Based on what is occuring in the real estate market, and the dropping interest rates, it would appear to me to be a great time to get into the home market. I’m curious as to others take on what I should be looking to get into in the next few years. Granted, this is just a projection and things could change in the next few years, but I want to make sure I’m thinking along the correct lines.
I’m currently a grad student that will finish in the spring of 09. I should have no problem getting a job and will have a decent salary (say 50-75k/year) and be 25yo. I will come out of school with essentially no debt and potentially looking to buy a house. I realize that current thought is to buy a home if you’re planning on staying there for longer than 15 years. However, for this exercise, consider that I’ll be in that place for 5 years. Given that time frame and the current market situation, should I really be looking at buying a home or should I just plan on renting? I realize that there are important factors such as developing an emergency fund and sacking as much as I can into IRA’s and 401k’s at that time, but wanted some perspective on home buying in the current market. Also, how would this change the picture if there was a second income of about the same value and economic situation.
To me, the question is how much of a premium you pay to buy instead of rent. If PITI costs (principal, interest, taxes & insurance) and your mortgage payment every month aren’t more than 120% of what comprable rent would be, and you’re running the numbers using 30 year fixed rates with a modest down payment, then it makes sense to buy.
If mortgage is twice or more what it would be to rent a place, then prices have been run up by speculators, and it’s not a healthy and sustainable situation long term.
The question you need to ask yourselves is: are you an “entrepeneur”?
You want to play conservative (and there is nothing wrong with that): you develop an emergency fund and sack as much as you can into IRA’s and 401k’s and build a “down payement”.
You are an “entrepeneur”: You see huge opportunities with the home market and you take some risks.
That is really what is to be determined. I plan to take a few risks as I’m young (investing in emerging markets, etc.) but your question will be answered more by where I live than my risk-aversion profile. I’m not necessarily looking at this to make a ton of money as it’s likely that one place I “could” end up living is a very crappy area that is undergoing very little growth and where not many people want to live, while a few other places have a bit more going for them and are undergoing more growth (by growth, i mean the area will continue to be developed a little more aggressively and people actually want to live there). Alot more is going into it in terms of relationships and other personal factors, but I’m just looking for advice to help me develop my thought process and frame of reference towards this. I’m looking at this from a perspective of not wanting to “throw away” rent money to somebody while I could be putting my money into my own mortgage and walking away a few years down the road with a little something to show for it.
In terms, of ‘throwing away rent’, unless you’re anticipating prices increasing more than 5% a year, or going with a 15 year note, you’re not necessasily going to be gaining that much equity.
Look at a normal 30 year amoritization schedule- for the first couple of years, only about 10-15% of your mortgage payment actually goes to paying down principal. The vast majority of it is paying off the frontloaded interest.
Right now, we’re in a situation where prices are likely to be flat for several years. I wouldn’t buy a primary residence right now unless I loved both the house and the area.
If you want to buy real estate in the next 1-2 years, you might be better off buying a rental property in a crappy neighborhood if that property was going to be cashflow-positive, and then renting your own place in a nicer neighborhood.
Or option 2- don’t know where you are, but if you can hook up with a home inspector you can trust, there are a lot of foreclosures and short sales that will be hitting the market come graduation time. You’ve got to be careful with those kinds of properties- they’re usually as-is, and condition can range from never been lived in to totally trashed.
The old adage of buy low, sell high only applys in certain instances in the real estate market. If may apply to you though as a first time home buyer. You do not have to worry about selling a home in a depressed market before being able to take advantage of a down market. If I was in your place, I would try to get in while the market is down. You have the opportunity to get a good rate and good value for your purchase price. Of course, keep in mind a reasonable budget etc. But I think there should be opportunities to get a really good deal right now.
However, once you are in, its not so easy. In order to buy low, you have to sell low which pretty much negates doing it for strictly financial reasons unless you are moving up in size or quality of home.
I think the market may appear to be right and in your area it may well be, research carefully. Having been in a similar situation I would suggest you wait 8-12 months after you start your first job, for several reasons. One, you may not like your first job and desire to change which may include relocating. You don’t want to be tied down to selling a house and starting a new job so early in your working career. Two, it will give you a chance to make sure your income is secure and the company you picked will have a job for you in the long term. And lastly, like someone else posted, this market is not likely to take off much in the next year and will more than likely go down a bit more before it comes back so waiting has little risk.
It costs money to buy a home: cost of home, cost of the mortgage, fact that you pay mostly interest for the first several years, maintenance costs, + other things you will no doubt buy
It costs money to own a home: interest, maintenance, major appliances, insurance, new roof, etc
It costs even more money to sell a home: 6% for real estate agents (BAM!), taxes, repairs etc.
Take the cost of the purchase + appreciation (~flat or worse these days) - all the costs mentioned above and it doesn’t take a math genius to see that in order for you to buy a home and not lose your a$$ one of two things need to happen.
1- You buy it for something like 30% under market value. It can happen. There are A LOT of foreclosures out there but many of them need work.
2- The place appreciates a lot (which is not likely right now)
I was just talking with my realtor today and he said he owns half a duplex with another person. Their mortgage is going adjustable so they wanted to refi. The place appraised 3 years ago for 158,000 and this time the appraisal came in at 123,000. Not only did the place go down in value, but now he isn’t at 80% equity so it will cost him even more. He’s going to bank that rates stay low.
Also, in a flat market- if you hold off 12-24 months, it will give you a chance to stash away a higher down payment, and will get you closer to living in the place where you want to live, not the place that you settle for.
The main assumption that you’re operating on is that the current housing market is an accurate assessment of the value of the home. This may not be true.
In other words, you’re assuming that while mortgage rates are low and there are plenty of houses available, it would be a good time to get a good price on a house.
That’s only true if the home values are accurate; if they’re still inflated, then no, it’s not a good time to be. Depending on where you live / what your price range is / what you’re looking for in a property, you might be buying a house that’s still devaluing.
Look, buying is almost always better than paying rent. But not when prices are plummeting.
Do some serious research into the market you’re looking to buy into. See what prices are doing - if they’re stabilizing or still appear to be dropping. Too many people think it’s a buyers market; It’s a buyers market IF you’ve got loads of disposable income and can weather some more depreciation. If you can’t, then it’s not necessarily a good idea to get involved as you might dump money into the property and watch it go down some more.
FLA Jill makes a good point when she says it’s not always better to pay a mortgage as opposed to rent. If your place is devaluing and not building up equity, it’s not really worth paying a mortgage. This is something to think about when you’re making the leap into a mortgage; if you’ve had the mortgage for 15 years, it might not be an issue. But for it to happen soon after buying would be an uncomfortable situation.