Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, March 11, 1990 TAG: 9003082001
SECTION: BUSINESS PAGE: B-5 EDITION: METRO
SOURCE:
DATELINE: LENGTH: Long
Like an increasing number of Americans, Tignanelli, a successful financial planner, has come to enjoy a comfortable house payment. While he could easily be spending 28 to 40 percent of his gross income on housing, he has chosen to allocate just 10 percent.
"I don't want to be house poor," explains Tignanelli, who heads a company called Coordinated Assets. "I like liquid cash more than I like a big, fancy house. I like to keep my cash liquid so I can put it in the stock market or any other investments I deem prudent."
House poor is no longer chic. That is according to residential finance specialists and those, like Tignanelli, who are privy to other people's finances.
"I think it's out of fashion to be in debt," he says. "People are still interested in buying the big house. But there seems to be an underlying change in emphasis from buying the big house to having an affordable mortgage payment."
"People have discovered that having both a mansion and a diet of hot dogs is not desirable," says Peter G. Miller, the author of several real estate books. "They'd rather scale back, have a smaller house and more money for vacations, retirement, college educations as well as other alternatives."
The reasons for the trend are many, the experts say. Using leverage for a home purchase is making less sense now that property values have stopped galloping ahead. Concerns about the economy have made people more conservative. And older home-buyers, confronting the need to save for their children's educations, not to mention their own retirement, are squirreling away more discretionary income for investments.
"People don't have the economic incentives anymore to buy as much as possible," says Thomas Holloway, senior economist at the Mortgage Bankers Association in Washington. "The thing that's changed is that inflation has come down. And while expectations of home appreciation are still positive, they're much lower than they were in the late 1970s and early 1980s, when housing prices jumped at double-digit levels and people used housing as an inflation hedge."
Except for a surge in home values in 1986 and 1987 - which was centered in the Northeast - price increases have slowed and, in some areas, sagged, since the late 1970s.
The median-priced home on the U.S. resale market increased in value just 4.3 percent from 1988 to 1989, reports Trisha Morris, a spokeswoman for the National Association of Realtors in Washington.
Given a slowing in home appreciation, "there's a good economic reason why people no longer want to borrow as much as they can," Holloway says. He also detects "an increasing consumer awareness that debt burdens are getting awfully high - mainly their debt burdens."
Donna Joseph Watson, branch manager for Employees' Mortgage Corp., a California-based company owned by its own workers, makes similar observations. "People don't seem to be stretching the way they used to," she says. "I think there's a definite trend toward conservatism." She sees high debt loads and softness in the economy as reasons for caution.
Watson often sees home-buyers before they begin their search for housing. Through a prequalification process, buyers find out how much they can spend. "What I'm finding is that there's a big gap between what they're qualified for and what they're actually comfortable with. I don't see that much stretching anymore."
Many of her mortgage customers wind up borrowing about $10,000 to $15,000 less than they might. Perhaps they have reconciled themselves to giving up the extra bedroom or bathroom they wanted, or they have let go of the notion of a garage. They feel the sacrifice is worth it if they can shave $100 or so off their monthly mortgage payments, she says.
One young couple that recently took a mortgage through Watson's firm made a still deeper sacrifice, she says. The couple, an electrician married to an office manager, with a joint income of $48,000, decided to spend $21,000 less than they were entitled to spend. They purchased a basic three-bedroom rancher. Buying a modestly priced home allowed them to keep their monthly house payments roughly in line with what they had put out for rent, she says.
Concern about whether the economy may be heading for trouble influenced the couple, Watson says. The husband, in particular, had concerns about job security, since his company had recently closed a plant.
Some financial planners contend that too many people spend an excessive proportion of their incomes on housing relative to other investments. One proponent of such a view is Wade J. Webster, president of Webster Financial Group/Planfirst, a financial-planning company.
"Many people are house-heavy. All they end up doing is making their house payments and not saving any money for other investments," Webster says. Many people put a lot of their capital into housing because that's the easiest, most socially acceptable area of investment, he argues. They believe they'll take the cash out of their houses when they retire, he says, but their plans often change.
"The vast majority of people will tell you that their plan is to sell their home when they retire and use the equity they've built up to produce retirement income. However, most of them don't do that. They either stay in the home they've become accustomed to or they move into a smaller home in a better location that often costs them as much or more," he says.
There is no simple answer to how much people should put into housing, although 28 percent to 36 percent of gross income is what lenders have traditionally set as the limit for a mortgage borrower's monthly house payment - including principal, interest, property taxes and homeowner's insurance payments.
by CNB