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Have you seen this ad? “Available soon: a new gated community of luxurious residences only a 12-hour easy commute from Silicon Valley. Each of these modern palatial estates feature a 40,000 to 100,000 square foot home on minimum 500-acre lot.  Priced from the mid-gazillions of dollars for the discerning buyer; no money down and 100 percent financing available.” Ok, I made it up; things are not quite that bad, but almost. 

I had to exercise all my self-control not to run up to the middle of nowhere this weekend for a chance to buy a home priced from $1,500,000, but I managed. The “from” is a dead giveaway; in real-estate-ese it means “whatever you really want costs extra.” 

I’m not a financial advisor and unlike so many who are, but who are also consistently wrong, I cannot predict where this housing market is going, but it’s starting to look too much like a bubble at the edges to suit me.  Perhaps there will be a soft landing, but if you’re in debt up to your eyebrows and are betting on housing appreciation to bail you out, you’re overdue for a reality check.

Some of the danger signs are ads encouraging people to take out refinancing loans and cash in on the home values, “before the interest rates go up.”  The lure of what looks like easy money often skews your ability to make sound financial decisions; too much of it goes to that vacation you always wanted or to prop up a failing business that can’t make the grade with the lending officer at the more conservative banks. Then, when the home values drop (nothing goes up forever), you find yourself underwater.

An article in the Sunday’s San Jose Mercury News pointed out that the national negative equity rate is 16.9 percent, that’s 1 out of 6 homes, and that negative equity is still rising in 21 of the 50 largest housing markets.  Of course it can’t happen here – well, it happened here last time, but surely it can’t happen here again, can it? 

People always try to justify bad outcomes after the fact, but the truth is that bad outcomes are part of the system. The surest way to avoid them is to protect yourself and that means keeping your housing desires and its related costs under control.

How big a White Elephant looks to you is proportional to the amount of your net worth stuck inside it. If you can afford a big, expensive home without stretching your budget, have at it; but if you look at your home and see a piggy bank, watch out.  The value today is not indicative to the value tomorrow.

Appropriately priced and properly managed a home is a good investment; they are financially stable over the long term, and also pay a large psychic dividend in pride of ownership and stability (not to mention mortgage deductibility), but negative equity can become a millstone around your neck.

Recommending that people maintain their self-control during home buying may be like trying to hold back the ocean tide, but if you’re stretching your budget you may be betting your future on interest rates. Being financially secure in a less expensive home makes for a better life than bearing the constant strain and risk of overdoing it.