Living Within Your Means vs. Taking a Leap of Faith

[yjacket]

We've been told many times by friends and relatives to just bite the bullet and buy.  "Take a leap of faith." 

 

Sounds like housing bubble 2.0.  I do not know if we are in another housing bubble, however your concerns were very similar to many concerns I heard in '05-'06.  Inflation is rising faster, just do it, get on the rung, etc.

 

A good website for checking out current supply and prices across the country http://www.deptofnumbers.com/asking-prices/

They also have info. on there about incomes.  

 

Housing is one of the few assets that is highly correlated to income and mortgage rates.  Housing is not tied to inflation in general, but wage inflation specifically.  Unless there is an exogenous event, housing prices cannot rise much faster than incomes.  The bubble in '06 occurred b/c banks were lending to individuals who clearly could not make the payments, NINJA loans, 5 year ARM, etc.  More loans given to people = increased pool of buyers = higher prices.  Lower rates = same monthly payment for higher prices.

 

IMO, the US economy is a serial bubble economy and has been for the last 16-17 years.  A few key metrics to understand if housing prices are out of line.  In general a house should sell for 100-150x it's monthly rent, i.e. if rent is 1000/month, home price should be anywhere from 100k-150k.  Home prices in general should be 2-3x the median income.  If median income is 100k, median home prices should be 200-300k.  These are rough estimates.  Based on what I've seen, home prices are not bubblicious, but in many places they are certainly fairly valued.  So unless incomes start rising, if prices keep increasing at another 10% yoy in a year or two look out, crash 2.0.  In addition, housing goes in a general long-wave cycle of approximately 7-9 years.  It isn't exact, but it is interesting, a housing slow-down occurred in 84-85, next one was 90-91, 2001 would have slowed down, except the Fed intervened from the dot-com crash to flood the banks with cash and kick-start the bubble . . . 7 years later is 2008 + 7 = 2015??

 

It's speculation and no one has a crystal ball, but the bigger point is to not buy out of fear.  If you buy out of fear, you are in a very weak position and will end up doing something irrational.

 

I read something once that stated something like "Very few things will determine your ultimate wealth in life as to when you buy a house"

[The Folk Prophet]

...home prices are not bubblicious...

 

Mmmm. Bubblicious.

 

[Guest]

Mmmm. Bubblicious.

 

 

 

Lakumi, how in the world did you manage to sneak into TFP's computer?

[Irishcolleen]

Have you looked into down payment assistance programs?  Many cities or counties have programs where they offer first time home buyers funds for a down payment. Sometimes it's a direct grant, other times it is a second loan that doesn't have to be repaid until the house is sold (that's only a good idea if you are going to stay in the house long enough to build enough equity to pay off the 2nd). Increasing the down payment will lower the monthly payments and often allow a lender to offer you a lower interest rate. Usually the city or county will require you to take financial and home buying classes in order to qualify.

[MorningStar]

Have you looked into down payment assistance programs?  Many cities or counties have programs where they offer first time home buyers funds for a down payment. Sometimes it's a direct grant, other times it is a second loan that doesn't have to be repaid until the house is sold (that's only a good idea if you are going to stay in the house long enough to build enough equity to pay off the 2nd). Increasing the down payment will lower the monthly payments and often allow a lender to offer you a lower interest rate. Usually the city or county will require you to take financial and home buying classes in order to qualify.

We looked at one of those many years ago, paying to go to a homebuyer class at a community college.  There was down payment assistance, but we had to come up with a certain amount on our own first.  I haven't seen that option around in a while.  There are also state programs, but lately their interest rate hasn't been as good as the regular market rate.  Weird! 

 

We have been to 4 or 5 homebuyer classes throughout the years "just in case" we're able to buy a house.  The state certificates last for 2 years.  I didn't like the last one we went to because the lender who teaches the class was promoting a tax credit and said, "It's free money.  I'm going to be mad if you guys don't take advantage of it."  Well, you have to pay for it and it's only an advantage if you're in a certain tax bracket.  Anyway, it rubbed me the wrong way. 

[Backroads]

Husband and I are house shopping right now.  One thing to consider is checking out the legal minimum down payment required and figure out your payments from there. 

[Irishcolleen]

Make sure you can be very comfortable with your mortgage payment and don't feel like you need to buy the at the maximum price you are approved for.  Know your budget and pick a mortgage amount and total house price you will not go over.  It is heartbreaking to fall in love with a house that is just slightly above what you can pay.