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Thoughts on Home Ownership

April 27th, 2009 at 07:21 am

I have been thinking about it because it seems so many people are home shopping. So here are my observations/advice for potential new home buyers.

**Be careful out there. In the last decade everyone was running out and snatching up houses because "they could never afford to buy a house" if they didn't act fast. As if the double digit appreciation could be sustained forever? I tell you, I never quite *got* that thinking. Though it was a factor on when we bought our first home, it was only because it was well within our means. Since a single detached home was not even in the realm of reasonable we didn't even bother trying. (We moved instead). I have people all the time tell me I don't understand because I own a home. Uh, believe me, I understand what it's like to be priced out of a home market. When that happens, the smart thing to do is to not buy. Wink Not to snatch it up before it gets even more expensive!!! & that is precisely what we did (not buy in the unaffordable market).

I share this because the pendulum has swung so far in the opposite direction, I see much of the same stuff going on. People are stretching into homes they can't afford because they are worried prices and interest rates will never be so low again. The same wisdom stands. I mean really, what is the freaking rush? Buying a home you can't afford because of the "low price" and "low interest rates" is little more than crazy. You have a certain amount of time and power that has not been seen for a long time. Enjoy it!

I just have to roll my eyes when so many people are running out buying houses like the world will end if they don't do it today. Take a deep breath and SLOW DOWN. Enjoy the BUYER'S market, for sure. It's been a long time coming. I have to say I am a wee bit jealous of the opportunity to buy in a buyer's market. Wink

But yeah, to sum it up simply, "It's not a deal if you can't afford it!"

Our first home had an interest rate of 8.25%. It's all relative. My parents' mortgage was in the double digits for a long time (they bought in the 80s during the era of high interest rates). In the 1990s, an 8%+ rate was not the end of the world. It was a "good deal." If nothing else, prices tend to drop as interest rates rise. If you can't afford it, did you ever stop to think no else can either? Stop with the panic already!

**My second point is a bit of a rant as well. Since we moved somewhere a little more inexpensive, and prices rose very rapidly here in the mid 2000s, this is the norm we came across with our friends. & I NEVER understood the thinking at all, because back home owning an apartment was far cheaper than renting. So though I understood on some level, the high desire for home ownership there, I never quite got the whole desperation when we moved somewhere with cheap rent options. I guess what happened is home prices just got so astronomical ($250k homes were selling for $650k within 3 years) that people panicked and decided they could never afford a home if they didn't jump prematurely. As a result, I got a pile of friends renting for pennies, who can't save a dime, taking on $3k/month PITI with $0 down.

I was completely lost as this whole thing unfolded. You don't know how many people told me they simply could not afford to save a DIME for a down payment, but they were taking on these massive house payments, far above what local rents were going for. Huh? & how in the heck can they afford such a massive mortgage payment if they can't save a dime with a $1k monthly rent payment? Have they lost their minds?

The short answer is, "YES!"

It was not sustainable, home prices have tumbled back to 2001 levels, very rapidly, and every single one of those people have lost their homes to foreclosure.

Anyway, being able to save up a significant down payment on a home is by no means the only indicator of the affordability of a house. BUT it is a BIGGIE. Quite simply, if you can't afford to save 20% down, I honestly think you have no business buying said house. Mortgages are expensive. House maintenance is expensive. & if you can't save 20% down, odds are you are going to sink. I know it's an extreme view for this day and age, but it's true. I haven't come across anyone who put 20% down on a home and lost it. Not that it doesn't happen, but it is certainly more rare. & with lower down payments comes the expense of PMI, etc.

Along the same lines, if you can't afford the fixed mortgage rate, you can't afford house. All it becomes is a gamble. One that most people are currently losing. I know there's a couple of people around here with ARMs who can AFFORD IT. No issue there. But if you don't have enough assets to pay off your house if things go horribly wrong, back away from the ARM!

I think this is why I often say any more, "If you can afford to save 20% down you can probably afford the house." It's not a hard and fast rule, but you are doing a million times better than most people who live in my city, which I guess is my point. Wink You stand half a chance to catch the curveballs of home ownership if you are a good saver.

BTW, people need to get real. IT can take YEARS to save up a down payment. & that's how we did it in the olden days. Even though we bought our first home quite young, my dh simply saved most of his wage from age 15-23. That is where most of our down payment came from. Sure we were in a unique position to be able to save so much so young, but if not, we would have waited a few more years to buy a home. No doubt about it.

**So how much house can you afford???

Obviously be wary of the loan products out there and what greedy brokers tell you.

All that being said, be wary of even the hard and fast rules of thumbs. Everyone's situation is so unique.

I was playing with a pile of online calculators, and using the usual hard and fast rules of thumbs, all of the online calculators said I could afford homes that I personally would feel very uncomfortable buying. An "ideal" PITI range for us is $1800 - $2300. Um, no thanks???? (We're at about $1700 today). These were mostly $400k homes. (Dh and I made a commitment to draw the line at $300k home price, when we were 25. Needless to say, as we age, the less we would consider tying up in a house. $400k sounds a little crazy if you ask me. Bought with equity? Perhaps. But I was assuming we used the same 20% down we already had. I was not running these calculators with home equity to spare).

The irony is since I live in California I am probably willing to stretch it a little more than most of the frugalites around here. Which I think says a lot when I feel extremely uncomfortable when a calculator tells me I can afford PITI of 35% of my income. No thanks!

