Some important things have clearly changed in the U.S. economy. Jobs are hard to find and probably will be for awhile. Many families feel like they're falling behind. Retirement, for many, seems more like an unaffordable luxury than a natural phase of life. Even the government may not be able to keep its promise to millions of Americans expecting Social Security and Medicare benefits.
Life is tougher than it used to be, but it's also human nature to overreact, and some Americans have gone from pessimistic to downright apocalyptic. America faces a lot of challenges, but the nation is still rich with resources and talented problem solvers. The middle class is under stress, but millions of families are also paying down debt, realigning their priorities, and setting the stage for a prosperous future. Ambitious people will continue to get ahead. And many of today's recession babies are growing up with more realistic expectations than their parents did. Intergenerational renewal has already begun.
Still, some alarmists these days are advising consumers to discard the most basic tenets of economic life, as if Mad Max had seized control of the Federal Reserve. But we don't need to throw out everything we thought we knew about how to get ahead. We just need to make intelligent adjustments. Here's some of the bad advice consumers should feel free to disregard:
Rent forever. An epic housing bust, now in its fifth year, has obviously upended the personal finances of millions of homeowners. Average home prices have fallen by more than 30 percent from the peak levels of 2006, with another 5 or 10 percent drop likely before it's over. Foreclosures have turned once-proud homeowners into shell-shocked bankrupts. Negative equity has locked many others into distressed communities with dim job prospects, because they can't afford the loss they'd absorb if they sold. Investor and financial writer James Altucher argues that buying a home is a horrible idea, because it locks up way too much money in an illiquid asset that earns far less than other investments might. A lot of others evidently agree, judging by home sales that have been pitiful despite a recovering economy and rock-bottom interest rates.
Buying a home, however, remains a smart move for many people, and it will only get smarter as prices fall further. The mistake that many people made over the last decade wasn't buying a home. It was buying a bigger home than they could afford, taking out mortgages and home-equity loans they couldn't possibly repay and making foolish assumptions about home values rising to infinity. They failed to follow the old guidelines, which still apply: A home is a place to live, not an investment vehicle. Buy for the long term, not for a quick profit. Commit one-third of your after-tax income or less to monthly payments. Budget for unforeseen problems. And if your jobs seems to be at risk, wait.
The virtues of renting are well-known and timeless: You're not responsible for maintenance or repairs. You can move fairly easily. Your money remains liquid. But all the reasons to own a home are still valid, too. For many families, it's the surest way to get your kids into a good school district where rentals are likely to be scarce. Owner-occupied homes are often in more stable neighborhoods where families grow roots and strong communities form. And you can festoon the living room walls with polka dots if you wish.
If that's not enough, there may soon be powerful financial reasons to buy instead of rent. With the homeownership rate falling, more people are renting, which is driving vacancy rates down and rents up. Research firm REIS predicts that rents will rise an average of 3.4 percent this year, which is considerably higher than overall inflation or pay increases are likely to be. Falling home prices and low interest rates, meanwhile, have made the affordability of purchased homes the best since 1970, when the National Association of Realtors started to track it. At some point, a whole lot of renters are going to get sick of putting a big check into somebody else's pocket every month. They'll look into buying and like what they see. That's when the housing bust will end for good and home values will start to drift back up. Sharp buyers might even pick up a few properties, and rent to those die-hards determined never to buy.
Skip college. It's so expensive! And it doesn't even guarantee you a job. Research college options on the Web, and you're likely to come across a rising number of skeptics who say college isn't worth the cost or the trouble. Here's why: A lot of the stuff taught in college is abstruse liberal-arts stuff that has no pragmatic use in today's job market. There are plenty of respectable jobs that don't require a college degree, like plumbers, electricians, customer-service reps, and many healthcare workers. Some people who enroll in college are poorly prepared and shouldn't be there in the first place, one reason graduation rates are alarmingly low. And many who do graduate end up with a pile of debt bigger than the typical mortgage.
Okay, fine, but before heading out for interviews with your shiny new high-school diploma, make sure you know how employers regard the virtues of education. During the recession, the peak unemployment rate was 11.2 percent for high school grads with no college, and 15.7 percent for high-school dropouts. But for college grads, unemployment peaked at just 5.1 percent. Pay is also much higher for college grads, and perhaps more importantly, they're the only educational cohort whose real pay, after inflation, is still going up. Everybody else's is stagnant or headed down. It also seems clear that a set of skills you learn once won't be sufficient in an economy that changes faster than ever, which makes lifelong learning critical—and the "learn how to learn" philosophy of a liberal arts education more practical than it may seem at first.
It's definitely true that a college degree alone doesn't guarantee a decent career. And the typical cost of four years' tuition, room, and board—easily $200,000—is steep. But the mistake is viewing college as an all-or-nothing proposition: Either spend a princely sum on education, or skip it altogether.
A better answer is to shop for education the same way you'd shop for anything else that costs a lot of money, applying cost-benefit logic to make sure you get the best bang for the buck. For starters, the inherent value of a college education is the instruction, not the room and board or the social experience. So enrolling someplace decent that allows you to live at home or live cheaply on the local economy is sensible. Private schools charge a huge premium over public universities, and except for the most elite schools, there's scant evidence that the added cost of a private education pays for itself through higher workplace earnings. So a cheaper state school might be a better investment. If you're not sure college is for you, wait a year or two and test your skills as an entrepreneur or tradesperson; you may learn things that help you get a lot more out of school if you decide to go. And why stretch a college education over four years, just to enjoy summers off? If you can save money by doing it in three, you'll enter the workforce and start earning back your tuition that much sooner.
Only buy used cars. Dad was right: A new car starts to depreciate the moment you leave the dealer's lot. And virtually no car is an investment; they only cost you money. So buying used sounds sensible, especially in today's touchy economy.
But used-car advocates overlook one thing that's pretty important: safety. Automakers are continually coming up with new innovations that make cars more durable in a crash, and even help them avoid crashes in the first place. And new cars are more likely to have that technology than used ones. Front airbags, on both the driver and passenger side, have been required since 1998, so most used cars have them. But cars are not yet required to have a lot of other safety features that have caught on, such as anti-lock brakes and stability control, which help maintain control in a skid, side-curtain airbags that protect the heads of front- and back-seat passengers in a crash, and roll sensors that can prevent high-sitting SUVs from flipping over. On many new cars, that kind of gear is standard or optional. On some older cars, it wasn't even offered. To tell, you'll often need to examine the headliner for markings that reveal a side-curtain airbag, or look for dashboard lights that flick on briefly when you start the car, indicating anti-lock brakes or stability control.
Besides, used cars aren't quite the bargain they once were. A sharp drop in new-car sales over the last few years has left a shortage of used cars and created a strange economic inversion: Some new cars actually cost less to own than an identical used model that's a year old. Car-research site Edmunds.com has identified more than 40 models, including variants of the BMW 3 series, GMC Acadia, and Mini Cooper, for which monthly payments for a used model are equal to or higher than those for a new model. That's because of rising prices for used cars, declining rebates offered on new ones, and interest rates that are usually higher for used-car purchases than new cars.
If you pay cash instead of taking out a loan, then the used model would still be cheaper. And if you bought an older car, you'd save more money still. But smart consumers these days should take nothing for granted and question any wisdom they're offered, conventional or otherwise. Sometimes it changes, but sometimes it doesn't.