Investing in a new home...worth the risk in this market?

[Frugal]

My spouse and I bought a new home about six months ago. Do you see this as a wise idea in this market? We live in an area of the Western U.S. with relative economic stability, and stable housing prices, as well as a better-than-average jobs market (for those in the technical sector, at least, if not in my sector!).

We used up all of our savings to buy a brand new house, because my spouse preferred a brand new house vs. an older house, with a risk of having to invest a lot of money over a short-term period to fix it up, and then eventually to sell it. I personally grew up in older homes my dad fixed up constantly, and never had anything like this...we lived mostly beneath our means, and could have afforded nicer houses growing up. Nor did I expect to ever live in a brand-new house. We believe we can resell our house in 1-5 years for a decent profit, because it is in a very desirable location with new construction, and lots of shopping and businesses continuing to go up. It is a high-growth area.

Keep in mind, please, this is our first home, we are under 40, and only one of us is working now, since I was laid off due to the economy several months ago. Would you have bought a new house in our situation? I am curious to hear what other people did when they got married, and bought their first house. We are able to afford this house, but could have saved on a less expensive, older one in an older neighborhood.

Did you ever rent out a house you bought initially as an investment? I am not sure if we can rent ours out right away, but my eventual goal is to have a rental property as an INVESTMENT. I have always believed real estate to be the best form of investment, yes, even in these trying economic times.

Thanks for the input ...

[Joan.of.the.Arch]

Interesting that you put your question about a house that you seem to live in (correct?) in the Investing and Banking forum. Do you really primarily see your house as an investment, something to make money from? If so, it seems like you should have found answers to your questions before you made your investment.

You are telling us that you live in a better than average area for economic stability, where the economy continues to grow, so you are optimistic about it. Yet then you tell us you lost your job. You tell us that your spouse thinks new houses are best, that new construction is continuing in your area, and yet you hope to make money renting (or selling?) your house which will then be in competition with newer houses in your hot area.

All your savings are gone, used to buy the house. You are unemployed (were you unemployed at the time of purchase?), and I followed your link to your webpage on which you say that you cashed in your 401K. Calling it an easy way to save money, you recommend:

"1. Consider cashing out low-yield 401-Ks or pension plans, even if you have to take a tax penalty. I paid a penalty of 20% for early withdraw after I was laid off from a nearly full-time job last year, and recouped more money than if I had let that money sit until retirement in forty years, at which point I expect the stock market may not even be around in its current form , or at least not offer me a high value on stocks. Use this tip with caution, and of course, only after consulting with your financial professional."

How did you get more money on that 401K than you would have by leaving it alone for 40 years?! How much money would your 401K have earned? How much did you get instead? I'm asking because that seems so unlikely.

You speak of your new house as your first, with the possibility of renting it out. So it sounds like you are already looking toward buying another one to live in. Is your house not suitable for the long term? Do you plan to move out of the area? Renting out a house while living outside the area can be difficult.

Why have you always believed real estate to be the best form of investment? I assume you mean housing real estate in particular since that is what you are referring to as your investment. Did you know that over the last century housing real estate has NOT been a fruitful investment relative to incomes and the value of our dollars? Unless, of course you count the bubble years when it really did go up a lot! If you were lucky to buy and sell during that bubble you could have made money.

Over time a house can certainly be a place to HOLD value, but not necessarily to INCREASE in value. Later, you can probably expect to sell it for more or less the value (relative to incomes, inflation) you at which you bought it if you bought outside of a bubble time. Or it can retain value that can be passed on to heirs. But as for making money on your home; I would be very skeptical. Maybe it will happen, maybe not.

I suggest you do much more reading before you proceed with investing in any kind of real estate. And perhaps join a landlord association to learn the ropes. If you think you want to make money on rentals or sales think of it as a business. Educate yourself and try to recognize when you might be operating purely on optimism or wishful thinking. Become comfortable with math to help you make your investment decisions.

Sorry my response is so disjoint. Hope you can get something out of it. I hope someone who is more entrepreneurial than me will respond as well.

[MonkeyMama]

I don't think it is ever wise buy a home as a short-term investment (1-5 years).

Well, I suppose it depends. But I just mean for the average person. If you have a ton of money to gamble on real estate speculation, is another story.

I don't think buying now is more or less risky than any other point in time.

I am personally not a fan of real estate investment. If you enjoy it and it works for you, fine. Generally, wealth comes from LONG TERM holding (decades), and good luck. I have seen a lot of people become millionaires in the California real estate market, but I also see people continually buying at sky high prices simply based on past performance. If real estate and land is already some of the most expensive in the country, I don't see how it will make anyone rich at these prices. But people continually buy. I think a better investment would be an up and coming area.

