House buying

[bjl584]

Thank you all for the comments.

I think the idea that you can't time the market (and shouldn't) is flat out wrong. Three years ago it was obvious what was coming. In bay area the house prices have droped a bit (20-25%) in the parts I'm interested in. I don't see any reason why they wouldn't continue down 15-20% more. So far by not buying we have "saved" 300k+. While our rent is relatively high it is a lot cheaper then that.
So my options are put 300-400k in downpayment now and buy something or wait 1 to 2 more years until recasts blow over (which are hitting here big time now). We have been going to open houses for years now (when we see something interesting). The quality of the houses and lot sizes have drastically improved over the last 3 years. I think if I bough something then I would be very disappointed right now.
The area I like has typically 2-3 sales a year so neighbour turnover is not a big issue.

For me the main reason to buy something would be that I'm sick and tired of moving and would love to get the whole "my own backyard" thing going on for the kids.

T.

You can't time the market. Yes, most people educated about finances saw a housing bubble coming, but no one could tell you exactly when it would happen, and it shouldn't effect when you buy a home. Maybe the housing bubble isn't over. Maybe you will buy today and two years from now prices will be lower still. Would you be disappointed by that set of circumstances? On the other hand, housing prices could improve, and two years from now you can look back and be satisfied that you got a "good deal" on your home. The point is, you really don't know what's going to happen going forward. Don't buy a home to make money. Buy a home to live in. Have all your finances in order (20% down, a budget, an EF, etc.) then go buy your home. It's not an investment the way buying a stock low and selling high is. You can't think of homeownership along those lines. It's a place to live and raise your family.

[MonkeyMama]

Ticker - I think you are confusing common sense and educated financial decisions with "market timing." I easily predicted the housing crash in 2006 (my own region), but I also predicted it in 2003, 2004, 2005. By 2006, it was like, "holy hell, this can not go on!!!!!!" The reality is that I was like 4 years off. Of course I have felt like that about the Bay Area since about 1998, and still do. I've got a lot of friends and relatives who own homes there - VERY precariously. I can't justify the cost to live there, personally.

Good luck with that. The Bay Area is a unique beast. Nothing like the rest of the country. Recoveries tend to be erratic and lightning fast, at times. MEaning, easy to miss the boat. I know firsthand. I did own property there 2 years, which was a wild ride.

My point is not to say, "no no no - prices will never drop further by the Bay." My point is just that no one can predict precisely when the market peaks, or bottoms out. Or when it may zig or zag. You don't seem to recognize that there is a gamble in waiting. Even if you gamble and win, it was still a gamble.

Of course, I certainly wouldn't take on that kind of commitment unless I was financially prepared. So, buying now could easily be the bigger gamble, if you aren't really ready. To be clear. I don't want my post to read "buy buy buy," because I know few that has really worked out for...

[Seeker]

I'm trying to figure out if it would make sense to buy now or wait a bit longer and keep renting. On one hand I love the idea of having our own house on the other I don't like parting with the down payment. We are in San Fran Silicon Valley and the prices are insane.

What do people think about buying now?

T

If you are ready with 20% down, consistent in career location, like the area involved, then buy because you are ready and want to live there and can see yourself staying there for a good many years.

No such thing as timing the market as a whole; yes, it's easy to look back.... but why do you wish to look back?

Which is better in the long run: 2k on rent, or 2k on a mortgage??? Which would you pay more in the long run??? Renting or ownership?

[Kjackson25]

All real estate is local so getting advice from anyone that doesn't not have an intimate knowledge of your area that also DOES NOT have a vested interest in you buying or not is not wise.

What I would do is start by finding out what the median income is in your market and what the median house price is. If the median income can afford to buy the median priced house then that is a positive sign that your market is NOT over priced. (It still could be, but the chances of it being overpriced is lessened.)

Next, figure out what payment you can truly afford. Once again this is a personalized decision, but don't listen to what mortgage and real estate agents tell you. All the "rules of thumb" here are really irrelevant, it is what you can safely afford.

Once you figure out what you can afford see what that would buy with a minimum down payment. FHA requires 3.5%, Rural Development and VA allow 100% financing. Let's say that can buy you a 3 bed, 2 bath, 2 car garage house with 1,350 square feet. See what it will cost you to rent that same sized house.

If rent is lower than what your FULL house payment would be (include taxes, insurance, any mortgage insurance with your principal and interest) then you need to calculate how much your principal will be reduced each year with a cumulative total over a period of years (probably at least a 10 year or longer timeline.) For example if renting is $400 less per month and your 10 year total principal reduction is less than $48,000 ($400 * 120 months) then renting has an advantage. If principal reduction is more then housing has an advantage.

Oh I know, "but what about the tax advantage of owning a home" frankly unless you have a lot of other write offs or have a big mortgage with lots of interest as a married filing jointly your standard deduction may minimize your tax deductability. For example, the standard deduction is $11,400-so your total deductions need to be more than that to justify itemizing on your taxes.

