What's Next: Ultimate Ownership

Column for What’s Next website ONCE IN A LIFETIME The age of serial ownership is over; it’s time for ultimate ownership

By Mark Levine The conventional wisdom about real estate is all wrong.

For two generations, residential real estate has followed a familiar pattern. Call it serial ownership. You know the plot: Young couple stretches to buy "starter" house. When their family, income, or ego grows the house is sold for a tidy profit that's invested in a larger “family” house. The children grow up and out and the now too large house is traded in—again for a tidy profit—for a smaller "retirement" home in the sunbelt.

Serial ownership worked wonders for the silent generation—the parents of baby boomers—and for many of the leading edge of baby boomers, but it was a real estate anomaly, a lucky fluke of demography, not a fundamental principle of finance. And rather than being something to pursue, it’s best avoided.

Prior to World War II home ownership was something for the wealthy and the rural. Everyone else rented. The few suburbs that existed were mini and moneyed. Then there came a once in a millennium confluence of events.

The American economy was roaring along in a postwar boom. The federal government was paying back GIs for their service with cheap educations and low interest mortgages. Those GIs and their brides were busy cranking out babies...lots of them. Levittown, and its equivalents, sprung up outside every American city offering homes for those new families. Highways and rail lines were expanded to connect Downtown and Levittown. Middle class Americans suddenly became suburban homeowners.

In between commuting and PTA meetings the silent generation found time to sire the greatest seller’s market in history. Having bought their home for $15,000 with government help, they were able to turn around and sell it to a member of their kid’s generation for $150,000. They took the money and ran to Tampa or Tempe.

Then in the 1980s, once the tail end of the baby boom generation bought their own "starter" homes, the total number of potential buyers started shrinking. Demand and values dropped. Rather than being able to turn over their homes for a tidy profit, some unlucky souls were actually stuck carrying mortgages larger than the value of their house. Most however, were just trapped in a house that didn’t meet their family's needs. Giving up the dream of selling their way up, they started watching This Old House to figure out ways to renovate their way out. So many now fit this profile that it has become a lifestyle: just look at the magazine you’re reading.

But along the way conventional wisdom didn't kept pace. Most financial advisers and writers are still advocating the early purchase of a home, stretching to buy more than is affordable, and buying with the intent of selling. The pundits are still pushing serial home ownership, and with it, their clients, readers and listeners into a money morass; they're convincing people to buy homes that may be too small, too soon, for too much. As a result, these folks could end up stuck in homes they can't afford, can't sell, and can't expand.

Let’s look at the hard facts.

There’s no longer any job security: the unwritten contract between employer and employee has been torn into millions of pink slips. Reach beyond your grasp to buy a home and it could end up in the bank's hands if you lose your job or need to take a lower paying one.

People are having fewer children, later in life. Buy a home that fits just your current, rather than potential future needs and in a few years the two of you could end up sleeping on a pull-out couch in the living room.

Whatever the tax impact, there are now a lot of better investments than owning a home. Which would you take: a $200,000 split level or $200,000 worth of Intel? Forget the current surge in the market: it's a short-term spike brought on by low interest rates, not a long-term trend. If you want to see the future look at the demographics.

Real estate exploded when 76 million boomers were competing for homes owned by their parents' small generation. When boomers turn around to sell it will be to the much smaller Generation X. It's simple supply and demand: long term, residential real estate is going to be a buyers' market. The best you can hope for is that your home will keep pace with inflation.

All these facts cry out for a new approach. Call it ultimate ownership. Rather than seeing the first (or next) house you buy as one in a series of houses you’re going to own, proceed as if this is the one, and only (or the last) home you will buy in your lifetime.

That places an added importance on the structure’s expandability and adaptability. (Of course, make sure the land also allows for future expansions to the structure.) Homes to which you can add an extra child’s bedroom on the second floor, a parent’s apartment on the ground floor, or an office in the attic or basement are savvier buys that more finished homes which don’t offer as many expansion possibilities.

Similarly, more smaller rooms are better than fewer larger rooms. It's easier and cheaper to change the use of one of two front parlors, a sewing room, or an extra bedroom, than it is to divide a sunken living room, a great room, or a master bedroom suite. Because they have more discrete areas, I’ve found traditional home designs to be more readily expandable than contemporary designs.

Planning to keep this one home for your entire life also means waiting until you can buy a home you’d want to live in for the rest of your life. You should make fewer compromises and hold out for more of your dream. That may require waiting longer and saving more in order to buy a more substantial house.

Rather than buying or stepping up as soon as you're earning enough to afford a house at the first or next rung of the market, you should wait until you have the income and savings to purchase the kind of home you really want—your ultimate house, in every sense of the word. Of course, substantial and ultimate don't necessarily mean complete: you’ll now have a lot more time to take care of all those projects.

Rather than only doing plain vanilla renovations that appeal to the widest range of potential buyers and whose cost is apt to be recouped on resale, if you pursue ultimate ownership you can feel free to indulge in quality-of-life renovations. Sure, an in-ground pool may be sunk money. But if you and your children, and then your grandchildren, are going to gather around that pool every summer weekend for the next three or four decades, who cares? Your pleasant memories will far outweigh any financial loss.

Ultimate homes should be affordable from day one. If your income climbs you'll just be able to afford renovation work that much quicker. And if your income stays flat you'll at least have bought something closer in character to you dream and will be less frustrated.

Obviously, an ultimate house should be located somewhere you’ll be happy at every stage in your life.

While that’s a very subjective judgment, on some level it usually means a diverse community that caters to all types of age groups and families.

In ultimate ownership you no longer view your home as an investment. Instead, it's a wonderful purchase: one that can provide happiness and pleasure for decades, while hopefully maintaining its value in real terms. This meshes perfectly with the 21st Century approach to personal finance called Die Broke.

Among other things, Die Broke preaches that assets should be treated as resources to be exploited throughout your life, and exhausted with your final breath, rather than as swag to be stashed for your heirs. Die Broke urges money should be spent on anything, or anyone, as long as it's spent rather than ensconced in an estate. Inheritance does no one, other than the tax man, any good. It forces the giver to do without, can reduce the ambition of the recipient, and throws a financial monkey wrench into a love relationship.

Real estate itself, or the profit from its sale, shouldn't end up in an estate. An ultimate home is instead something that can be borrowed against for a child’s college education, a new business, or home renovations. It could even become part of a retirement income. By taking out a reverse mortgage on an ultimate house someone can actually be paid a tax-free income to stay in their own home for as long as they live. Through ultimate home ownership a house could meet a lifetime's worth of emotional and financial needs.

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In serial ownership you’re spending your life in a moving van with every place you live just a roadside motel. You only stop when you run out of money and gas. No place ever truly becomes special since none is ever permanent. In ultimate ownership you truly have a home: a special place that expands and contracts and changes along with you and your family. You’re free to place your permanent stamp on it.

You can measure your kid’s heights with a permanent marker. What the heck...you can even cut a notch in the door frame.

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