In Defense Of Buying: Our Housing Situation Explained

credit: bestridehome.comI’m probably going to be writing a good bit about our house buying process in the upcoming months, and wanted to clarify our position a bit. Of course, you are still free to disagree with me afterwards ;)

Right now, we’re just looking. So far it’s just idle online surfing from afar on various MLS listing sites and on Craigslist. Before we buy, we have a lot of research to do. We want to get a better idea of neighborhoods, school districts, average lot sizes, specific neighborhood characteristics, traffic, and long-term growth prospects. In fact, we are going to be renting on a month-to-month basis after the move, it’s already been set up. We are in no rush to buy a house, and plan to be both patient and discerning.

I do think that housing is overpriced in many areas. I’ve seen and written about the inflation-adjusted price charts, read various bubble-obsessed sites, detailed how they can be a horrible investment, and calculated the crazy median price-to-income ratios of many cities. And I’ll continue to digest all the information I can.

But I’m also willing to buy if the deal is right. If we find a house in a neighborhood we like, on a bigger lot, a little beat-up perhaps, at a price that is below average for the area, then yes, we may buy the house.

Why? Going back on an old saying about the stock market, it’s not timing the market, it’s time in the market. If we were unsure if we were going to stay 3, 5, or even 7 years here, we wouldn’t buy. This is the exact reason we didn’t buy three years ago, even though we probably could have profited nearly $100,000 by now. Is the housing market going to drop 20% next year? Stay stagnant for a decade with rising inflation? If we wait, when is it too early to buy back in? Too late? I don’t know, and I don’t care. I’ll buy when I find what I like at a price that I’m willing to pay. It may take two months… or two years.

Now here is where you’re going to have to choose whether or not to believe me. We plan on owning this house… forever. This may seem unrealistic given that the average person moves within 7 years, but the average person also doesn’t save over 40% of their after-tax income. We know what we want. This upcoming move has been the culmination of years of waiting and careful planning. I won’t say that there is no emotion to this purchase; the idea of owning a house that we can pour some sweat into, learn some remodeling skills, and make your own is one of the best intangible benefits of owning I can think of. At the same time, we weren’t going to move back until we could afford a house on just one income. And we can now.

All this being said, this is an explanation, not a recommendation. Whether to buy a house is a decision every family has to make for themselves. Either way, I’ll be making plenty of updates along the way so stay tuned!

Comments

  1. Awesome post and I completely agree. Buying a house is a huge commitment and requires careful planning. You seem to be quite ready to settle down and start a family ;) .

    When are you going to blog about the cost of kids… haha

  2. never say never

  3. I will also add that we have siblings that have lived in their first (and only) houses for the last 5-10 years. Of course, they have had much better timing for their purchases :/

    No kids yet! I can barely clean up after myself.

  4. SmBizMan says:

    The thing about real estate that people forget is that once you are on the train, you dont need to catch up: if it is moving slow, fast, forwards or backwards, you can move from train car to train car with relative ease.
    You just need to get on the train.

    All real estate is local. I live in the north shore of Boston and local real estate has been hit hard, some places nearly -30%. However, only 18 miles from where I live there are bidding wars going on right now in Cambridge and the Alston/Brighton areas. And of course there is the always appreciating waterfront properties.

  5. I wish you the best of luck. I bought a house since I know I’m going to be here for around 5 years. Now I can’t imagine renting again even if I didn’t think I would be there for more than 3 years. It just feels so great.

  6. Heather says:

    Sounds like a great strategy. Even though a house has many emotional benefits, you can’t avoid the fact that you have to balance that with some cold, hard math. I’m a die-hard renter, but I’ll let the whole “train” post pass.

  7. Pretty good post. I am pretty bearish on housing (as you can probably tell) but your logic and rationale is good here. That being said, I would like to point out that in most cases real estate is local…however the one thing about the past 5 years or so has been that almost EVERY market appreciated to the point where fundamentals do not even come close to supporting values.

    Some markets have seen big declines already while some have held in there and haven’t really declined yet. So yes there is still a local flavor here, but the credit bubble was not contained to any one area or even state. Easy credit flows all over quite easily.

