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April 26, 2011

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The new rules seem to be pretty close to the prevalent rules when we bought our first home in 1963, and our second and final home in 1977.
Interest rates were very low in 1963 but we were a family with 2 kids and a 3rd. on the way back then. My salary as a junior engineer was low so we wanted to keep our monthly house payment fairly reasonable so we bought a new 4br 2ba home for $27K. It was great, we were on a street with families just like us, the grade school was a short walk away, and our kids had a nice life growing up there. We put 25% down to get a conventional, low interest loan, it was about 3/4 of our savings. Gas was about 25c/gallon, a new car was about $2K, and there wasn't an energy problem.

By 1977, prices had gone up a lot. We sold our home for $90K and bought a used custom home in the best development in the city for $107K. Today it's worth about $1M and was paid off when I retired in 1992.

If I was in the same position today as I was in 1963 I'm not sure what I would do. Probably I would rent a home for a while until I had a clearer picture of the trend in home prices and the employment situation.

Unfortunately 1963 and 2011 are like two different worlds with regard to the economy and the financial state of the country. The future looks very cloudy and uncertain indeed the way I see it.

I agree with the new rules, but with one exception: I DON'T think people should avoid moving unless they absolutely have to.

My husband and I purchased our home in January of 2009, and deliberately set out to purchase much less than we could afford. Specifically, we set out to purchase a home that we could still afford even if only one of us were working. Not because we have plans for parenthood that involve one of us being a stay at home parent (we don't), but because we BOTH experienced layoffs as part of the recession, and are well-aware that we might experience layoffs again at some point in our lives, and while we have a health emergency fund, we'd hate to see it obliterated in the name of keeping a house that requires two salaries to afford.

Purchasing a home that cost significantly less than we could afford required sacrifice, and we knew going in that we'd have to sacrifice either size/amenities, or neighborhood, and we chose neighborhood. There's nothing inherently wrong with where we live, but it is decidedly NOT the place we want to call home in the long-haul.

We decided to harken back to the days of starter houses, and view ours as exactly that. It's a wonderful place to call home FOR NOW, and will remain as such for several years to come. But ultimately, we do envision selling it and moving on - perhaps in 7-10 years. And when we do move, it won't be a means of trading up in terms of space or even finishes, but location.

Although the "Bubble Economy Rules" look very outdated now they were pretty good rules to follow in the years leading up to the crash. I bought and sold 4 houses in an 8 year period and ended up making a very large amount of money. I did lose a fair amount on my last house but it was only about 10% of the amount I made on the previous 3 houses. That money has all been diversified and invested elsewhere now. Having the real estate bubble hit at just the point point in my life has practically set me up financially for life.

Alternatively, I have a few friends who bought their first house back a decade ago when I was just starting. They've seen their home values go up, up, up but then down, down, down. It was that cashing out that made all the difference for me. Think of it as home rebalancing. :)

"Unfortunately 1963 and 2011 are like two different worlds with regard to the economy and the financial state of the country. The future looks very cloudy and uncertain indeed the way I see it."

And in 1963 everything was crystal clear?

You should've stretched even more when you bought in 1963.

FMF-
The last decade should've taught everyone to consider doing the exact OPPOSITE of what others are doing. The more people I hear say "Don't buy real estate" the more I want to buy more.

Pop --

I'm with you. The more I hear "do this", I want to "do that."

We are in house numebr two and will probably be there until we retire. Contrarty to the bubble thinking we will have our house paid for before we retire. If we move we move. If we stay we stay.It all depend on what we want to do when we retire.

I strongly believe in the New Rule, that's how I bought my Condo. We always used credit cards(that give miles, which are used for travelling)to remodel or pay for any repairs and promptly paid off the balance when the bill was due.

These rules are 5 years late. The new rule. Good 5 years ago.

Now - Old school rule is the way to go.

How you purchase a house, how you finance it, and how much equity it has has zero to do with the return.

And stretching to buy is all about the return.

So the real current rule should be...stretch to buy within affordibility and keep payments low to maximize cash flow.

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