How to Be a Smarter, Wiser Consumer

Perhaps it is no coincidence that this housing market dip is the most severe since the Great Depression. Since then, there have been generations of folks whose only experience of real estate was seemingly ever-ascending home values and ever-easier-to-obtain mortgage loans. In 2009 and beyond, buyers, sellers, Realtors and even tenants will be smarter and wiser, thanks to the lessons of the subprime mortgage market meltdown, the foreclosure crisis and the housing price reset. This wisdom should translate into smarter mortgage and homebuying decisions going forward, and a more stable market in the long-term.

In fact, one of the least excruciating ways to look at the housing “crisis” is as tuition — the price we have all paid for lessons learned. The thing is, the only way paying tuition makes sense is if you actually learn the lessons.

Some of the most important takeaways from the recent housing drama include:

• Bigger and faster is not necessarily better. Your family’s real estate move-up plan should be like the menu at your favorite chi-chi restaurant: organic, holistic and sustainable. By organic I mean that you should buy a more expensive home and take on a more burdensome mortgage as your household income increases, rather than taking a mortgage on the wish and prayer that your income will go up as your mortgage does. (The one exception might be for professionals who have a very certain income jump in their future, and make enough income to need a big tax write-off now, like pre-partnership doctors and lawyers, or pre-tenure professors.)

  Holistic means that your mortgage should make sense in the whole picture of your life vision, as it affects everything from where you work and how much you work to what you do in your spare time. Sustainable is self-explanatory; take a long-term view to deciding whether your mortgage payments are feasible for your family. Do your own long-term financial planning and make sure it is compatible with any long-term changes in your mortgage and payments before you pull the trigger.

• Read everything you sign when you buy. Many subprime borrowers — who make up about 60 percent of foreclosed homes, vastly disproportionate to the 13 percent of total mortgage loans they represent — swear that they didn’t know that their mortgage payment or interest rates, or both, would adjust significantly within a year or so after they bought their homes. While occasional instances of blatant fraud have been proven, for the most part these cases can be chalked up to buyers so enthralled with the rush of buying a home that they signed without reading. In fact, federal law requires that planned adjustments, and the nature of the loan be disclosed at more than one point during the transaction, and many times at the closing table. The upshot? Make sure you read before you sign; it’s not overkill to request your closing documents a day or two ahead of time — and if something doesn’t seem right, don’t sign. Period.

• Don’t treat your house like an ATM. Many homeowners who are currently “upside down” on their homes do not actually owe more on their homes than what they originally paid for the property. Rather, they owe more than they currently owe on the property, and they owe more than they paid because they borrowed heavily against their home equity. Equity lines of credit and loans are not inherently evil, but they make it super-easy for the less-disciplined homeowner to use borrowed money to buy matching his-and-her cars, take super swank vacations, boats and more. Smart homeowners use equity lines and loans as an emergency backup, for smart home improvements they can afford, and ultimately, sparingly.

• Think long-term. Probably the biggest lesson of all is that real estate is a long-term purchase; walk into your home purchase with the understanding that you might not be able to refinance or sell super quickly, if or when you want or need to. So, it behooves the smart buyer to be comfortable with their mortgage for the long term, rather than buying a home with the knowledge that a refi will be necessary 12 or 24 months after closing.