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Ok ... we've all heard the advice. Wait for prices to drop since they will drop further. Here's my question ...
If you can get a property that you like for the same amount of rent you're paying now ... is that the time to buy?
Here's my situation: market rent for houses in my area is about $1500, give or take. Long story short, we ended up paying $1800 for a larger house because this was the only landlord we could convince to take our three dogs. And, we didn't mind paying more since this landlord was willing to give us month to month flexibility on our lease without a one year commitment which, of course, we liked because we do want to buy eventually.
A foreclosure is coming on the market that we like. We're thinking about offering $220K for it ... even though recent comps in that same price range are for smaller properties. They may ask as much as $300K for this one.
We're willing to walk away since anything more than $220K would exceed what we're paying in rent now. However, if by chance they accept the offer ... are we making a mistake? Could prices drop further? At what point do you buy?
Can prices fall further? Yes they can. The probability of a significant price drop in the future will depend on your area. Many area's in the U.S. are appreciating now, while many are stable, and still others are still in decline. Locally here in the Orlando MSA, we have area's in all 3 catagories. I personally think if you're motivation for buying your home is to try to time the market as just an average joe, your buying the house for the wrong reasons. You should be buying because you love the house and you want the stability of being able to live there for a very long time.
The point you should buy at is the point you feel most comfortable buying. If you buy today your home may be worth less next year, but are you selling it next year? If you wait until you are certain home prices aren't going to fall any further, then be prepared to not have all of these foreclosures and sellers galore, you'll be competing with many other buyers at that time because if you are sure, everyone else will be too!
Now as far as if your mtg equals your rent payments, keep in mind you have additional expenses other than mortgage when you buy. From insurance, to property taxes, to maintenance that you should be factoring in to your budget. Also realize you will have some pretty good tax incentives when you own as well though.
Don't get discouraged thinking the foreclosure will be selling for 300K, you have no idea what the condition of the home is like inside (I'm assuming) and you never know what the appraisers for the bank are going to say the home is really worth.
Try and find an honest realtor that will show you your local market statistics (toughest part) and research as much as you can online about your area. My gut says if your mortgage on that 220K house is going to equal what a comparable house would rent for, I'd say that area is getting real close or at bottom.....but without even knowing where you are in the country that's really going out on a limb.
Now as far as if your mtg equals your rent payments, keep in mind you have additional expenses other than mortgage when you buy. From insurance, to property taxes, to maintenance that you should be factoring in to your budget.
To be clear at $220K the mortgage payment ... including property tax and home insurance ... would be as much as I'm paying in rent now. That's with a standard 30 year mortgage at about 6.5 percent interest and no down payment (we have VA financing.)
The only thing that wouldn't be included would be the maintenance but ... I'm not paying for house maintenance with my rent now either ... just for yard work, which is a standard provision in my lease.
Ok so ... how much do you add to the monthly cost estimate for maintenance?
Funny ... the last home I owned for five years ... I didn't have any of those costs, luckily. I had to replace the dishwasher ... that was all.
But, of course, I realize that these things can come up at any time.
I don't consider them as part of the monthly estimate, but are you financially able to handle have to drop a couple of thousand for a major repair? Granted, it may never come up, but what if it did?
I don't consider them as part of the monthly estimate, but are you financially able to handle have to drop a couple of thousand for a major repair? Granted, it may never come up, but what if it did?
Yeah ... I could. I make good money and have the ability to make even more with overtime.
But the question for all of the bottom callers is:
If I can get a house that I want with a mortgage payment (including taxes and insurance) for the same amount I'm paying in rent now ... (maintenance notwithstanding).
Usually buying is a good option when rents are about equal to ownership costs. There are added expenses to owning as people have mentioned, but there are also tax deductions to consider... and hopefully you are paying down a debt and the home is appreciating.
When you factor "historic" trends, the repairs should cancel out with the equity you are gaining. Sometimes more (2003-2006) and sometimes less (1990s, 2006-2008). That does no good if you dont have an emergency fund for repairs so make sure you have that in place before buying, regardless what the bank approves you for.
Also factor in whether you are going to stay in the home at least 3-5 years. Even if the home appreciates, it will take at least 2-3 years to "break even" with closing costs and Realtor commissions that come with owning a home. 2 years should be the minimum in most cases, but you should go over your finances with a financial planner and a mortgage specialist (not someone that just sells loans like they would a TV set) to see where the payoff will be worth it. Depending on your area and situation, it could take years to make a profit as the market adjusts and you need to plan for that.
Historically, home prices have gone up about the same % as income and rents. Thats logical, if rents are much lower than prices people won't buy. If incomes go up 2% a year, prices can not sustain increases of 5% a year for long. Until prices come down to where rents/incomes can sustain them they will likely keep falling.
Yeah ... I could. I make good money and have the ability to make even more with overtime.
But the question for all of the bottom callers is:
If I can get a house that I want with a mortgage payment (including taxes and insurance) for the same amount I'm paying in rent now ... (maintenance notwithstanding).
Is that the time to buy?
Your method is a good start, but there are other things to consider. Obviously, the value of the mortgage deduction, the chance that you might have to move before you hit "break-even," and, as you say, the chance that prices will fall further. IIWY I'd want to know how far prices have already fallen, and whether they are starting to stabilize. For myself I wouldn't want to buy in an area with massive numbers of foreclosures, abandoned properties, etc. Prices might be very low indeed in an area like that, but the neighborhood could go downhill fast.
So finding the "sweet spot" of lower but stabilizing prices is what you want, and you'll want to do a lot of "due diligence" homework on the area before you commit. We can't really do tha for you, partly because it involves a lot of rather subjective risk evaluation on your part. This is where google becomes your BFF. BTW, just out of curiosity, where is the house (city, state)?
I can't believe I am saying this but I agree with scone on this one. You really want to make sure that sector of the market is heading toward stabilization or that you are getting such a stellar deal that you can handle more decline. We have sectors in my market that have hit stability and others that are still declining. So I don't think that just the rent vs. mortgage equivalency is enough.
Also, as far as maintenance, I tell my buyers to plan to put away about 1% of the sales price of the home away for future maintenance. So in your case, plan to put around $2,000 a year away for a future roof, furnace, water heater etc. That way you can take on repairs as they occur without deferring your maintenance.
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