    If you really do your due diligence then I think you will quickly see the big picture here (and I think you already do for the most part). If you find something that is going to work really well and it is priced at a point where you can afford it with a responsible mortgage then go for it…but again, I think that after you look around a bit more it will become more and more obvious that now is not the time to be buying and that patience will be rewarded. Is it possibly worth $50K-$100K or more to wait an extra year or two? I think so, but the choice is yours in the end.

    I could be wrong but in light of the current economic/credit/housing conditions, it seems unlikely that housing will appreciate (at least in real terms) for at least several years…So there isn’t much harm in waiting it out (especially if its cheaper to rent). Good luck.

  8. I think your thought on how long you’ll be in the house is perfectly reasonable. We’ve been in our house seven years now – several more than I figured we would be. Inertia is under-acknowledged.

  9. I think your justification of you not buying a house 3 years ago was stupid! If you knew you could have profited 100k, and said no to buying a house, that was downright dumb. In any case, good luck with the process.

  10. The problem with the “average person” is that no is is really “average.” Their are plenty of things the “average” person will or won’t do, so it’s better to plan on your mindset, not on averages. If you get a house, plan on staying their for 20 years, because you never know what may happen that makes you have to stay.

  11. I was wondering what websites you use when searching for a house. I’m looking into buying a house in the next year and I use the following:

    Real Estate Search:
    http://www.realtor.com/
    http://www.trulia.com/
    http://www.zillow.com/

    Neighborhood Research:
    http://www.bestplaces.net/
    http://www.salary.com/
    http://www.familywatchdog.us/
    http://money.cnn.com/magazines/moneymag/bplive/2006/index.html

  12. Good post. We recently moved from South NJ to Northen VA area and the sticker shock was immediate. Decent single family homes start over 600K! After two months of looking, we signed a contract last week. Though we paid more than we wanted to initially, I believe that we still got a decent deal. We got the house for 50K+ less than the asking price. The local housing market in the area is stabalizing and should recover next year. So I definitely think that it’s the right time to buy a home.

  13. That sounds like the same exact reasoning as this guy who was profiled in the Boston Globe. He’s a very bright guy and is a regular poster on bostonbubble.com under the handle johnp. Seems like everyone else on the forum is still waiting to buy, but he just bought and gave all the same reasons you cited as well. Good luck on your home buying process, and congrats!

  14. I was just thinking about what you said about affording a house on one income and saving. Right now you’re saving 40% of your income. After one of you stops working, wouldn’t your savings rate go close to zero, depending on the income differential between you and your wife? Also, after your savings rate takes a dramatic hit after you buy a house and your wife stops working, have you factored in the cost of kids? I have many of the same financial ideals as you do, and also happened to have a child before we bought a house. It was a real eye-opener in terms of cost and time and am grateful I was able to go through it before we decided to buy a house, or else we might’ve been in a financial mess.

  15. Ted Valentine says:

    I say stop over analyzing. If you try hard enough you can make the numbers say whatever you want. Do what makes you and your family happy and that is worth more than all the money in the world. If that means buying a house, and you can afford it and get a good deal, then buy a house. If that means renting and that makes you happy, then who cares if you miss out a real estate profit you could never have predicted.

  16. As long as you don’t buy more than you can really afford, you will be fine. A house is a great long-term investment.

    There are some neighborhoods around here going really strong. Our house has stagnated, but hasn’t gone down in price either.

    I know things are really different and bad off today, but when we bought our condo in 1999 we were told we were crazy and the same in 2001. We were crazy and now our $300k house is worth $600k easy. The sky has been falling for 8 years or so… Anyway, I remember shrugging my shoulders when friends and family freaked out we would buy in such an expensive area, because we locked in a very affordable fixed payment. The first condo. Then we moved 2 hours away so we could afford a home twice as big, and our payment went from $1800/month to $1300/month. At face value we were buying up big time, but in reality we were downsizing. I had relatives in this area who thought we were insane and I remember shrugging and saying we couldn’t even afford a real house back home and I didn’t really care if the house depreciated to 0 since it was such a reasonable payment. Couldn’t even rented a studio apartment in the worst part of town for $1300 hardly back home. To us it was a no brainer. People freaked out, we have a buttload of equity now.

