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My wife and I are first time home buyers, we are getting a decent deal on a nice house built in 2005. So shouldn't bee too much of a nightmare, but we have budgeted money for repairs.
We will be doing a 30 year loan and will make extra principle payments. If we really buckled down we could live off my income but it would be tight. My wife works and makes more then me but I do have the more secure jobs and we use my benefits. Currently my job is driven by the Asian market, as well as the rest of the world and us. So I feel a little better.
We also have some family support in emergencies.
I feel confident, but there are those few doom and gloom chicken littles out there saying anyone who buys a house is crazy.
Just getting to the wire and well always the little bit of doubt in the back of my head. Curious what you guys think.
This comes up a lot. The fact is that there are those doomsayers that believe it is insane to spend money on purchasing a house. Many such folks are like alcoholics that once they "take the cure" curse everyone that enjoys a glas of wine as being fools teetering on the brink of collapsing the life. The logic goes "I lost money buying a house and therefore no one should ever buy a house"...
At the other end are the pronouncements from the home builders and national real estate advocacy groups that still basically say "buying a home ought to be goal of every breathing American".
I have made money as a real estate agent and investor. I have also had deals go bad and cost me money. I have a about 25 years experience doing this and know that "doing your homework" allows just about anyone to determine if it makes sense to "rent vs buy" and further simple spreadsheet analysis can make it all but guaranteed to understand the odds of making money vs losing money on anynreal estate deal for almost any time period.
The rent vs buy calculator from NY Times is excellent. Of course you still need to shop / do legwork to determine fair prices for rentals / purchases and get access to historical trends of how rapidly rent increases in the area you are considering but in generally this is a great exercise.
The sorts of spreadsheets that you can get from books by Robert Bruss and others that help you determine the potential for an area to experience stable / rising prices vs flat declining prices are a little more involved, but are still pretty straight forward -- in addition to rents / prices for residential real estate there are literally formulae for how many grocery stores / fast food places / commuter routes / jobs an area supports and how these things factor into real estate values. You can, and should, also "cross shop" neighborhoods above and below your price point to determine the trends that may be effecting the broader market that you are considering. Various indicators of short supply of housing in either high end/ midrange or low end categories can shift the developers / sellers to alter the character of community toward upper or lower brackets.
Finally the linkages between school quality and house prices have been well documented. Even if you do not have children nor have any intention of ever raising a family it is almost certainly wise to buy in the area served by the highest quality schools you can afford. Even in rare cases where "open enrollment" is the norm the physical proximitity to high quality schools is an enormously stabilizing force for residential real estate and underperforming schools decimate values.
The decision to buy (just about any thing and just about anywhere and at just about any price)...
is about your personal employment (income) stability in that that specific location...
relative to the the time period needed to recoup the purchase expenses.
And I would put money that says the OP doesn't stay, either willingly or by force (job loss/job relocation) in that house for 10 years. Which makes the purchase option at that juncture a bad financial move, one that could and very well can cripple your relocation economic solvency. Welcome to unintended landlordship is all I got to say.
The concept of starter home derives from the assumed guarantee that home prices increase in excess of inflation to finance the upgrade. This is not true anymore, the period of appreciation to get the upgrade now spans most people entire working lives (30 years). This is incompatible with a family's progression, since they are ready to upgrade in much less than 10 years of life anyways. As such, the concept of starter home is moot. NOwadays it's renting until you can buy the house you're gonna stay put, and that as I described above, is in it of itself a crapshoot.
This house can meet our needs for 30 years. It is also in a great school system. 4 bed, 2400 sq/ft. We didn't want to risk the starter home and getting stuck.
As for job security, I feel extremely confident for 10 years, with a belief that I could retire with this company. (I know this is rare, but is feasible and I am not by any means expecting to based on statistics.) Unless unusual termination from job. Which can happen anywhere. My company is in an industry that is back ordered, as well as the entire industry is backordered.
