So last week we looked a little bit at the some of the reasons why many people aren’t buying homes. Despite inventories increasing, mortgage rates at near-record lows, and less housing being valued as underwater, the United States is still about 10% under the home ownership high of 2004-2005. The current ownership rate is about 64% of Americans and in 2004 it was 69%. Moreover, rental rates are actually on the rise. So it seems there is a bit of a disconnect. Rent is on the rise, mortgage rates are cheap, there is more inventory in the market yet we aren’t getting as many buyers.
Despite that fact people still continue to buy homes and home ownership is projected to increase. But after the financial crisis of 2007-09 a question that should be asked for many is home ownership even right for you?
Full disclosure, I own a home. However, I didn’t own one until I was 40. I occupied a home with my ex, but technically she owned the home and we proceeded to sell that home and move for career purposes. We used the proceeds from that sale to pay off her student loans (which was a good financial move at the time). However, just because I own a home and want to potentially own more real estate (a rental, vacation condo, lake home) or move up in house I know that owning a home isn’t for everybody. I don’t like a lot of things about home ownership. I am not a working in the yard kind of person. I personally don’t care that much, although I do want it to look nice. Mrs. ROB is proving to have a much greener thumb than I do. I don’t like the shoveling of snow, having to make improvements on the home, paying real estate taxes, paying for repairs myself, etc.
So how did we decide home ownership was right for us? The truth is that we actually kind of fell into it. At the beginning of 2014 I had declared one of my goals was to start saving for a house, not actually buying one. And I had to pull some financial strings to get a down payment. I am not upset that we got the house. We got a pretty good deal on it. But there were other reasons that factored into our decision to buy a house. After doing a little research here are some things you might consider when making the decision to buy a home.
1) How long are you going to be in the area/job? One of the questions that people don’t ask or maybe don’t think about in a comprehensive way is how long are they going to live in the area. One of the reasons I didn’t buy a house right away when I moved to my current job is that I didn’t think I was going to be here for more than just a couple of years. If you are going to be in an area for less than five years most of the time buying a house isn’t for you. Part of the reason is financially it doesn’t make sense. Unless you are in a super hot real estate market or you buy the house with cash you probably won’t recoup your closing costs and down payment in that time. I mean when you sell your house you will have to pay realtor fees of up to 6%. That takes a chunk out of your profits. Plus, you have to pay off your mortgage, which might not have been paid off that much if you have a 30 year mortgage. Financially, you actually lose money. So if you plan on leaving I would say rent.
We decided to buy because it looks like we will be here for a little while (I mean I have lived here for 10 years already) and I have my mortgage on a 15 year fixed rate where I am building a bunch of equity. If we were to leave we would actually make a little money, but not much.
2) Can you afford a down payment? The days of no down payment loans are pretty much over. In an earlier post I talked about the different kinds of mortgages that you could get. But all of those mortgages don’t mean anything unless you have some kind of down payment. To buy a home in most places you need at least 3% down, which will translate into about $5000-$10000 depending on the value of the home. Can you save that much money? Do you have it? More than likely, as well, you will have to come up with closing costs that can be up to an additional 2 to 3% of the purchase price of the home (e.g. home owners insurance premiums, home inspection, etc). You can roll those costs into the mortgage, but only if those costs, along with the mortgage, isn’t valued more than the house.
When we purchased our home we put 5% down and rolled those closing costs into the mortgage. However, we negotiated the price down about $10,000 down from the original price and it appraised at more than what we purchased it for. Thus, we could do that. The lower your down payment the harder time you will have with this strategy. Getting $10000 for a down payment and closing costs can be prohibitive for some people.
3) Owning a home is cheaper than renting, sort of. A lot of people will tell you to buy a home because you need to stop throwing your money away when it comes to rent. Home ownership isn’t necessarily cheaper than renting. The statement about throwing your money away is only half right. Because when you buy a house things will break and YOU have to pay the costs. In the 9 months since we bought our house, we have spent probably about $3000 on home improvements including a new toilet, dryer, insulation for the home, repairing the central air conditioner, drapes, curtains, etc. That doesn’t include the small amount of moving costs we paid, which which I did primarily myself (thanks to my students for that final move). We have also spent at least $10000 on furniture (which we needed) for the house. I mean we basically got rid of our all our apartment furniture because it was over a decade old, stained, and in just poor condition. But we only did that because we bought a house and wanted some new items. And we aren’t done yet. We still have more things to do for our house. Hopefully, not expensive things, but people recommend that you budget about 1-3% of your home’s value on improvements/repairs for the house each year. Things will break. Roofs will leak. And you don’t have anyone else to fix them except you. Renting, particularly if you live in an urban area, maybe more pragmatic and actually cheaper.
4) Your home is NOT a piggy bank. Generally, it is true that homes go up in value. Our home has increased in value about 3% over the past year. Yahoo…I guess. However, just because it goes up in value doesn’t mean it always will (think about 2007-2010). Unfortunately, a lot of people used their houses like piggy banks in the mid-2000s. Taking out loans to consolidate debt, make home improvements, or to go on vacation. That, to me, is just plain STUPID! A house is a place that you live in. Yes, it is an asset that grows in value. But it is an illiquid asset. I can’t go to the bank and instantly get $100 from the Home Owners ATM (although that would be an interesting product) like a normal checking account. Real Estate can be a GREAT investment. But I think we should look at your primary home as a place you want to put down roots, you like the neighborhood, town, or school district, and/or culture of the place you live. A house, to me, is just a house. Buying a house because you think you will get rich off of it isn’t typically a good idea. If people want to buy more real estate for rentals or just owning more property that is a different story, but the home you live in I don’t think of as an investment where I will get a lot of money out of it.
