You've decided it's time for you to buy a house. Here are some things to consider.
- When you buy a house, be prepared to never refinance. In many states, you'll lose a critical capability - one I never thought I would want/need to use.
- There are [at least] two primary indices used to measure the housing market. Use them to help understand the market you're buying (or selling) into
- Learn about the Case-Schiller Index. Here is the S&P's Index Methodology for Case-Schiller.
- Then there's the OFHEO
- They report different numbers. Here's some of the why.
- The Ofheo index relies on data collected by Fannie Mae and Freddie Mac, which Ofheo regulates, so it excludes loans too big for Fannie and Freddie to guarantee (those exceeding $417,000) or too shaky (the riskiest of the subprime).
- Case/Shiller includes those, but its data are limited to 20 major markets because it relies on the costly process of going to local property records for data. One ... complaints is that house prices in these markets may be doing worse than those in other places.
- Are you prepared for the length of time it takes to sell a prospective house?
- This means, if you need to move, your house could be empty while you pay the mortgage and rent/another mortgage.
- Find out the home inventory levels for the area. Portland, Oregon had a 3 month average when we sold our home (best sale evar!). Our current neighborhood is currently around 28+ months (on average, which means some are muuuuch longer). It's over 15 months normally anyways. Oops.
- Your Realtor® can provide this info, and check my HouseBuying page for other resources.
- Consider your financing options
- Given the recent lessons banks learned the hard way, you may only have two choices - full doc, 30 year fixed or adjustable.
- Find the crime rate and type for the prospective neighborhood/town. What, the Realtor® working "FOR" you won't give you crime stats for the neighborhood? States there are ethical challenges? Poppycock.
- Check out ZipRealty.com, it's free to join, and they have attractive Realtor® rates. Give your Realtor® something to sweat.
- Don't buy the most expensive house in the neighborhood.
- Are you using a "real estate agent" or a certified, honest-to-God, fully trained and certified Realtor®?
- You can find the marketing guff here. I've had terrible luck with Realtors® for buying, but I seem to find good ones when I sell (and then move, never to use them again). I just haven't learned how to interview them well apparently. As "the world's largest professional association", I question their standards - there are many more engineers needed in the world than Realtors®, for instance.
- Be great if there was a requirement that Realtors® have fiduciary duty. Apparently, on the East coast, many states require real-estate transactions to be handled by lawyers, and I understand you may get fiduciary protection from that relationship.
- Your Realtor®, whom you have engaged as to represent YOUR interests, makes more money when you buy a more expensive house, or one where a higher commission is offered. Is there a serious conflict of interest here? You bet.
- So, you're shopping for a house
- Consider a neighborhood where 2 similar houses are being offered, same price range. One is offering 4% commission and the other the more standard 7%. Realtors® typically split the commissions (not always). Is your Realtor® going to risk losing nearly 50% of their possible commission and show you the house with only 4% commission?
- As the buyer, this is an advantage since the 4% seller may be more motivated to negotiate because they have an extra 3% wiggle room over the 7% seller. That 3% goes into their pocket, after all.
- So, you're ready to buy.
- The seller is asking $400,000. You, the Buyer want to pay the least possible for the house. Your Realtor® makes more if the price is $400,000 than if the price is $370,000. That's about a $1050 difference to your Realtor®'s commission if they can convince you the house is worth it. So guess who's trying to "sell" you a house? Yep, BOTH Realtors®...
- Read through the Q&A section below.
Q&A
Q: Why take out a 30 year mortgage instead of something shorter-term?
A: A 30 year mortgage reduces your financial risk associated with refinancing. Just ask all the folks who have an ARM coming due (payment about to change, upwards), and a house that's underwater - they lost their gamble.
Q1: How do I know if the price of a house I'm considering is reasonable?
A1: Take the average amount for rent for a comparable house, and multiply the monthly rate by ____ (36?). If the number is close to the price of the house you're looking at, you probably are doing fine. If it's higher, good deal. If it's much lower, be prepared for the housing crash of 2008-2010 (I'm guessing). Maybe after 5+ years of insane appreciation, of course.
Q2: When is it advantageous to rent instead of to purchase?
A2: See Q1 and A3.2
Q3: How much should I put down?
A3: GREAT question. Believe it or not, it is not "AS MUCH AS YOU CAN!!!"
- If housing prices are steadily rising over a long period (See indices above), more is probably OK. I bought into "they ain't making more land!" and have watched 1/2 of my retirement savings disappear as my house price has tanked.
- Some people recommend only putting in the minimum and using any other you would put down to have a more affordable mortgage as your backstop. I'm not recommending this approach, just sharing things people have said to me.
Q: What are some things to consider when buying a home?
A:
- Find out what the average sell time is in the area you're buying in, and trends over the past 10 years. Are you ready to wait that long if you need to sell your house?
- Owning is only more beneficial from a monthly cost perspective IF: (aka Am I throwing my rent money away, or will the tax benefits of a mortgage actually be beneficial over renting?)
- RENT + (YOUR_TAX_BRACKET_PERCENT * PROPOSED_MONTHLY_MORTGAGE_INTEREST_AMOUNT)
- > (is greater than)
- PROPOSED_MONTHLY_MORTGAGE_AMOUNT
- * Note, there are other reasons to own vs rent than just monthly costs, like appreciation. Be careful if you're treating your home like an investment instead of a place to live - look how many people got caught out in 2008 and onwards.