“Buy and Hold” Makes a Good Homeowner

Homeownership is the foundation of a solid, long term financial plan.   Before rampant speculation spoiled the housing market, the average American lived in a home for about 7 years.   With the disappearance of easy home loans, the market has been in a correction phase.  The new wave of homebuyers will be better qualified, more conservative, and able to seize the opportunities of a plentiful market.  

Most Americans are not at foreclosure risk, and have faired well with their single most important asset.   Most foreclosures involved investors that intended to flip their property for fast gain, or homeowners  who undertook loans with extremely high loan-to-values within the last 3 years. Over the 20th Century, the year to year increase in home prices had been roughly 3.5% per year.   Not bad considering we buy homes as our primary shelter, not as an investment tool.  Look to Standard & Poor™s Case-Shiller Home Price Indices for recent evidence.   This index has been tracking home sales in the top U.S. markets since 1987.   What the numbers show is quite interesting.  

From January 1987 through January 2000, home prices in the
Chicago market showed a robust increase of about 6.7% year to year. From January 2000 to January 2008, the trend had risen to just above 7% year to year. This takes into account the price drops of the last 2 years.   The peak in home prices was achieved in the second quarter of 2006 when the rise had reached to almost 11% year to year or three times normal gains.   Even with falling prices, most homeowners who have been diligently patient have done quite well for themselves.   This is true for every top 20 U.S. market except for Detroit which has its narrow-scoped automotive economy partly to blame for negative growth.  

Equity in a home is merely a paper gain (or loss) until it™s sold.   Most foreclosures have been investment properties, bought to flip for fast profit.   Some have been owner occupied homes purchased with little or no equity interest.   Others pulled out equity periodically for uses other than home improvement.   Impatient with the idea of waiting for the normal uptrend to resume, these homeowners have chosen to lose their original investment and throw their credit history into the trash.  

Given the numbers, we may be near a bottom to this downtrend.   The
Chicago market has declined by 10.8% since the peak in September 2006 and has reached a level not seen since January 2005.   The declines of the last several years have been a necessary part of balancing a long term trend.   As prices meet the long-term trend, stability will return and fresh buyers will begin to gradually build prices up.   Today™s mortgages favor the documentable owner occupant and disqualify the high risk takers.   The next phase in the housing market will be marked by normal, healthy growth by buyers qualified to own.   We all have learned a great lesson.  

© 2008 Michael S. Amers

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