There. I think that sums up the past few years of the real estate market in the Maryland suburbs outside the District of Columbia. I originally posted this entry in January of 2007. It was rather rough and I have tried to spruce it up a bit. The story remains the same.
Yes, I am pointing that collective finger at my peers.
The children of post World War II were labeled the baby boomers. Their history is still being written. They witnessed more change and turmoil than any other generation. They grew up in homes that were parented by adults that in many cases had lived through the great depression. They watched “Leave it to Beaver” and “Father knows best”. They rebelled against the status quo and gave the world Woodstock and political upheaval with anti-war demonstrations during the Viet Nam era. They became parents.
It is their parenting that led to the current group of young adults. Baby boomers reacted to the upbringing they endured. They went to great lengths to make sure that their children never had to suffer the indignity of hand me downs and non-name brand clothing. They made sure that their children had a safe automobile when they reached driving age. They made sure allowances were available.
Something got lost in the love that was shared.
The sense of understanding the value of the nicer things in life somehow morphed into a very strange sense of entitlement. The perception of earning and working for long term goals was replaced by the sense that “I want it now!” is justified.
Apparently, when the need to earn money is replaced by parental grants, the understanding of the value of money is lost. Price tags no longer have a relationship to hours worked to earn the cost of the item. Price tags have just become another number.
Our market saw incredible increases in home prices. Income did not go up at the same rate. There was a perceived reduction in inventory. The reduction in inventory did not create such a shortage that prices would increase as dramatically as they did. There were a few factors that fueled the fire.
You don’t need any cash, just a signature will do!
Traditional mortagages were cast aside in favor of newer non-traditional loans. The children of the baby boomers were presented with new options for financing their home. They would not be saddled with the old 20% down and finance 80% over 20 years. The new home buyer could now pick and chose from a plethora of programs.
100% financing became vogue and interest only loans came into favor. These changes increased the buying power of those entering the market. ( The changes probably decreased the chances of the loans ever being repaid according to terms)
What occured is history. The scenarios played out across the area were something like this. A young couple starts looking for a home. They meet a Realtor that advises them that they need to be pre-qualified in order to begin searching for a home. (This is normal. You have to know what you can afford to set your home search criteria? The new agents never learned the art of pre-qualifying clients.) The young couple calls a Mortgage Broker and finds out that they can qualify for a $600,000 loan.
They don’t stop and realize that they will have to make timely payments on that $600,000 loan. After all, if they could not afford it, the lender would never have qualified them for that amount. (This happens a lot. After all the lender doesn’t have to make the payments for them.)
Pre-qualification letter in hand, the young couple begins searching for a new home. They find many that meet their criteria. They decide on one and ask their Realtor to prepare an offer. Unbeknownst to them, a few other couples have been searching and they also selected that home. The seller receives multiple offers and the bidding war begins.
The home may have been listed for $450,000. Other similar homes have sold for $450,000. The home is actually worth $450,000 at the beginning of the bidding process. Our featured couple decides that they will pay up to $460,000 for the home. The home sells to another couple for $465,000. Our featured couple is crest fallen. The couple that bid $465,000 has an accepted offer (Now faced with hopes that the home will appraise. Hmmm, for some reason, they always seemed to appraise just a bit higher than the contract price).
Our couple strikes out again. They find another home and go through the same process. They lose again. They ask the Realtor “What can we do?” The Realtor explains that patience will win out and that they will find a home.
Unfortunately, the young couple decides that they will get the next home come hell or high water. They look and find another home to place an offer on. They instruct their Realtor to use an escalation clause that will go to the max that they are qualified to spend. (The Realtor explains the escalation clause. The Realtor probably does not explain that the escalation clause is not worth the paper it is written on.)
The place an offer on a $450,000 home and win with an offer that is $600,000. They somehow believe that the home is now worth $150,000 more because they were willing to pay that.
Today that couple is sitting in a home that could sell for maybe $500,000. They owe $600,000 on the property because they have been paying interest only. They got the house.
How did this happen?
Baby boomers tried to make sure that their children were never lacking anything. It seems that this focus was on material things. Somehow the baby boomers forgot to instill a sense of value in things. Somehow these children never learned that the monetary value of desire is like quicksilver or fool’s gold. There are practical rules regarding the value of real estate. Our prices are in the process of adjusting. The fancy non-traditional loans are resetting every year. As interest rates increase, the monthly cost of “I have to have that home” is increasing.
Now is the time for new buyers to learn from the mistakes of the past. Advice for them is quite similar to very old adages. Buy today what you can afford today. Plan for tomorrow based on fact and not emotion. Seek credit and financial counseling so that you truly understand the value of the dollars you earn and purchase accordingly.
Money never has and never will grow on trees. It really should be earned.
Oh, and before you buy your sixteen year old child a brand new car, think about the message you are sending and the lesson you are teaching. They only inherit the future and all the opportunities. Handing them everything before they learn life’s lessons only sets them up to fail. When they do, we all fail.
About the author: John MacArthur is a real estate agent working in the Maryland suburbs of Washington,DC. He and his partner, Lourdes Tudela have consistently been recognized in the top 1% of agents nationwide. If you would like to speak with John regarding real estate buying or selling, you can contact him at 301-509-5111.