Is now an especially good or especially bad time to buy a home?

June 8, 2005 3:04 AM

My wife and I are tired of renting, and looking to buy a place we can call our own. Given current real estate prices, but low interest rates, is now a particularly good or particularly bad time to move ahead with a home purchase?

My wife and a I live in a particularly expensive part of the country (Fairfield County, CT) where housing prices are traditionally very high, but the market has known few drops in the last 30 years where the market has receded. At this point, a decent starter home 2 br, 1.5 baths will cost $550,000 on up. Given what we have saved up, we can swing a mortgage of $400,000 or so and get a pretty decent rate (after taxes, the mortgage payment would be about equal to our current rent payment). But the sheer dollar amounts for how little one can get truly give me pause. We can wait another year and hope for the bubble to burst (if that ever happens), but risk interest rates going up to where a mortgage is not affordable? Not asking anyone to tell the future here, but just curious as to what perspectives people can offer. Thanks for the help!

posted by psmealey to work & money (24 comments total)

I'm just a guy, see, and don't really know anything about money.

Now that that's out of the way, I don't see how renting can ever be better than owning. When you own, you can deduct the interest you pay on your mortgage, plus, virtually all homes will appreciate in value over time, as long as you maintain them.

On the downside, you haven't mentioned property taxes. I'm not sure if you have them there, but where I live, I've got a 53 mil tax to deal with. Keep that in mind when doing your finances. You might be shocked that you own another $600 or so A MONTH on your little $400K home. That's what you'd pay here.

Another downside is maintenance. Any homeowner will tell you there's always something to fix/maintain. Cleaned your gutters this year?

On the flip side of maintenance is the joy of owning. It's nice to decorate however you want, paint things the colors you want, and generally just have your own place. I enjoy sitting on my deck grilling out a nice chunk of roast beast, but your mileage may vary. Me, I like my garden and yard.

Anyhow, all that said, I wouldn't hesitate on a home purchase. If you hold on to your small house for about five years, you should have enough equity to step up to a nicer place.

But, just my opinion.
KFJ
posted by kungfujoe at 3:40 AM on June 8, 2005

I have no professional knowledge of this but...

My brother is convinced now is not a good time to buy property, he's expecting a housing price crash. However he and wife bought a home in Seattle area about 1.5 years ago and the value has already gone up considerably.

Personally, I don't see a downturn in prices for another year or two, at the very least. Not sure why, but I just have a feeling that this may be a new dynamic in America, akin to off-shoring jobs. Semi-low interest rates, and people willing to go massivley into debt for housing. The only downturn I can personally envision is in prices of housing in the newer McMansion neighborhoods. I have seen a fair number of these needing serious repairs after a short while due to sloppy construction.

My only real advice would be to be very careful about your choice of mortgages. One of the few constants I have heard from both sides of the housing price debate is that the interest-only mortgages are very suspect and should be avoided.
posted by efalk at 3:43 AM on June 8, 2005

Instinctually, I would say wait a year and see what happens. But realistically, if you're already paying through the nose for rent, buying has some serious tax advantages. You could end up paying less for a mortgage, and then you get equity to boot. But in today's housing market, it's not likely.

Look at it this way: if someone told you that a certain stock was up 18% this year alone, when it should only be up about 2.5%, and you kept hearing murmers that it was seriously over-valued, would you invest your cash in them? Because that's how much prices have gone up for homes (on average) just this year.
posted by Civil_Disobedient at 4:19 AM on June 8, 2005

Just another guy here. You might consider a condo. Some of them in our area of NE have doubled in value over the last seven years. Upsides: lower purchase price than a single family house, mortgage interest tax deduction, equity of ownership, no exterior maintenance. Downsides: condo fees, still having to pay taxes, possibly restrictive association rules, possibly incompetent or corrupt condo association management.

My understanding is that there's an inverse relationship between mortgage rates and housing prices. Because of population pressure, the price of moderate housing always goes up over the long run. In other words, unless you buy a mansion, you won't see the price go down. The short run is something else. I bought a condo that was foreclosed on, at well under half what the defaulted previous owner paid for it. When I sold it five years later, I did well.)

posted by Kirth Gerson at 4:22 AM on June 8, 2005

For a first time homebuyer now seems like as good a time as any to jump into the market. Certainly there is the possibility of a market retraction. Housing prices could fall, although I doubt they would fall more than 20% or so except in perhaps the most over-inflated markets. Condo prices would probably fall the fastest so I would avoid buying a condo right now, unless you are buying in downtown NY or someplace where that is the main option. Also, interest rates are low but many predict they are set to rise, so it might be wise to get a mortgage which locks them in. As long as you see yourself in the home for more than seven or so years I should think you would be able to ride out any retraction in real estate prices.
posted by caddis at 4:28 AM on June 8, 2005

Buy.... you're throwing away your money on rent... if the bubble bursts so bad that we are all going to lose money on our homes, we've got bigger fish to fry anyway.