I also know a lot of people who did make a ton of rentals and said it was the worst mistake of their life (emotional toll - issues with tenants, etc., etc.). We could have rented out our first home for a fortune (rents were/are so high - far more than the mortgage), but I just didn't want the stress. I suppose basically, beware of anything that boasts "Get Rich Quick!" No Pain? No Gain.

As far as new homes - depends on the market. In the market I live in new homes are a GREAT value. That is why we bought new. You have to battle with the perception that older homes are a better value, though. People here will still pay MORE for a house than needs a ton of work because they don't know any better. (Or for the ambience). Some of the perks we have is extremely low maintenance, high quality structures, and very energy efficient (cheap utility bills). So, even if we paid a premium, I think it could maybe even out. I have barely spent a dime on home maintenance in 10 years, in exchange for buying new. This is not a 100% guarantee, but pretty likely if you shop carefully. Just few of the issues that older homes will face. Even if we stay here 30 years we shouldn't have the "replacement factor" with plumbing and roofs, etc. They *should* outlive us. Why was it cheaper? Newer homes sit on less land. Land is the bulk of the cost for homes where I live. Easy way to get our cake and eat it too. (Lot size is the same I grew up on in a more expensive city so I have no issues with that part. I actually wouldn't want any more land to take care of).

[bjl584]

My spouse and I bought a new home about six months ago. Do you see this as a wise idea in this market? We live in an area of the Western U.S. with relative economic stability, and stable housing prices, as well as a better-than-average jobs market (for those in the technical sector, at least, if not in my sector!).

We used up all of our savings to buy a brand new house, because my spouse preferred a brand new house vs. an older house, with a risk of having to invest a lot of money over a short-term period to fix it up, and then eventually to sell it. I personally grew up in older homes my dad fixed up constantly, and never had anything like this...we lived mostly beneath our means, and could have afforded nicer houses growing up. Nor did I expect to ever live in a brand-new house. We believe we can resell our house in 1-5 years for a decent profit, because it is in a very desirable location with new construction, and lots of shopping and businesses continuing to go up. It is a high-growth area.

Keep in mind, please, this is our first home, we are under 40, and only one of us is working now, since I was laid off due to the economy several months ago. Would you have bought a new house in our situation? I am curious to hear what other people did when they got married, and bought their first house. We are able to afford this house, but could have saved on a less expensive, older one in an older neighborhood.

Did you ever rent out a house you bought initially as an investment? I am not sure if we can rent ours out right away, but my eventual goal is to have a rental property as an INVESTMENT. I have always believed real estate to be the best form of investment, yes, even in these trying economic times.

Thanks for the input ...

Were you ready and able financially to buy the home? What was your downpayment, and what percentage is your mortgage payment compared to your monthly income?

I have looked around at investment properties, but I never considered my primary residence as a potential rental. Not that you couldn't, I just never have. But to me, a primary residence is a place to live. It's shouldn't be viewed as an investment. Don't buy based on market conditions, interest rates, or potential investment return. Buy when you are financially ready to do so.

[Frugal]

I think some of you, especially Joan of Arche, misunderstood what I was trying to say. Yes, I do believe a home is an investment. Is it only an investment? Well, no, obviously it is also a place to live. I know for a fact that this house was a good investment, but I was trying to find out whether other people view buying a new home in particular as a wise investment in this market. I know it depends on the area you live in, that goes without saying.

The main reason I am writing was to see whether other people purchased their first major INVESTMENT as a new home, or a "used" home. I don't personally believe that most people choose or are able to buy a new home for their first home, but I don't know. The area I live in is probably not representative of all areas of the country.

Real estate, in some areas is more stable as an investment than the heavy fluctuations of the stock market. I have a family member who has made money over the years in this area.

I would still like to hear from other people what they think. Not desiring to argue whether houses are an investment on this forum. I know what I believe to be true about this matter. Simply wanting to find out what others think about investing in a new home vs. older one, with all the upkeep.

[frugalgirl]

The main reason I am writing was to see whether other people purchased their first major INVESTMENT as a new home, or a "used" home. I don't personally believe that most people choose or are able to buy a new home for their first home, but I don't know. The area I live in is probably not representative of all areas of the country.

Real estate, in some areas is more stable as an investment than the heavy fluctuations of the stock market. I have a family member who has made money over the years in this area.

