Is Bigger Better? Scaling Down The American Dream

By: Roshawn Watson

Builders everywhere are scaling down home sizes, amenities, and prices. Today's post-crash buyers are not willing (nor able in some cases) to extend themselves like before, and the impact on the housing market is substantial.

New Home-Buyers Forego the McMansions
No longer are 5000 square feet homes the expected norm for your typical upwardly-mobile middle-class family. Builders are axing private-theaters rooms, and grand "impress the neighbors sized" foyers, and unnecessary fireplaces.

According to the Mortgage Bankers Association, applications for mortgages have hit a nine-year low, plunging a seasonally-adjusted 11.7% in the week ending Nov. 6. New home sales in the U.S. have fallen sharply as well, from 1.3 million in 2005 to 485,000 last year. The latest Census Bureau data suggest that this year's sales will be even lower: only 294,000 new homes were sold through the first nine months of this year.

Builders believe most of today's buyers of new homes want smaller and simpler. Note that the average new single-family house peaked at 2,507 square feet in 2007 and has since slipped to 2,392 square feet (per Census Bureau data). Average new home prices are sliding, too, by 16% -- to $269,200 -- between the first quarter of 2007 and the third quarter of this year, the Census Bureau reports.

The Driving Forces Behind the Shift
Although it is true that Americans have been embracing a new-found frugality in the recession, there is more to this change in consumer preference than meets the eye. In the past, many Americans were clearly overextending themselves financially to purchase homes they couldn't afford, and mortgage lenders were all to happy to facilitate their indebtedness with a variety of "creative" financing products. As reported previously, 40% of homeowners were overextended. Some of us were completely ignorant while others were speculating on increased property values. The rationalization was if homes are assets, we should borrow to get as much home as possible, so that we can capitalize from the increasing values of our investments. However, the crash has awakened our awareness of the precarious state that all that debt placed us in.

Additionally, credit worthiness criteria has been tightened, so some buyers of new homes no longer qualify for the larger mortgages. Unemployment is also a factor, as some Americans struggle to put food on the their tables, there are simply fewer people in the market for new homes.

What all of this means is a need for more economized home models to fit the changing preferences of the American consumer. For example, many have undoubtedly questioned the financial wisdom of paying $15,000 annually in property taxes and exorbitant heating and cooling bills for a family of two with relatively low net worth. Being house poor for appearance sake seem silly, yet 73% of homes worth $1 million or more are occupied by non-millionaires. Perhaps, the market downshift may reflect a fundamental change in the way people want to live. Real estate is cyclic, so time will surely tell.

Lastly, if you like this post, please subscribe (upper left-hand corner), click here to get my eBook FREE, and Propel it, Stumble it, and tag it on Delicious.
Image Credit: Atelier Teee

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Uncommon Money News (Vol. 77)

By: Roshawn Watson

Brand New Post Coming Friday Nov 20:

In preparing to write my posts, I often come across noteworthy and sometimes bizarre financial and business news. Below are links to some of these sites. Enjoy!

I have participated in the Carnival of Financial Planning 115 ed hosted My Trader's Journal . The included posts was: Should You Buy a House Outright? and Save For Retirement or Avoid Student Loans. Thanks for including my posts in your carnivals.

To my readers: I am so honored by your support. Thank you for reading, subscribing, and for voting for articles from this site on social bookmarketing sites such as stumbleupon, reddit, delicious, digg, propeller, twitter, and yahoo buzz. Together, we are telling thousands of the importance of financial literacy. I absolutely could not do it without you. You are vital this this site, and I appreciate your help so much! Thanks.

Thanks for all of the support for Are The Wealthy Dishonest? The back links and other promotion for this post have been great. This post was linked to last week on Mademan, a men's lifestyle website. Thanks so much for the links.

Posts Of Week

Who is Paying Taxes? (INFOGRAPHIC)!

T-Mobile admits its staff illegally sold personal records of thousands of customers to competitors.

Business

GM to start repaying debt to U.S.