So say you have a $170,000 loan at 6%, that is approx. $10,200 in interest, say the property taxes are $3,000 that is a total of $13,200 in deductions. If you don't have any more write offs the advantage of owning a home is $13,200 - $11,400 or $1,800- if you are in the 28% marginal tax bracked your total tax savings that year would be $1,800 * 28% or $504 that's $42 per month. Not a huge advantage. Unfortunately, the mortgage and real estate industry would likely be touting a $13,200 tax deduction times 28% tax bracket or $3,696 per year or $308 per month (this is incorrect unless you had $11,400 in other deductions- which is highly unlikely)

Others will argue that the house would appreciate. It could and historically they would be correct, but in today's much, much tighter underwriting environment where you ACTUALLY have to QUALIFY to buy, home appreciation will likely be driven more by wage increases (which have been woeful) than by "creative lending." If anyone is touting the benefit of appreciation in real estate I would question them thoroughly on the reasons why they think that and see if those reasons make sense to you. I would certainly want my house value to be close to or below the what the median income can afford so I can increase my chances of appreciation due to wage increases.

Another factor to consider before buying is if you are going to sell in say 10 years, typically selling costs are significant. Real Estate commissions are 4% to 6%, sales concessions in price reductions, paying closing costs, etc, could drive your selling costs to 10% or more. So if you buy a $190,000 house, put $20,000 down, finance $170,000 and the house doesn't appreciate and sells for $190,000 in 10 years, it costs you 10% to sell it ($19,000)- hmm whose money paid those selling costs? YOURS!!! Unless you think a home is going to appreciate you better make sure you are going to own it long enough for the rent/homeownership cost differential to be enough.

Contrary to popular belief this is NOT an easy decision. There are a lot of factors that need to be considered and many of those factors are unknowns so you'll need to be comfortable with all kinds of future possibilities.

I would agree that in a majority of situations, a home is not an investment, it could be considered a savings account or a smarter way to utilize your dollars, but unless the home appreciates CONSIDERABLY the home is not an investment. Plus even if it was, it is not what I would call a smart one to count on. The only way to really get your money out is to SELL IT and then where will you live? It would likely be better to buy a smaller home you could live in FOREVER and use it's value to pass on to your heirs or to sell if you are going to be in a long term care situation. (That is a highly individualized decision that you will need to make.)

For those that tell you to put a big down payment, I totally disagree. People that make big downpayments don't fully understand economic theory, opportunity costs, the power of having control over your money and many other reasons. I don't recommend buying if you have NO MONEY, I think you should have access to a lot of money, in case something bad happens (emergency account) I just think having that money in your house is not finanically intelligent because you lose control over that money. These types of financial concepts are past most consumers and unfortunately most financial pros plus the banks and Wall Street would much rather you have your money creating more equity so they are safer if you do lose your house. Ironically, if you have all that money in your house and you run into financial trouble you are MORE likely to lose your house because you don't have access to that money to pay your mortgage until you can get back on your feet.

Face it, buying a house, making the commitment to repay $300,000, $400,000, $500,000 or more of your hard earned money is THE BIGGEST FINANCIAL DECISION you will make in your life. Find a qualified finanical professional that understands this and can explain to you why doing something is BEST FOR YOU, not best for them, or best for the bank, or best for the real estate agent, or best for your neighbor, but BEST FOR YOU! I can't emphasize that enough.

Realize this, no matter how much money you make and how much house you can afford when you buy a house that is priced well above what the median income in YOUR AREA can afford then you are quickly and drastically reducing your pool of potential buyers when it comes time to sell.

If the median income in your area can buy $150,000 house that means that 50% of your market makes enough money to be able to buy your house and if you buy a $300,000 house how much does that pool of buyers shrink? How many of that smaller pool of buyers would be in the market when you were ready to sell? How many other $300,000 houses would be in the market when you are ready to sell. Lots of unknowns there which means you are at more risk.

Realize this. The difference in payment between a $150,000 house and a $250,000 house invested at 6% over 30 years is around 3/4 of a million dollars- if both houses appreciated at the same amount you would need more than a 7.2% appreciation rate to be able to sell that $250,000 house for enough money to buy (say that $150,000 house in 30 years because you are downsizing, right?) and have an additional $750,000 (or so) to tap in retirement. AND you would have to uproot your family home and go thru the hassle of moving. Hmm, buy that big house and HOPE and PRAY for a 7.2% appreciation rate in this market- ha, ha good luck.

Hope this helps you realize some of the little known things you should be thinking about when considering buying a home. If the person you talk to about buying doesn't talk about these types of things I highly recommend finding one that does. Unfortunately, that will probably be a difficult search. Good luck.

[disneysteve]

Once you figure out what you can afford see what that would buy with a minimum down payment. FHA requires 3.5%, Rural Development and VA allow 100% financing.

How can anyone have lived through the past few years and still be recommending buying with nothing down? It was never a good idea and seeing how much chaos it caused in recent years, it is an even worse idea now. How many millions of homes have been foreclosed or sold short because they were bought with nothing down only to have the value fall leaving the buyer underwater on the mortgage and unable to get out when they needed to sell for some reason?