Buying a home
It’s the American Dream: Most people hope to own their own home someday. But how does it work and where do you start? I will address these exact questions in this Home Buying 101 Series.
There’s No Wrong Time
First, let’s talk about the idea of buying a house at “the right time.” You may stress about buying at the top of the market and decide you should wait until prices decline. Two years later, you’re still waiting, and homes are 20% more expensive! Now you’ve wasted thousands in rent and lost out on that potential equity. Honestly — if you’re buying a house to live in, stop thinking of it as an investment. Unless you sell this house and don’t buy another one, it’s not an investment. It’s more like you’ve joined an exclusive club with high dues and even higher rewards.
Why It’s OK to Ignore the Market
You may say, “But Chris, if I take your advice and buy anytime, couldn’t I potentially pay too much? Couldn’t I end up ‘under water’ on my mortgage in five years?” Yes, you could owe more on your mortgage in five years than your house is worth if you had to sell it. So think about this: If you’re committed to be a homeowner and you sell this house, you’ll likely buy another one. If you “lose money” on this house because the market is down 5%, that also means you’ll pay 5% less for the next house. Ditto if you sell when the market is up 10% and realize a gain, you’ll pay 10% more for your next house.
This is Where Goals Come In
If you’re buying a starter home — meaning the house works for you today, but in the near future, you expect to have a couple of kids and need a bigger place (or you expect to be able to afford a nicer house/better neighborhood/whatever) — buying high is not bad at all. You pay a premium only for the first house to enter the club. If you sell that house when the market is down, you’re saving that same percentage when you buy the next bigger, more expensive house. For example, you sell your starter home for $400k, which is 5% less than you paid. On paper, you lose about $20k. Now you buy the “Forever House” for $750k, saving that same 5% or $37,500 — at least — since more expensive homes often lose a bit more in a down market. That’s not so bad, is it?
If you expect to downsize or move away when you sell, it can be tricky depending on how long you expect to stay. If you’re there for at least 10 years, no problem. The market most likely will be higher than when you bought. If you expect to stay only 5 years or so, you might buy at the top of the market and sell at the bottom, which is a total bummer. There are things you can do to mitigate that, but it helps to be aware — when you buy — that you may sell for less.
What Can You Do about That?
Not all towns or neighborhoods see prices going down at the same rate, so analyze — or ask your real estate agent to investigate — historical cycles in the regions you’re considering. You might also look for a place where you can add some value without spending a fortune, or a house you can easily rent until the market recovers.
The good news is that if you’ve been waiting to buy a house, wait no more. Sure, we could very well be at the top of the market right now, but if you’re a first-time buyer, do the math — weigh the crazy low interest rates, the amount you’ll spend in rent, tax savings, and all of the other advantages of home ownership against your innate ability to time the market. Go buy a house. It’s time.
As always, I have Carl Zukroff to thank for making this story intelligible.