Fed Reserve bans most bank overdraft fees

FedEx to Break Records: 13 Million Packages Shipped in 1 Day

T-Mobile admits its staff illegally sold personal records of thousands of customers to competitors. (POW)

"We don't know how to build a sub-$500 computer that is not a piece of junk." -Steve Jobs

U.S. Postal Service posts $3.8 billion loss - Nov. 16, 2009

Economy

Median home prices fall in 8 out of 10 U.S. cities

Entertainment Money News
Aaron Carter's Manager Responds to Pop Star's Back Tax Lien

Nicolas Cage: Movie star, foreclosure victim

Gosselin sues TLC for $5 million

Cindy Crawford, Husband Targeted in Extortion Plot

Eddie Cibrian's Ex Wants Him to Pay $49,000/month

Paranormal Activity Scares Up $100 Million

Offbeat Money News
Who is Paying Taxes? (INFOGRAPHIC)! (POW)

Five Painless Ways to Cut Expenses

How the middle class are shoplifting to keep up appearances

The professor offers to sell the class a $20 bill. Bidding starts at $1 and goes up in $1 increments. The winner pays the professor whatever the high bid was, and gets the $20. Here’s the catch: the second-highest bidder also has to pay, but gets nothing in return.

Stop Investing To Get Out of Debt

By: Roshawn Watson

Savings rates have increased dramatically over the course of this last year, and so has investing. At least 26% of consumers believe their more frugal ways will be permanent. We have gone through the financial grinder and emerged more frugal. Unfortunately, many of us are also in debt. It is difficult enough to encourage people to save anything, so the thouoght of stopping investments in order to get out of debt seems like a bad idea, especially given the turmultuous economic environment. However, it is still the right choice for many individuals. When is it advisable to suspend retirement investing to get out of debt?

Do You Want To Be In Debt Forever?

Do you want to be in debt forever? It is a legitimate question. Since our incomes are not infinite, we will undoubtedly have to make some decisions regarding spending. It would be nice if we could pay our bills, fund our retirements, pay off our debts, contribute to college education funds for our children, and have a ton of fun with our money simultaneously, but it is not feasible for most people. We accordingly need to financially prioritize our spending, and one of the first priorities is getting rid of consumer debt. Otherwise, the debt will linger on. When I look at my old student loans records, Sallie Mae was all too happy to extend my repayment period to 300 months! With a term that long, I would not make much financial traction and would have paid them tens of thousands in interest. I'm glad to have that monkey off my back. By eliminating your consumer debt, you are removing one of the biggest constraints to your cash flow. It is one of the fastest ways to finally to build wealth because your dollars will go farther. Don't take my word for it. According to the 400 richest Americans (Forbes 400), 75% believe "the best way to build wealth is to become and stay debt-free."

Do the Math

Additionally, the math often works out better for those who pay off their consumer debts. In most cases, the interest rates on your debts are likely higher than the return on your retirement. Historically, the stock market averages around 12% per year. If your the interest rates on your credit card is 17%, you save yourself 5% per year by paying off the credit card first. Also consider the price of all of the debt. If you have an average car payment of $480 (per Edmunds.com) and a second car payment of $200, an average student loan payment of $250, a credit card payment of $200, and miscellaneous (furniture, stereos, or personal loans) debt of $120, you are paying over $1000 monthly towards consumer debts. If you were to invest this instead, you would have over $1.3 million in 25 years, assuming a conservative 10% average return. Thus, the sooner you get out of debt so that you can do some real investing, the sooner you build some real wealth.

Debt Equals Risk

Most people are mired in credit card debt, have student loans, and car notes. In fact, 61% of Americans live paycheck to paycheck just to make ends meet. Most people are just one or two paychecks away from financial ruin. All it takes is one misstep, and your low interest credit cards can go sky-high thanks to universal default clauses. I have unfortunately heard of credit cards charging as high as 79.9% interest. By keeping debt in your life longer for the sake of investing, people are risking repos, late fees, high interest, and worse. Consider how vulnerable to a job loss if you have a lot of payments. I have heard 100% of the cars that were repoed had a car note on them. If you mathematically adjust for risk, the answer is clearly to get rid of the debt in most cases.

The Caveat

Perhaps, one of the few times that I personally would continue investing while paying off consumer debt is if I knew that I wouldn't be able to clear the debt in a reasonable time. For example, if it would take me over 2.5 years to pay the debt off. Otherwise, I would just get the snakes out of my life and move on to bigger and more prosperous endeavors.

Lastly, if you like this post, please subscribe (upper left-hand corner), click here to get my eBook FREE, and Propel it, Stumble it, and tag it on Delicious.

Related Posts

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