    My point is there will always be naysayers. & only people in high COL areas really understand why you would consider paying so much for a house. What to them is insanely expensive may be really reasonable from your perspective. I’d be more inclined to say now we are really at a peak. But if we didn’t have a house it certainly wouldn’t stop me from buying. It is a really good time to buy. Trust me – we have never had the luxury of time to think through a housing decision with houses that sell on average in 5 mintues with 50 offers. Take advantage of the time and the fact that there is no hurry!!! If you don’t get in over your head you’ll be just fine.

    Putting a significant amount down really helps as well. It gives you a cushion if you are at the peak and have to sell sooner rather than later, due to unforeseen circumstances. I would only buy if it was considered a long-term purchase, but a large down can give you some insurance in a sense.

    Good Luck!

  17. I would have to disagree with putting lots of money down if you’ve got significant savings and know a little bit about investing.

    If you plan to stay in your house forever, I’d say the market conditions are somewhat moot aside from a relatively minor change in your monthly payment. You guys seem quite “traditional” so I reckon this is a wise choice.

  18. smurfett says:

    oops forgot the URL:

    link

  19. smurfett says:

    Have you read Scott Burns article on home ownership? I’ve always thought that owning a house where payments are 2-3 times my rent is not a good way to save my money, unless I think of the house payments as forced savings. But his article is making me have 2nd thoughs.

  20. I guess I will add my opinion here. Buying a house to me can be both a financial and sentimental investment. It is hard to justify it as a sole financial investment when emotion is involved. But what is wrong with buying a house as a sentimental investment? You want a house, then you buy a house. No explanation to yourself is needed. You know the house will not lose you money. It may not gain you a lot, but who cares. There are many other better ways to make money. When you make enough money from other sources. The cost of this first house will be just like the cost of a fancy toy.

  21. DJ – Hindsight is 20/20. :)

    Thanks to the all the well wishers!

    We’ll both be making more after the move than we do now. So the 40% number will go up. Then we’ll have kids someday when we grow up ;) They cost more, we work less. It will go down. Gotta balance it so everything works out, which is much easier if you’re not already depending on both incomes.

    Nothing is wrong with buying a house as a sentimental investment, as long as you are aware that you are paying $X,XXX more each month for sentimental reasons. One might rather have an expensive toy each month! For me, I don’t mind part of it being for sentimental reasons, but I’d rather it not be all of it.

  22. At your projeted future income, the tax breaks become much more important. When you’re at a 33% bracket, the numbers shift. If you get thrown into AMT, you’ll kick yourself if you didn’t buy.

    Someone engaged in credit card arbitrage in such a high tax bracket surely appreciates a 3.8% tax-preferenced loan on an asset with tax-free appreciation.

  23. I like the post. I bought a house 20 years ago in the state of Washington and things have worked out well. I have another single friend who lives on a shoe string budget (extremely shoe string.. by choice) and for him renting makes the most sense. He doesn’t need the space of a house. He usually rents a room in a house. The future has so many uncertainties at some point you’ve just got to make a decision on what is right for you. The fact that there are many people who decide to rent (and many articles on renting) and many people who decide to buy (and many articles on buying) means that there isn’t a single “right” answer. A couple of years before I bought a house, Consumer’s Report ran an article that expained why renting might be a better option than buying since the high inflation of the early 80s had come down. It turned out that buying a house was still a good idea in many places. I think you have good reasons to buy. Good luck!!

  24. Is there a page to get a local housing market statistics over 15 years? Cyberhomes and zillow give only up to 7 years, in my area at least.

  25. Forget the naysayers, and I have been one of them. I rent. However in the end who cares. Buy because you want to own a house and want to live in certain place. Other than being able to afford everything else is a bit moot. Though, I’m not sure I’d agree with you wanting to live in place forever. Forever is long time.

