It’s like Cab Calloway says to Dan Aykroyd and John Belushi near the beginning of The Blues Brothers: “Boys, times are bad.” Local home values are mostly going down. Fannie Mae and Freddie Mac are now the property of Uncle Sam. And the broader economy looks shakier than it has in a very long time.
So with all this turmoil, does the basic tenet of personal finance—that your home is your biggest investment—still hold true? We turned to Matt Hodges, a partner and loan officer at Compass Home Loans, for the answers.
Can people still think of their primary residence as an investment, or is it simply now a place to live?
I think it always should have been looked at as an investment. Otherwise what’s the point? When you’ve got a property that you own versus rent, you’ve got maintenance costs, emergency costs, loss of asset appreciation [due to using those assets for a down payment], and the potential inability to sell the house in the future. It should always be looked at as an investment.
How has the time frame of that investment changed in recent months?
I think that the time frame for ownership always should have been long term. Unless you are an experienced real estate investor who can speculate and flip a house, you shouldn’t be doing it.
Long-term means different things to different people. If you’re an MBA student who’s here for two years, you probably shouldn’t buy because you’ve got costs going in (3 percent closing costs), costs going out (6 percent Realtor commissions), and so you’re betting on [the property] appreciating 9 percent just to remain flat.
You have to be willing to accept that property values don’t always climb. [But] the fundamentals of real estate are, over time, real estate climbs in value.
So are you comfortable saying that real estate will still climb in value over the long term?
Barring a complete collapse, and the government is obviously stepping in right now to shore up the capital markets, yes I do feel comfortable stating that appreciation in real estate historically has occurred and will continue to occur.
In your work with clients, have things changed recently in terms of how far people are willing to stretch to make payments?
I don’t think that too much has changed. I’ve always counseled my clients on the importance of payment shock—the percentage increase over their current mortgage or rent payment, and how that affects their cash flow, their income. Lenders have also now stepped in to reduce what the borrowers can pay. For example, one of my lenders has instituted a 55 percent maximum debt ratio. Of someone’s gross income, only 55 percent can go to their mortgage and all of their recurring debt.
That might seem like a high number to many people, and I agree it is. But for many years, there was no limit whatsoever. You could be above 100 percent of gross income in outgoing debt and still get approved.
If one is looking to maintain or increase the value of one’s house, what are the best strategies? What improvements will have the greatest effect?
It depends on the utility of that improvement. If you have one bathroom and you add a second bathroom, that will help tremendously. If you have two bathrooms and you’re adding a third, that may not help as much.
And, if there’s obvious improvements that need to be made to make the house safe and marketable, you must do them. A client the other day [was thinking of buying a house with] the HVAC system disconnected. It will fail appraisal; [that repair] has to be done.