Also our bills are about $150 more a month for our mortgage/insurance/taxes/hoa then what we have been renting at for the last 6 years. (before we were renting apartments, not houses)
The economic benefit to owning & living in a house is that you receive "tax free income" in the amount of the fair market rental of the property.
Think about it this way. Imagine there are two identical houses right next to each other. You own one & live in it; I own the other & live in that one.
Imagine our IRS form 1040s. We each have income, deductions, and a tax obligation.
Now instead of living in the house each of us owns, instead, we rent to each other. You own the first house but do not live in it. Instead, you rent it to me for $X/month. I own the second house & rent it to you for $X/month. Absurd, I know, but just stay with me. Because these are otherwise identical houses next to each other, the fair market rent of the two is the same.
Now, imagine our IRS form 1040s. We each have income as before, but we also each now have extra income in the amount of 12*X. We each have deductions as before, but now because we are landlords, we are able to deduct certain other expenses & depreciation.
Imagine our bottom-line tax obligation: it is higher in this case than in the first case because we each have higher "income" relative to the base case.
When you compare the two scenarios, it is clear that in the normal case, when you own a home, you are "paying yourself the fair market rent" but that phantom income does not show up on your IRS 1040 because, well, it is phantom & not real.
That phantom income is one of the economic benefits of living in the home you own.
My theory is that median home prices will eventually revert to the historical levels of 2.5 x median household income. This should be evaluated on a local basis (you can easily find data on median household income and the current median home sales price)
An example is the Nashville, Tn area. The median homes sales price is currently 169,000 and the median household income is 49,000. The median income level indicates that the median home value SHOULD be right at 122,500 dollars. Currently home values are over the historical norm by 27.5%. (169,000-122500)/169000
It can be argued that the record low interest rates make this increased valuation acceptable HOWEVER you must consider what will happen when interest rates rise. Your home value will decrease due to the simple fact that when people buy housing they are buying the payment. Get out an amortization schedule and look at what happens to a payment on a your mortgage when rates increase to 8 or 9%. This WILL lower the value of your home as fewer people will be able to afford the payment required to purchase it.
On a longer term outlook interest rates HAVE to rise. There is no incentive for capital formation at the low rates we have now. These low rates are only enabling bubbles. In addition to almost certain interest rate increases look at what has been happening to median household income. It has been steadily decreasing over the past ten years and NOT ENTIRELY as a result of the current economy. I feel incomes will continue to decline, we keep off shoring our industry that produces value while increasing service jobs that do not add to our surplus. An economy will not grow without creating a surplus.
I am not saying don't buy, all I am saying is do the math. If the median income in your area supports the median home value then I would feel more confident in making a purchase. An example is the Rochester, N.Y. area; I saw a recent article that showed housing to be right in line with incomes. In that market there is less risk.
I live on the edge of two small towns, on the outskirts of a small city.
For a small town I am close too.
2.5X median income = $151,632
Median house = $180,300
Actual REALLY small town I live in.
2.5X median income = $144,522
Median house = $126,700
The county (house is in it, but once again, near the edge, but the majority of the county covers the first town)
2.5X median income = $131,108
Median house = $176,000
Its interesting, I start to question of validity of a system like this. I have one town, where my address is listed, yet I live 3 miles away from door to center of the other town(which is bigger) And I am in a county that covers both areas. So in a way I am overlapped in all areas. If that makes sense.
First off, I'll admit that I'm on of those that believe we're screwed as a nation if we continue on our current path. My belief is that we'll inflate our way out of our problems. This would cause the raw materials that go into homes to rise in price. To compensate, I think that Americans will move toward smaller homes. If we go the direction of Greece (fix problems through deflation), then buying is a horrible decision at this point.
With that said, it appears that your considering buying for the right reasons. Its important that your time frame is long and your not stretching your budget. Make sure to have at least one years living expenses beyond a 20% down payment.
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