Old School Housing Truisms

Amid the housing frenzy of the past few years, there was a lot of conventional wisdom which got ignored. I want to remind all of you that it was not that long ago that all of these rules were rigidly followed (and had been followed successfully for 50 years).

When I bought my first house in 1998, all of these rules were still being followed.

1. YOU NEED A 20% DOWN PAYMENT. This shows the bank that you have discipline and are able to live below your means. It also means the buyer has some "skin in the game" and will be less likely to walk away from this debt. If you didn't have 20%, you have to pay Private Mortgage Insurance (PMI). PMI was a very expensive penalty, it would usually add another $100 - $200/month to your mortgage payment, which further reduces how much home you can afford.

2. GET A 30 YEAR FIXED MORTGAGE. If you couldn't afford a 30 year fixed, you couldn't afford the house. Adjustable rate mortgages, interest only mortgages, subprime mortgages made up a very small percentage of all mortgages and were reserved for very special cases.

3. IF YOU NEED TO SELL YOUR HOME WITHIN 3 YEARS OF BUYING IT, YOU WILL PROBABLY LOSE MONEY. This is why when you took a job in a new city you rented! If you weren't sure if you were going to be in a place for at least 3 years, you didn't buy a house! Remember, when you sell there's a 6% commission plus closing costs (about 1.5%). You needed about 3 years of appreciation in order to cover those costs, and even that wasn't a guarantee.

4. HOMES ONLY APPRECIATE AT THE RATE OF INFLATION. This goes back to point #3, you could only count on about 3%/year appreciation on your house. That means a $100,000 house should only increase in value by about $3,000/year. After 3 years, a $100,000 house would be worth about $109,272. If you needed to sell and paid 7.5% (commission and closing costs) you would net out about $101,000.

5. YOUR LIFE WILL BE THOROUGHLY DOCUMENTED, TOP TO BOTTOM, BEFORE A BANK WILL GIVE YOU A MORTGAGE. They want to see two years of steady employment (pay stubs, W-2s and tax returns). They also want to see your investment and savings accounts, and no more than 25% of your down payment can be a gift from your family. They check your credit report to see if there are any judgements against you, and if there are - you need to pay them off. This is a grueling process and they basically find out everything about you before they end up loaning you money.

6. HOUSING PRICES CAN AND DO GO DOWN. Despite what Realtors tell you, every housing market - at some time - has gone down. Even some of the biggest and most expensive housing markets, including San Francisco, Honolulu and New York, went through periods of sustained housing declines. These declines take years before the losses are recovered. The bank wants to be sure you will stick it out and keep making your payments and that's why they wanted a large down payment and a full documentation of your financial situation in the first place.

All of these rules are slowly being reinstated in the wake of this massive housing bust currently in effect.

For 50 years the homeownership rate in this country held steady at 65%. In the past 10 years they've been able to push that up to 70% but only by repealing every one of these rules. The entry of approximately 15 million homeowners over that time caused the average price of a home to double. Now those 15 million fake homeowners who never put any money down, who used no documentation loans and Option ARM or subprime mortgages will lose their homes and prices will go back to their inflation adjusted norms.

And there's nothing that the Republicans or the Democrats can do about it.