After the precipitous drop in home values from 2004-2009, new home buyers saw their dream of building a residential nest egg vanish. Most were bewildered as for the previous half-century, post WWII saw both the U.S. economy and home building emerge stronger than ever. Back then, homes appreciated in value every year without fail, only the percentages tapered off during a tighter economy. For those skittish about playing the stock market to accrue wealth, real estate became the only game in town. The notion that ‘rent money is spent money’ was pervasive, and newly married couples began saving for a down payment right after the honeymoon.
By 2008, however, the honeymoon was over. Hit with the worst economic downturn since the Great Depression of 1929, first stocks and similar investments, then home values were the last bastion to fall. From 2004 until 2010 across the country, home values averaged a 30% drop. While the U.S. economy has demonstrated steady upward progress since late 2009, we are only now (if one believes the politicians) on the cusp of reestablishing the same economic vitality as before the fall a decade ago. A lot of ink has been spilled with countless journalists raising fear among potential homeowners as to the volatility of the housing market. For anyone who has studied economics, they should have seen it (the ‘recession’) coming.
Economics 101: What You Need to Know About Supply and Demand
Most of the theory behind the U.S. economy and its policies stem from a British financier, Maynard Keynes. Simply put, nations are supply-focused and when demand for a commodity, such as housing, is high, inflation must be introduced to drop prices to more acceptable levels. Now that is a very diluted version of his macroeconomic theory. To extend it a bit, know that everything, even downturns, runs in cycles, and that cycles impact some areas, regions, even nations, with differing intensity and duration. Why this happens will not be explained here. In short, the current economic downturn was forecast decades ago by a Brit you’ve probably never heard of, and everyone from top executives at Fortune 100 enterprises and elected leaders, follow the economic trends as laid out by Keynes over 80 years ago. Also, that the solution for home buyers, while simple in theory, may be hard to accept: Save as much as one can for a down payment, keep one’s credit rating as high as possible, and know when it is time to apply for a mortgage, and to call a realtor to ‘get in the game’.
How to know when it is time? Well, the cycle we just mentioned represents the business or trade cycle. It is viewed as the up and down movement of the Gross Domestic Product (GDP). The cycle represents the time that an economic boom peaks and the inevitable contraction both run their course and the economy levels off. What happens next? In other words, what goes up must come down. The boom/contract cycle starts over again, just from a different position that it had held before. It is not a simple matter of waiting until the boom collapses because along with it, other factors, such as employment, may be impacted as well.
Let’s now compare taking the plunge and buying a home with the game many played as a kid, double-Dutch jump rope. Remember standing by the sidelines and gauging when was the optimal time to jump in yet avoid becoming tangled in the ropes’ revolving cycle? (Brought new meaning to the term, ‘knowing the ropes’.) You might we wondering, well, if the economy is on the rise again, is it time? Simple rule of thumb: If your debt load is small or non-existent, if you have saved at least 10% of your home’s estimated cost, if you have been gainfully employed for at least the last two years (preferably at the same firm), if you are fiscally responsible, then is it highly likely that you can enter the marketplace and experience all the joys and challenges of home ownership.
What If You Bought a Home Between 2004 and 2010?
This theory also works for those who have purchased and maintained homes since 2004. Residential home prices across the nation are expected to appreciate by almost 7% this year. Despite this increase, many will find that their premises may not be worth quite what they initially paid for them, but understand that realistically, they have not thrown money away on rent. Know when to cash out by understanding what you need monetarily to maintain the next facet of your life and that your current home will only partially finance that new lifestyle. There are many housing options to consider as well: condos, new-builds, older homes, and townhomes are but a few choices.
Where to buy? What to buy? When to buy? How much home can I really afford? These are some of the questions to ask as well as a great way to establish relationships with a mortgage banker and a realtor. These professionals will have your back and guide you toward home ownership. For example, if you are a DIYer, a fixer-upper in a well-established neighborhood will make your money go farthest. That’s because you are building equity into a home by upgrading it, and older homes will likely have lower property taxes as well. Housing starts are another great option as the current demand for construction supplies and lumber is soaring. New housing communities and condo development often have ‘sweetheart deals’ and offer substantial discounts to buyers not willing to wait until the entire building project is complete. Putting up with the noise and inconvenience by day for a couple years may be worth it to spend less when buying your forever home.
The most important caveat for those who have calculated what they need to buy a home, is to also know what it will cost to maintain and to live there day-to-day. There are many formulas online to help you with your personal finances, so do the math, know your numbers, and get out there and buy your piece of the American Dream.