With 2012 ahead and four years since the housing collapse helped push the nation into a severe recession, it might be time to sort out the lessons from the crisis. Here are changes and trends that will -- real estate experts hope -- revive the housing market and everyone's financial future.
1. Buying what we can afford
In the go-go years from 2003 to 2008, home buyers typically purchased homes at 20 percent to 30 percent beyond their budget because money was so easy to secure from banks. They also counted on promotions and bonuses, and the belief that their home's value would continuously rise. Now, we know better. It's become more common for buyers to tell their agents how little (rather than how much) they want to spend, even if they can qualify for a bigger mortgage. "They don't want a McMansion anymore -- they want what they can afford," says Pearl Kamer, chief economist for the Long Island Association business group. Because qualifying for a mortgage is so much harder today, "in the short run, this is depressing home sales, but in the long run it will create a more stable housing market," Kamer says.
Real estate professionals are, perhaps, more sharply aware than anyone of the impact of the housing crisis and recession. "In 25 years, I've seen the whole gamut: People have gone from being flamboyant about money to being cautious," says Nikki Sturges of Daniel Gale Sotheby's International Realty in Huntington. She notes that not only are people buying smaller homes, but they also want to be clear about heating and electric costs and to be sure they'll have reserves for emergency repairs for refrigerators, ovens and washing machines.
2. Creating stronger financial habits
The savings rate is the highest it has been since December 1993. People are requesting credit reports and trying to polish up their blemished credit scores. "Homeowners realize they need strong financial habits, not just to qualify for a mortgage, but to survive in a down economy," says Richard Guardino, executive dean of the Wilbur F. Breslin Center for Real Estate Studies at Hofstra University.
To make sure that people don't borrow beyond their means, most financial institutions have gone back to traditional underwriting standards of lending at 70 percent to 75 percent of loan-to-value ratio, says Michael Vittorio, president and chief executive of First National Bank of Long Island. Generally, a FICO score above 680 is necessary, as well as income verification, like tax returns for the past two years, he says. "And you often have to put skin in the game -- come up with more cash to assure the bank that you won't walk away from the loan and hand them back the keys," he says.
Vittorio says he is concerned that some banks have gone back to being too liberal in lending, and have a very short term memory of the crisis. But many also agree that the new underwriting standards are a double-edge sword. While they are making buyers more financially responsible so that they can't extend beyond their means, "lenders have become so risk averse that they are paranoid and disqualifying potentially good borrowers," says Ehsan Nikbaht, professor of finance at the Zarb School of Business at Hofstra University.
3. We are more educated and proactive
Another lesson is that people finally understand what bought many homeowners to their knees: They got mortgages or refinanced with adjustable rates, and when those rates readjusted -- and went through the roof -- they were in trouble. Buyers want to lock in interest rates now so that there's no question what it will cost them in three years, says Jeffrey Forchelli, a real estate attorney and managing partner at Forchelli, Curto, and Deegan in Uniondale. People are afraid of losing their jobs or the ability to get another job, which could mean not being able to afford a mortgage, or if they don't get anticipated raises or bonuses they won't be able to afford increases in an adjustable rate. "They realize that being foreclosed and the misery of ruining their credit is not worth a little bit of a nicer house," he says.
Buyers are reading the fine print and scrutinizing their mortgages, appraisals and refinances like never before. "When a client comes in, they seem to have already familiarized themselves with closing costs, points, title charges and appraisals," says Peter Levy, a real estate attorney in Jericho and past president of the Nassau County Bar Association. They are also more likely to ask, "What will happen to my mortgage obligation if I lose my job in three years or if I get sick?"
Levy warns that they'll still be saddled with the mortgage, and advises clients to have the proper insurance coverage for life, health and disability in place. "That's all part of owning a house -- it's not just the monthly mortgage payment," he warns.
4. Renting is part of the American dream, too
People have come to the realization that everyone doesn't have to own a house -- nor should they want to. Forchelli says that some people may want to be more mobile for job opportunities or free from the financial obligations and other responsibilities that go along with home ownership. "That's nothing to be ashamed of. Renting is a lifestyle choice that we should feel OK about," he says.
But the consensus among area real estate and financial experts is that the future of housing on Long Island will be tied to the development of affordable rental properties for two key markets: young people looking to build a life on Long Island, and empty nesters looking to sell and stay. "Unless that need is met, the long-term economic viability of Long Island is suspect," says Michael Watt, president of Long Island Inc., Babylon- based small business consultants.
5. Buying for the long-term
There's an old saying that even turkeys fly in hurricanes. The message? When the housing market was booming, there were a lot of builders and buyers that rushed into the real estate market that perhaps shouldn't have, Watt says. They flooded and undermined the whole industry.
Watt says he hopes that people will either buy homes to live in as a saving tool or as an investment with the understanding that there's a gamble. He says that today's buyers seem much more committed to their homes, most buying with the expectation that they might need to stay put for at least seven to 10 years before they can break even. "People no longer view a house as a speculative investment with a near-term 'flip' option or ATM to pull out cash equity," Guardino says.
6. Financial reform is a silver lining
The creation of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 bans many of the practices that created the crisis, says Kathleen Day, a spokeswoman for The Center for Responsible Lending, a Washington, D.C., nonprofit dedicated to eliminating abusive financial practices in banking services. She says that underwriting standards may make it tougher on borrowers, but banks also can't load up mortgages with hidden fees and risks anymore. Among other things, Dodd-Frank created the Consumer Financial Protection Bureau, which will oversee and "quickly stamp out the next generation of tricks and traps under the guise of financial innovation," Day says.
7. People have more compassion
With an unprecedented number of careers derailed and homes lost or threatened, those who've managed to remain relatively unscathed are more grateful than ever before and more painfully aware of the financial circumstances of others. "Record numbers of Long Islanders are giving back to the community by volunteering: giving networking advice, providing job leads, teaching computer classes, offering pro-bono legal and financial advice, donating clothing or filling food pantries," says Peggy Jaeger, director of the Nassau County UJA -- Federation of New York's Connect-to-Care Program.