I would still like to hear from other people what they think. Not desiring to argue whether houses are an investment on this forum. I know what I believe to be true about this matter. Simply wanting to find out what others think about investing in a new home vs. older one, with all the upkeep.

The old adage in real estate Location, Location, Location is actually true. An older home in a highly desirable location will be worth more if it is bought and modernized than a new home in another part of the same town.

We bought the house we live in as our first home because of the location. The neighborhood I live in is the best location in my town. It backs onto a golf course/country club. Each property has at least one acre of land and is bordered on the other three sides by the old estates of the town. It is within easy walking distance to the town park, library and jogging paths. The homes range in age from 30 to 50 years and were built by each individual lot purchaser. Thus, they are all different. A new housing development a mile down the road has all new homes built 3 to 5 years ago by the same builder. The values of those homes have stagnated while the value of the older homes in my neighborhood keep increasing even though they may need to be updated. Why? Because the location is better. The location will always be better in my neighborhood. The value of the other neighborhood was great when the development was new but those homes are now competing with other newer homes in other newer developments because there is nothing special about the location of these newer neighborhoods.

We have spent a not insignificant amount of money modernizing our 30 year-old house. However, I know that I could sell it anytime I wanted and get a good price because it is in a fantastic location. It won't sit on the market long if I want to sell. I will be able to recoup remodeling costs if I sell. The main reason I bought this home was not as an investment, however. We bought here because we liked the location. The house we could change to our liking but we could never change the area - 1 acre quiet wooded lot in a cul-de-sac bordering the golf course.

[disneysteve]

I think some of you, especially Joan of Arche, misunderstood what I was trying to say. Yes, I do believe a home is an investment.

I know for a fact that this house was a good investment, but I was trying to find out whether other people view buying a new home in particular as a wise investment in this market.

The main reason I am writing was to see whether other people purchased their first major INVESTMENT as a new home, or a "used" home.

Honestly, I think you are somewhat confused. Either that or you aren't stating your case very clearly.

A primary residence is not an investment, or at least not a very good one. At best, you might see appreciation of a few percentage points per year but that is offset by taxes and maintenance costs. The end result is usually pretty flat.

Whether or not one buys a new home or a used home really doesn't matter. What matters is that you buy a home that you can afford. 20% down payment. No more than 2.5-3 times your annual income. Monthly payment not more than 28% of your monthly income.

Do I think this is a good time to buy a home? Yes, in most markets prices have dropped significantly and are beginning to stabilize. Mortgage rates are low. If you are financially ready to meet the guidelines I gave above, this is a good time to be a buyer. I don't think new vs. existing home really matters.

My cousin just bought a brand new home in Florida (actually bought a lot and the home is currently under construction). He looked at existing homes in the same development and they were $40,000 more expensive than the brand new homes. Why? The sellers bought those homes 3 years ago when prices had peaked. Then the market crashed and the builder was forced to lower the prices on the new construction and also throw in a bunch of upgrades for free. So my cousin is getting a brand new home with numerous upgrades for $40,000 less than a 3 year old home without all the upgrades. So sometimes, a new home is the cheaper way to go.

[JoshuaHeckathorn]

I think some of you, especially Joan of Arche, misunderstood what I was trying to say...

I would still like to hear from other people what they think. Not desiring to argue whether houses are an investment on this forum. I know what I believe to be true about this matter. Simply wanting to find out what others think about investing in a new home vs. older one, with all the upkeep.

The first place I bought was new. I prefer to keep life simple, so I buy new condos in great locations. I'll never own a SFR because I have no desire to deal with the maintenance, yard work, and everything else that comes along with owning a home. Then again, some people love doing that kind of stuff. I don't. We'll see if my tune changes after kid #2 comes along

[savingdealz]

I agree with disneysteve.

[FrugalGirl321]

The main reason I am writing was to see whether other people purchased their first major INVESTMENT as a new home, or a "used" home.

We purchased used because of personal preference. However, in our area, new homes have lost MORE value than old homes. They're built with poor materials here, (lots of vinyl), and they're all cookie cutter with lots sitting on the market. The unbuilt ones are selling at such deep discounts, keeping newer home resales even lower. I have some friends who have lost 50% whereas in our older neighborhood, we've only lost about 10%. Everywhere is different though and it's about personal preference.

If you love your home, and plan to stay, who cares what it's worth as long as you feel you got a good deal.

[JessieHanz]

Investing in a new house is a good idea considering that you are investing for your own future.. As for me, it's the best choice to make an investment..