The last wave of investment homes was sold abruptly at big losses, and values started dropping across the board, especially in places like Florida, California and Nevada. ARMs reset and foreclosures continued to spiral. Suddenly, hundreds of thousands owed more on their homes than they were worth and had nowhere to turn. Soon, the stock market tanked, the values of retirement plans were slashed and millions of jobs were lost.
The net result: Real estate has been repriced. The rest is history -- a history we should not soon forget.
The repricing of home values almost everywhere in the country brings with it a whole new real estate reality, one that marks a return to some of the real estate "rules" of the past. It's a reversion to many tried-and-true fundamentals you should recognize and comprehend:
- Save smart for a down payment. It's true that tying up all your equity in a mortgage can take away your emergency cash buffer in a downturn. But with the market starting to stabilize, the benefits of a large down payment -- from 15 percent to 20 percent -- will pay off in the coming up-cycle in the form of higher equity, lower payments, better interest rates and more readily available refinancing.
- Borrow within your means. Just because you're approved by a lender for a specific mortgage amount doesn't mean you can really afford the home. The wholesale defaults that occurred on tens of thousands of too-lenient loans carry a strong message: Live within your budget. Lenders grew more complacent with underwriting and appraisal standards because double-digit annual price appreciation lulled them into believing their collateral was safe. In their gamble, they abandoned the three C's of mortgage lending -- credit, capacity and collateral -- and everyone lost. Until the run-up in values, a safe mortgage on a home was considered no more than three times a buyer's annual family income. Some old-school traditions need to become new-school traditions.
- Buy for the long term. This isn't the time to try to make a fast buck in real estate. There's still some market pain left, and it's unclear when prices will rebound. If you're buying this year, plan on staying put for the long haul.
- Your market is unique. National housing trends don't mean anything. Understand your market's dynamics, which include the health of the local job market, local foreclosure statistics, price movements, a home's average time on the sales block, the lack of -- or abundance -- of newly built homes coming upstream and the prices of "comp" sales in your specific neighborhood of interest.
- Watch for the pricing warning signs in the next cycle. Continued home-price run-ups year after year should raise a big, bright, red flag in your castle. From 2000 to 2005, U.S. housing prices increased by an average of 53 percent, with many markets far exceeding that, including California at 109 percent, Nevada at 94 percent and Florida at 90 percent. That party ended abruptly, and nearly everyone suffered a hangover.