The home’s changing role in family finances
Homeownership used to be the bedrock of the American dream, but the economic storm and its lasting effects have radically changed how everyone — no matter what stage of life they’re in — looks at their home.
Many potential home buyers are now hesitating, taking a closer look at their options. “People are starting to realize that the American dream of homeownership is not right for everyone,” Kim McGrigg, community manager at Money Management International, a non-profit consumer credit counseling service.
And those who already own homes may have hit a snag or readjusted their expectations. Five years ago, as a young married couple, Joe and Cheryl Shaw bought a charming historic home in St. Charles, Mo. They have a 9-month-old daughter and a 3-year-old son. They want to have more children, but the home is too small.
Unfortunately, they paid $222,000 for the home and still owe $203,000. Its estimated value is now only about $185,000.
“We are outgrowing the house, and are ready to move on,” says Joe Shaw, 40, who is an assistant principal in the Francis Howell School District. “But we’re in the hole, so much so that I’m not sure that we can afford to move on.”
A hole in retirement plans The Shaws are in better shape than homeowners who have lost their homes to foreclosure. And many other families can no longer count on their home value as part of their retirement nest egg.
Nolan Heiter, a business systems analyst at SunTrust Bank in Richmond, Va., says that his and his wife’s retirement plan always had included their home equity. That has to be adjusted now because the home’s value has dropped.
“Our vision had always been that we’d be able to sell the house and get enough out of it to pay cash for a smaller retirement home and have no mortgage,” says Heiter, who is now nearly 50 and doesn’t think the value will turn around before he retires. “We may be facing a situation where we have to use some of our retirement income to pay for a mortgage.”
Mortgage means new family priorities
Owning a home can mean balancing more priorities. Ask your financial adviser these questions:
1) How does my mortgage fit into my overall financial picture?
2) What other insurance needs should I consider?
3) What changes should I make to my budget?
Even those who can easily afford a home are rethinking their dreams. The McMansion era may be on its way out. Homes are shrinking: The median size of single-family homes declined from its peak of 2,268 square feet in 2006 to 2,100, according to a study based on Census Bureau 2009 statistics by the National Association of Home Builders.At the same time, multigenerational households are making a comeback. In 2008, a record 16.1% of the U.S. population lived in extended families, with at least two adult generations or a grandparent and at least one other generation, a Pew Research Center found. That is up from 12% in 1980.
That increase, in part, is because many unemployed adult children are moving back home with their parents. And large family homes are more available to them because many parents are not able to sell them and move to retirement condos.
“There may be a multigenerational household for a period of time until the financial situation changes and is on more solid ground,” says Elinor Ginzler, AARP senior vice president. But some owners are choosing to live in an extended family.
About two years ago, when home prices were going down, Dan and Lauri Pratt sold their home in Kaysville, Utah, and bought a larger home in nearby Farmington. It had a large walkout basement, which they have turned into a small apartment for one of their sons, who is still going to college and is married and has a baby. “One reason for the basement was that it would help them save some money on rent and utilities,” says Dan, 51, a construction manager. “And my wife is able to watch our granddaughter without the hassle of dropping her off and paying for day care.” Pratt expects the apartment could be used again for some of their four younger children or his mother-in-law.
The risks of homeownership Even though it’s a buyer’s market, a growing number of people are deciding to rent. Some have no choice because they do not qualify for a mortgage, while others don’t want the perils of homeownership. In the third quarter of 2010, 59% of renters said they were more likely to continue to rent in their next move, vs. 54% in January, a Fannie Mae study about homeownership found.
The housing crisis has shown that owning a home comes with risk. “Many who bought homes as investments have gotten quite burned on that,” says Eleanor Blayney, consumer advocate for Certified Financial Planner Board of Standards.
The changes are not only related to the economic crisis. Some Americans are reinventing their homes to be more energy efficient. Others are looking for ways to make their existing homes safe and livable. About one-third of Americans 45 and older said they have made changes to their current home so they could stay longer, the AARP survey found.
Even when the economy improves, home buying may not return to normal. “We need to rethink housing in the 21st century,” Blayney says. People should always remember that there is a potential downside as well as an upside. And homes are not a piggy bank. So people should not assume their home value will help pay for their children’s college education or their retirement.
“It’s a whole new ballgame,” says Sid Davis, a real estate broker and author of A Survival Guide for Buying a Home.
Factors to consider when making a move. Reasons to rent:
• Staying five years or less.
• Low upkeep costs.
• A way to try a neighborhood before buying.
• Security deposit and upfront rental fees are much lower than a mortgage down payment and closing costs.
• No risk of foreclosure.
• No property taxes. And no home insurance, although you need personal property insurance.
Reasons to buy:
• Mortgage rates are still low, and in many cities home prices are a bargain. (It now is more affordable to buy than rent a two-bedroom home in 72% of the nation’s 50 largest cities, says Trulia.com, a real estate search engine.)
• Tax benefit in the mortgage interest deduction.
• Equity will start building when the market rebounds.
• Intangible benefits, such as a place to raise a family. The ability to paint and make other changes unless bound by home association rules
By: Christine Dugas
Found on: usatoday.com