- Don't Buy Too Much House
I think this rule has never been truer than now, during a financial crisis of historic proportions. It remains to be seen how the credit crunch will play out, but why did it happen in the first place? People bought too much house. There will be lots of debate over why that happened and whose fault it was, but it all comes down to people buying houses they could not afford.
Not everyone "couldn't afford" the kind of houses they were buying-- some chose to spend lots of money on other things and run up credit card bills, in effect choosing not to be able to afford their house.
And some people, even if they could afford the house they bought a few years ago, are going to find themselves in trouble now if they lose their jobs or can't borrow more money to spend.
Think about it: everyone has things they can cut back on if times get tough. You can cut back on entertainment, meals out, new clothes, new cars, etc. But for most of us, our housing payments are the biggest chunk of our expenses. They're also the hardest to cut back on: you have to either sell your house, rent it out and move into a smaller one, or take in roommates to make extra money, leaving aside dire options like destroying your credit by going into foreclosure. Even in a good real estate market, these things take time and cost money. In a bad real estate market, they may not be possible.
Back in the heady days of the real estate boom, people would always say that home buyers, at least younger ones, shouldn't feel bad about stretching to buy the best possible house they could. It seemed like a safe bet when you could reasonably assume that your home's value would go up quickly and that your earning potential would steadily increase. But now I'm sure a lot of people wish they had been much more conservative.
Where do I fit into this? I went from paying $850 a month for rent and utilities for a tiny studio to about $1,800 a month for the mortgage, common charges, taxes and utilities for a 2-bedroom. (It's actually been more than that due to an escrow error for my property taxes that has been difficult to fix.) So did I buy too much house? (The rule also applies to Too Much Condo!)
I am saving less cash each month than I used to, even though I have gotten 2 raises since I was renting that have helped make up the difference. But given how much the value of my investments has fallen, I'd love to be saving more. I am exactly in the position I described above, where I could definitely make some lifestyle changes to save money, but they'd make nowhere near as big a dent as having lower housing costs. But I have no debt other than my mortgage, and I'm still maximizing retirement savings through 401k and Roth IRA contributions-- my budget is balanced.
Here's another important thing: my home, I think, will turn out to have been a very good investment. The cash I put into it would have lost its value in investments right now, but based on the current housing market in New York City, my condo's value has more or less held steady if not increased slightly since I bought it (based on price per square foot of recent sales in the neighborhood), and I don't think it will fall as precipitously as the stock market has. I could rent it out and turn a small profit. Or I could take in a roommate if I needed to.
I'm not being a Pollyanna about the real estate market: if I had to sell my condo any time soon, I'd be in big trouble, because there's just too much on the market and my place isn't that special. But I put 20% down, I have a 30-year fixed mortgage at a good rate, and as long as I stay employed, I can make my payments while still saving money. All this is because I bought a modest home that I knew I could afford, not what a mortgage broker told me I could afford.