context, San Jose median prices reached about 13 times the median income during the peak of the boom.

And, if you need to use a product other than a 30-year fixed mortgage, you probably can’t afford it.

Consider this as well: if your home equity cannot be counted on as your retirement plan, you’ll probably need to save more money each month than you do now.

7. The mortgage interest deduction isn’t that big of a deal.

The extra costs of ownership (property taxes, special assessments, home repairs, maintenance) and transactional costs (transfer taxes, real estate commissions, loan fees, escrow fees, etc.) more than offset any perceived monthly savings.

8. Bigger isn’t inherently better.

Over the last 60 years, the size of our homes has grown while the size of our families have shrunk. During the boom, things got even more out of control.

But, big houses cost more to clean, heat, cool, furnish, and maintain. That’s a lot of time, money, and energy that could be put to more productive or fun uses elsewhere.

There’s probably only so much house that we really need, and the rest is for showing-off and storing all our stuff (most of which, we probably don’t need either).

9. Newer and fancier isn’t inherently better.

The remodeling and building trends of the boom years, convinced consumers that new fake-wood floors were better than old real ones, that everyone needs a fancy bathroom, and that any decent kitchen must have granite counters. This is utter hogwash.

Authenticity is the key to style and grace. Some homes just feel good…and the vibe usually because the house is comfortable being what it is. By contrast, many remodeled homes feel awkward and uncomfortable, perhaps because the house is trying to be more than it is. Keeping-up-with-the Jones’’s is not a comfortable or healthy thing for people or homes to endure.

The eras of excess – the 80’s business boom, the 90’s tech boom, and the 2000’s housing boom – have trained generations of Americans to be great consumers. But now the Age of Austerity is here. Frugality is the new black. Social mood is shifting to where conspicuous consumption is scorned rather than celebrated and simple living is back in style.

10. Building and remodeling with “Green” materials often isn’t “Green” at all.

There was a new community of 20 or so homes built near where I live in the East Bay, made up of 4,000+ sq. ft. “Green” homes. This was the peak intersection of the housing bubble and green consumerism.

The simple fact remains most green consuming isn’t as green as not consuming at all. Tossing your old TV to get a more energy-efficient one still puts an old TV in a landfill. Usually the most “green” thing we can do to our homes is just leave the how they are.

Sure, there are great new technologies (like solar power) and promising trends (like xeriscaping), but ec0-friendly consuming is usually not as eco-friendly as no consuming…or simply consuming less.

Disclosure: No Positions