  26. Nony-mouse says:

    Even though I just purchased a home a week back, i still think renting is the way to go. Rent is not even 5% of the price of the house. In most cases, it is something like 2%. (again, depends where you live.)

    Money doubles in about 12-14 years….which means a $300K in the bank should be around $600K in 12 to 14 years but I doubt a house in MY AREA would jump from $300K to $600K in 12-14 years.

  27. Oh, when I Say put significant down I mean 20%. I wouldn’t put much more than that down – I totally agree Rick. I just am used to people putting 0% down. I don’t think that is so wise, plus there is PMI, etc. 20% should be a good rule and help you ride the wave. We put 20% down and wouldn’t prepay a dime to the mortgage otherwise – far better off investing.

    Where the heck do you live Non-mouse? The other reason we bought was in 1999 in the Bay Area renting was FAR more expensive than owning. IT really depends on the area – obviously this was the other extreme. But most everyone I know renting here today pay FAR more than a mortgage I locked in merely 3 years ago. IT’s all relative. Rents always go up, mortgages can lock in your living expenses. We can argue all day since we all live in very different areas of the country. Our property taxes don’t rise considerably in Cali as they are more locked in until you move. Other areas property taxes will get you, etc. IT really depends on the area.

  28. John Smith says:

    Well I call BS on all the warm fuzzy sentiments towards homeownership. I’ve been reading ALL ABOUT lots of other people who bought 2 years ago with the same sentiments who are really in trouble due to foreclosure.

    “I’ll buy if it’s a good deal” — DUDE — there AIN’T any good deals right now! That’s the point of the housing bubble.

    I personally believe you’re doing this because you *need* to have some little project that you can blog about. I see it over and over — people doing things just so they can blog about them. It’s a sickness!

  29. Penalty Box says:

    I guess, the part of this argument I don’t see discussed in renting vs buying is the money that is paid in rent. One way or another, I need somewhere to live. Rent is equal to mortgage in the area in which I live. I look back on my 4 years of grad school and look at the $1400 a month I paid in rent as a total of $67,000 in the toilet, as opposed to the last 2 years of owning a house, getting a tax break on it and putting some of that money into equity of the house, rather than a landlord’s pocket. I feel like I am actually saving a decent amount of money by owning a house as opposed to renting. Even if you include the index fund-type interest on my 10% down on the house, I am still making more in equity by owning my house without including the tax break. Any thoughts?

  30. PB,
    In most urban areas, it is cheaper (monthly) to rent than buy an equivalent place. You have to add property taxes, assessments, insurance, repairs, etc. into the calculation. Also, not everyone will benefit greatly from the interest tax deduction depending on their situation.
    So while most people would agree that owning is a decent long-term investment (10+ years), it would be tougher to argue that it beats renting for a shorter time span. That’s where the “intangibles” come into play as rationales. ;-)

  31. I would agree with the previous poster. Owning is scary in the DC area, for example. I moved out here from a smaller town, selling my condo for $270K (bought it 4 years earlier for $95K!). I have the money in the back and have been looking, but what i see would still leave me with a large mortgage. I’m not really thinking hard landing here, but slight falloff then stagnation in this market. I’m a disciplined investor and my strategies give me a healthy return on my money anyhow, which covers my rent and grows my money nicely besides, so diving into a stagnant market with the property tax, condo fees (or extra maintenance of a house), etc, is just not appealing.

    The quesiton is where the stagnation ends and trying to time that moment and go purchase something. Its like trying to sell at the top of a stock market or buy at a bottom…

  32. There’s no way to guarantee that you could have made a 100k. A lot of people took that bet, and now they are losing big time.

    It seems like you’ve done a lot of research and are well informed of both the potential positives and negatives. Good luck, it sounds like when you do decide on a house, you’ll be properly informed and prepared.

  33. Susanna says:

    Have you looked into foreclosures in your area? Our realtor bought a small horse farm that was in foreclosure this year – otherwise she couldn’t have afforded anything so extravagant. Yahoo! Real Estate has a good foreclosures section: http://realestate.yahoo.com/Foreclosures

  34. Buying the house that you plan to live in forever is NOT an investment; it is your HOME!

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