When we were younger and just starting out we stretched more because rents were astronomical (higher than owning) and because we had just started out in well paying careers (both of us). We may have pushed it with 40%. I also know our PITI was higher than 40% (50%+?) when my spouse stopped working. That being said, both situations were extremely temporary. Neither of us had any urging to get in over our head with a house payment. At 30 our PITI is around 25%. That is about as high as I would go any more. (& that is 25% of only one income. We wouldn't increase it simply because dh returned to work). Which reminds me, yeah, I was running all the calculators on my income alone.

Reminds me, I would advise to run the calculators assuming you only live on one income (if you are a dual income family). We certainly bought both our homes when we were both working, with payments we felt we could afford on one income. Boy it would be interesting to run these calculators with a second income. Scary!

Our goal is to lower our PITI with time. We have no plans to upgrade our home, ever, and we are young enough in our careers that we expect our income to grow considerably in the future (though we have already had a lot of income growth in our 20s). Thus if we were just buying a home today for the first time we would play it far more conservatively than we did in our early 20s. In our 40s we would like to have our house paid off. Which basically means I would have little desire to buy anything we couldn't pay cash for, or pay off rapidly, in our 40s. Thus, though we were aggressive on one end of the spectrum, individual circumstances certainly change how we approach things.

& some other food for thought - if you are single - don't push it. You have only yourself to fall back on. We always tried to aim for a house payment WE felt comfortable with on one income. But having a second income to fall back on increased our ability to stretch a bit. I find myself in the forums thinking some people can likely afford more house than the forum gives them credit for. But then I feel like I am just contrary because a single person will come along and everyone gives them a thumbs up. & I just cringe. I could not personally imagine taking on such a large mortgage (standard rules of thumb) if I were single. Little details like that really change the playing field, in my opinion.

It's all food for thought.

& I have to say, I am glad I am "out of the game" so to speak. Buying a house is not an easy decision. It is a decision that needs much more thought than it has been given by most in the last decade. For that, I wish all you new home buyers lots of luck!

-----------------------------

ETA: I was thinking about this because I have a relative in her 60s, single, who just bought a home recently (partially with inheritance). My dad asked me if I thought she should pay it off rapidly (because she is hitting it hard). Considering her age and economic circumstances I told him it wasn't the worst - there is always a reverse mortgage for a case like hers. She pretty much makes minimum wage. She lives in small town Kansas. I mentioned paying off a small mortgage makes sense. I'd be more keen to hit mine harder on the front end if it would be gone in a few short years. Anyway, my dad told me he thought her mortgage balance was $60k-$80k. I simply gasped. O.M.G. I am sure she would look at my $210k mortgage balance and gasp. But I am merely 31, I've already paid off $90k, and I make about 4 times her income. To be fair, my dad merely ventured a guess from her broke status, the cost of the home (known) and the inheritance they received (known). So though he was guessing, I think his guess was reasonable. & all I Could think is, "Yikes!"

8 Responses to “Thoughts on Home Ownership”

  1. Ima saver Says:

    I certainly agree with you! We have been mortgage free for over 30 years except for a short period of time. When we built our current home, we needed a short term mortgage to finish the house. My payments were $500 a month and I thought that was terrible. (This was in 1995) I hurried up and paid that mortgage off in less than 2 years. I couldn't stand the thought of all that interest we were paying out.

  2. Phenomenal Woman Says:

    I do not think people are going to go too crazy with home purchasing right now. Mostly because banks are stricter with lending and it is not a time to take your jobs and salary for granted?

    With that said, we recently purchased a townhouse. This is a 4 year old townhouse that is as large as our current house. We got it for less than we paid on the house and the interest is way lower. In the opposite, we are able to purchase a home below our means even more than before.

    To make it even better, everything is in excellent shape per the inspections and everything is new with granite counters, hardwood floors and etc. This will save us even more money now that we do not need to do any upgrades, repair existing problems and etc.

  3. monkeymama Says:

    The people I know are definitely going crazy! You are right, it is harder. But it's still easy enough to get in over your head...

    Congrats on the new home!

  4. Apprentice Bliss Hunter Says:

    Walking home from work today and saw a sign up on a new housing estate:

    3 bed semi - price slashed from 288,000 to 169.000.

    Wow !!

    Makes me wish I had a 20% deposit ready to go!! (no deposit at moment)

    I think that by the time I have my deposit saved, the market will risen again. My opportunity will be gone for a bargain basement purchase.

    But then I thought I can wait and buy a house in the NEXT recession - due perhaps in the 2020s/2030s !!! hehe

  5. gamecock43 Says:

    I think there is still the frenzy from the housing boom. Everyone was talking during the boom about how buying and selling real estate is an easy way to increase your net worth. Everyone was real estate crazy. Now- everyone is still fascinated- still thinking they should buy now because everything is on sale.

  6. whitestripe Says:

    there has been a non-stop frenzy in my area for the past 15 years. there is no difference in the amount of people buying now as opposed to five years ago, when prices were a good 1/3 higher. i agree though, you should never buy a house because you think you won't get a chance later on, or because your think it's a good deal. and i also believe there is NEVER a 'good' time to buy and that real estates use this as a marketing tool. the only time it is actually 'good' to buy is when you are ready!

  7. Phenomenal Woman Says:

    lol! I think of the Kenny Roger song "The gambler". You need to know when to walk away, when to fold, when to draw... and etc.

  8. monkeymama Says:

    The "big" thing where I live right now is people with no cash snatching up rental real estate. I cringe! Literally buying with 0% down, counting 100% on rent for cash flow. I wonder if these people watch the news. Like, this is what caused the mess in the first place? Hello?

    But it's a good deal!!!!!! Wink

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