Many of us have often daydreamed of our ideal life. Somewhere in that dream fits a home that has all the fancy extras. Things like, a two-car garage, cozy fireplace, jetted baths, spacious kitchen, and large bedrooms with big closets to put all our nice clothes in.
The daydream turns into reality as we scrimp and save for a down payment to offset the high cost of construction so we can have affordable payments. The process of drawing up preliminary plans is fun and exciting. Soon, the plans become more realistic as the permits and funding are secured.
The construction finally begins and brings with it many problems and solutions as the home is crafted into shape. We walk through the bare framed walls and try to imagine what it will be like.
There are the usual cost overruns and things turn out to be more expensive than was originally thought. Small adjustments and restructuring add to the cost of the project, but things are going fairly well and the home should be finished on time and ready to move into.
Once the construction is completely done and the inspectors give the occupancy permit, the new homeowners can breathe a sigh of completion. Nobody wants to move old furniture and appliances into a new home so we usually flip for all new things and write the cost of everything into the mortgage loan.
The loan is finalized and the monthly payments are larger than we had planned on, but a new home is something worth making sacrifices to have. This is a typical scenario for homeowners that have homes built for them by contractors.
The housing market is determined by what home buyers are willing to pay for homes. This works out fairly well most of the time even though the housing market is a fickle beast. It has a lot of variables that influence its activity. Similar to the stock market, it has trends of volatility.
When the housing market is experiencing a downward trend, the results are mixed because the market is made up of thousands of local housing markets that rely on local economies. The overall result however is usually bad for homeowners in general.
Suddenly, many homeowners realize that their homes are not worth what they owe on them. In fact, many homes our worth tens of thousands of dollars less than what is still owed on them. The dream home has turned out to be a nightmare home and there’s no sign of alleviation in sight. This is a heart-breaking experience for so many owners.
To some it may seem smart to just walk away from the home and let it go into foreclosure; still there are others that have no choice. Unwise financing and overextending credit has made it clear that the home is an unaffordable burden.
It’s difficult to know how to handle this situation if you’re right in the thick of it though. Some homes are clearly not worth what is owed against them and are therefore a bad investment at the time being, but if we treat homes like the stock market there is a light of hope. The stock market as a whole has recovered nicely after every down trend.
If a homeowner can ride out the storm of a weak housing market without letting the home fall into foreclosure, he or she will be much further ahead in the long run. The value of homes will recover as they always have if the local economy of each neighborhood is sound.
The credibility of a homeowner that lets a home fall into foreclosure however will take decades to recover. The worst thing on a credit report is not a bankruptcy as many people think, it’s a home foreclosure. A home foreclosure and loss can follow a person for many more years than a bankruptcy.
Bad things happen to good people. We all know that this is completely true. Creditors believe that a person that looses a home and land is a much greater credit risk than someone who just lets go of credit card debt and medical bills through bankruptcy.
The money spent on high interest loans for the next two decades of a person’s life after a home foreclosure could easily dwarf the difference of making home mortgage payments on an overpriced, undervalued home.
The housing storm will pass. As struggling homeowners we need to carefully weigh and measure our options before we make more bad choices. I believe that now is a great time to buy or build a home if you do the work yourself and not leave everything to contractors.
The high price of labor is what has gotten us into this ordeal. The prices of homes are much higher than they are worth at the moment because so many contractors are skimming too much from labor performed. Many of these contractors don’t even have a high school diploma, yet they’re making six-figure incomes. They are getting away with it because nobody is challenging them. The economy is doing it for us. It’s telling us that something is amiss in the housing industry.
The price of homes will rebound, but it might take awhile. The housing market is giving contractors a big time out which they need.
Larry Angell is the author of Sweat Equity, building a house at half cost. He runs an instructional website about how to build homes that are strong financial tools, not financial burdens. He counsels low-income families how to obtain affordable housing and reach goals of home ownership.