I just had a conversation with someone about buying a home and they are putting off some apprehensive vibe thinking that the Economy might have a shift and whatever they purchase might lose value. There are a number of issues about this topic so I thought I would address what I could so others would have a better understanding of when the right time to buy a home is.
First thing you have to understand about buying a home is that you can’t control the world. If you are in the market to make a purchase you should realize that no matter what the price of the home is eventually prices will go up over the life of the home because there is only so much real estate to buy in this world.. the saying goes… they aren’t making any new land… and that is true with the exception of volcanic activity in Hawaii and that land won’t be habitable for many decades.
The second thing that you must realize is that this decision to buy a home is something that you must do for yourself. There are millions of people that grew up in apartments or rented homes and condominiums. They do not have the same attachment or value property found in a single family home on land that is not within a HOA. They see their home as something that can change over their lifetime as a variable that they are not attached to. If you are that type of person then owning a home may not be for you no matter what the price. On the other hand if you want your piece of the world where you call home for most of your adult life and the lives of your children it doesn’t matter if you grew up on a farm or on the 37th floor in downtown Manhattan.
Prices, Market Failures How You Judge Your Timing Of Buying A Home
The most important factor of buying a home is not outside factors but are you personally ready to buy a home. Back when interest rates were 21% and higher for a 30 year loan under Jimmy Carter there were still millions of people buying homes. The reason they were buying is because they were ready to buy and had a need to buy.
The best time to buy a home in your lifetime is when you are young enough that you can easily work hard to pay off the loan but you are far enough in your career that you have established stable employment and that you have an income that is around the average income of the country. This might be high compared to others in your industry but that is the situation. Today you probably want to be earning over $50,000 a year and you want to have earned that income long enough that you have at least 20% for your down payment.
People will say that you can make your purchase with less down but the more you borrow the more you will owe. Over the life of your loan you will at least pay double to your bank for the sticker price you bought at. In many cases you might pay much more.
For this reason you follow the rule of buying a starter home that is big enough for 5 to 10 years with the understanding that you will be moving into something bigger and better maybe even before your 5th year in your home.
You also follow the rule that you buy the ugliest cheapest house in the best neighborhood. If there is a home that is bank owned or under foreclosure or if it has minimal problems that make it an eyesore then you can normally pick these homes up at a discount compared to the rest of the homes in the area. Now you don’t want to buy a home with structural or other really expensive problems but if you save 30% because the yard hasn’t been cut in a month and because there is green mold on the siding and maybe the driveway needs repair and the appliances are ugly but functional.. this is your dream home.. Everyone else will be running from it and you should be running to it because it means your 20% down payment might now be a 30 or 35% down payment and this will reduce your monthly mortgage by a huge amount and the problems can be fixed within a month or two of you moving in.
Refinancing can help if you have really high interest rates but for the most part you shouldn’t be taking out seconds on your home and you shouldn’t be refinancing when you can just pay off your loan quicker by making additional payments. Your loan should work for you but unfortunately when you are paying back years of interest at the beginning of your loan that is just like paying the minimum payment on your credit card you end up paying just interest. When you refinance the dirty secret is that yes your rates are lower but if you are 15 years into a loan you just started off again at zero and all your payments will go to interest.
Final Note
Knowing when not to buy a home is pretty much impossible but knowing when you should buy a home is very easy to identify. If houses are cheap because there is a glut in the market or if houses are cheap because there just was a market failure then if you are prepared you can buy at a discount.
Trying to identify when a market is about to fail so you can stay out of it is not something you can easily do. Also if you are buying a home to live in for 10 to 30 years then you should have planned on the price you will pay and the interest you will pay and if you pay your debt as planned you will have little to nothing to worry about if you have selected a good lender for your loan. You just have to ride it out and in the end prices will normalize.