5) A house is just a house. I have a little secret to tell all of you looking for a house. Are you ready? There is NO SUCH THING AS THE PERFECT HOUSE! Now don’t get me wrong I know there are significant differences between homes and their locations. But if you get so wrapped up into a house that you want to buy and it keeps you up at night whether or not you will get that house then I think that is a wrong headed way to approach buying a house. A house is where you place your head. A home can be found anywhere. A home is filled with laughter, family, prized possessions. But a home can be an apartment, townhouse, condo, mansion, hell an igloo if you think about it. In my opinion, there is NO such thing as the perfect house. I fully admit that when I take our dog for a walk I wonder what other houses look like and even get a little envious when I see their backyards and a bigger home. But that jealously fades when I consider other factors. Yes, I would love to have a house on water someday (my dream) or have a vacation property in another country that maybe I share with others (friends lets talk) but I would want that stuff because of a location, not because of a particular home.
6) Location, location, location. Yes, the old adage in real estate is true. We bought our home in another state from where Mrs. ROB and I work. We got that house for at least 30% cheaper than what it would’ve cost in the area where my job is. Now my commute is longer, but we live in Providence, RI, recently voted the coolest city in America. We live close to two different universities. We have awesome restaurants within walking distance. We have a pub we enjoy going to. There are two pizza places and bakeries right around the corner. There is an elementary and private school that are considered to be above average literally around the corner from our house and generally we live in a very safe neighborhood. Plus, did I mention we got our home at a good price.
I do wish our home was a couple of streets over, which are much more tree lined and a bit quieter. I wish we had a bit bigger yard and I wish we had a finished basement/attic space, which will probably cost us about $20,000-$40,000 to finish. Those are all projects for the future. In general, I am happy with the house. My commute is fairly long in the morning (45 minutes to an hour, but I have done that long of a commute before) and that kind of bites, but we made a decision on a good location.
7) Buy a home that you can afford. Last summer, when Mrs. ROB and I were looking for a home. I fully admit I had house fever. Although I initially only wanted to save for a house, when we started to look and get serious (and Mrs. ROB hated our apartment) I swear I was on Trulia, Zillow, Realtor.com, Redfin, and any other site I could think of for at least a couple of hours a day. I researched different homes that we could afford. I looked at dozens of calculators trying to figure out what it would cost Should we both be on the mortgage? How much should we have for a down payment, etc? What kind of house we wanted? Should we buy a house that is more in line with friends of ours, etc. I was obsessed. Then when we decided to start bidding on houses I became much less possessed by the idea of home ownership.
I remember when I talked with one of our mortgage brokers and I told her how much I initially wanted the mortgage for she informed me: “Jason, you know you can afford a lot more. In fact, you might want to keep looking.” Now I know she was being nice and it was more of a testament to the fact that Mrs. ROB and I have made some good financial decisions (despite all of the mistakes I have made). I have tried to right the ship and continue to do so. But I knew that I wanted to buy a house where I could have a mortgage payment not much more than our rent, a 15-year mortgage, and knew that we had a lot of furniture to buy. Would I have loved a new home that is decked out to the nines. Sure. Could I afford it? Maybe. I followed the rule of thumb where you don’t buy a house that is more than 2.5-3x your income. Additionally, your house payment should be no more 28% of your gross pay and no more than 36% of your total debt payments (that doesn’t include utilities). As it turns out we bought a house that is about 2x my income and less than 28% of my gross income. So we certainly got a house we could afford. Ultimately, I had to get over my house fever. A house is just a house. Don’t buy the bright and shiny one just because the Joneses do. That gets people into trouble. Buy what you can afford. And if you can’t afford a house so be it. There is no rush. Just because interest rates go up a bit, doesn’t mean you should buy a house right away. If you want to get a rough estimate for what you can afford just google home affordability calculators. Some of them are better than others, but I still like the old rules of thumb.
8) Don’t Be Scared. Finally, a lot of people out there might not buy homes because of financial crisis a few years ago. They read news stories or knew people personally who lost tons of value in their homes. And unfortunately many of those homes are still underwater. However, here is a fundamental mistake I think those people make. They only see their home as an asset, not a place to live for 10-20 years. If you think about your house as a place to live then the value isn’t as a important. You are basically paying the same costs for your mortgage for an extended period of time and by the time you get toward the end your mortgage will most likely have increased in value. Yes, 2007-09 was terrible for real estate. No homes are not guaranteed to go up. In fact, some hot markets (San Francisco, New York, Boston) need to go down severely! But generally homes go up in value. Generally, they are a good investment and they provide some semblance of financial stability. With a house you know what your payment will be for the next 15-30 years of your life. With rent you don’t. No one likes to lose money, but if you don’t treat your house like a piggy bank, you plan on being there for at least 5 years, and you keep up the home (e.g. yard work, basic maintenance) generally it will be worth more than what you paid for it.
Home ownership isn’t for everyone. It might depend on the stage of your life, your income, family size, location, job security, etc. However, if you have a good job, good income, a family, you like the place you live or plan on being there for a while, and you can save for the initial down payment I think home ownership is a really good thing.