My only consideration would be to purchase a house in an area that has not seen a dramatic increase in home values. For example, my house has gone up about 10% in the past three years, I'm in a fairly fast growing rural area near Ann Arbor, Michigan. My son's house, in Alta Dena, CA has probably gone up 20% in the past year alone... If the real estate market crashes, I'm speculating that those that have gained the most will likely lose the most if it all falls apart.

disclaimer... I may not have a clue about what I'm talking about!
posted by HuronBob at 5:19 AM on June 8, 2005

Thanks for all the advice. Compelling arguments for and against. Just a little more info. In the surrounding towns (Greenwich, Darien, New Canaan, Stamford, etc.) Connecticut taxes are still relatively low. For a $500,000 home, we're looking at $4k per annum for annual property taxes. Contrast this to nearby Westchester County, New York, and you can triple that amount. Also, because of the nature of the area, there's a bit of a lack of inventory as far as condos go, and my wife has a hard requirement for a garden, so that rules out a condo.

That little voice of common sense in my head tells me exactly what Civil_Disobedient said, but experience tells me something differing - I grew up around here, and my parents and I can only remember a slight recession in the housing market that lasted form 1982-83, but the market is a solid as any in the country. My biggest fear would be waiting another year, having home price increase another 20% and having interest rates tick up.

Thanks again for all the great insight and advice!
posted by psmealey at 5:28 AM on June 8, 2005

Really, as long as your interest rate is pretty low, it's probably a good idea to buy the home. Especially if you get a 30 year mortgage.
I'll second KungFuJoe, Kirth Gerson and caddis.

Owning a property means that you can live in it (and deduct the mortgage), sell it (likely at a profit), or rent it (for income).

Renting means that you have a roof over your head but are essentially flushing your money down the toilet that is your landlord.

Over any long term period, your property values are likely to fluctuate a little bit. You might buy a house for $400k and then, 5 years later, notice that a similar house in your neighborhood is sold for $370k. Over the long term, though it's more than inevitable that your property value will increase, especially in the market that you describe.
For example, my folks bought their house in 1988 for $150k. As the result of home improvements, neighborhood growth, in combination with whatever "housing bubble" is occurring here in Philadelphia, their house is valued, today, at about $600k.

Condo's are a pretty good bet, too. Insofar as they're easier to rent if your short term plans call for you to move again. I bought my condo for $199k at a low interest rate. My monthly payment is less than the rent that I paid at a much crappier apartment. Also, other identical units in my building, only two years later, are selling for $230-$250k and renting at about $400 more than my flat mortgage payment. As a homeowner, currently my only dilemma is whether to sell this place or rent it when I move.

If you were buying a house in an area that was less than savory or in an area where there was some development expected, I'd advise some wariness. Don't gamble on other factors increasing your property value. It sounds like you're looking for a nice house in an already nice neighborhood. Expect good long-term results. Your worst-case scenario will probably be: Sell the house for approximately what you paid for it. And you'll have improved your credit along the way, enabling you to buy a better house.

As far as interest rates go, get them while they're low. When I was buying this place, the rate was briefly around 4.5%. Foolishly, I thought that maybe it would drop a little bit and I could lock it in a little lower. Not so. It went back up to about 5.2% before I bought.

on preview: The lack of public, outdoor space (like a garden, deck, or yard) in a condo is a drawback. It's something that I'm looking forward those things when I upgrade to a real house.
posted by Jon-o at 5:37 AM on June 8, 2005

It depends.

I saw a comparison between SF and DC. In one, both rents and housing prices were horribly inflated. You were damned no matter what.

In the other (I *think* it was SF, but I am not sure), housing prices were horribly inflated, but rents were not. In terms of "value of living space", buying there was stupid. So, why did so many people buy?

Speculation. Since real estate was inflating rapidly, they bought as investments -- and are still doing so. Another clade are the "turtle tossers" -- they flip shells (that is, they buy inner city houses, many are brick and stone, but in such bad shape that they're nothing more than a shell, gut rehab them and sell them.) They're not interested in home ownership, they're turning a $50K investment into $150K or more ( These are St. Louis numbers.) Warning: They're in it for cash, and some are infamous for not buying quality when rehabbing.

I think the bubble is popping, and it is really going to be ugly as a lot of leverage unwinds -- doubly so because of the creative financing of Fannie Mae and Freddie Mac.

The big problem with buying in an inflated market is how fast you can be flipped upside down on the loan. If you have a $200,000 loan, but your house is worth $300,000, you have 100K in value equity. But, if you house, because of a real estate crash, is now worth $100,000, you're $100,000 in the hole. You can't even sell the house and walk away clean, without a hundred grand in other assets.

The last time this happened was California, in the early 90s. A good deal of banks found themselves with a problem: Instead of mortgage payments that people couldn't make, they were being sent house keys. This was bad, for both the banks and them. (This is why banks don't hold loans anymore -- they moved the risk away. That's one reason why banks are making more loans - they're not taking the risk.)

There are several factors that will make the crash worse this time.

1) Consumer debt is much higher -- meaning, it will be easier to drive people underwater, and they won't have the resources to keep paying. The "hike interest rates on any credit notice" credit card debt isn't going to help either.

2) Paid equity is much lower for newer homeowners. In the case of interest only loans, it is zero. After two years of payments on a $200K house, you still owe $200K. This means that people are staying at risk of being driven underwater -- and are set to balloon when they have to start paying principal (the idea is you refi before that date -- but that market will go away when the bubble bursts.) If they can afford the higher payments with equity, they'll survive. Given the personal savings rate in the US, they can't.

3) The new bankruptcy laws mean that it will be much harder to escape the debt. You will pay for it, even if it takes your whole life.

4) The Federal Debt is limiting how much support the feds can offer in case of a worst-case scenario, namely, Fannie Mae or Freddie Mac (or some hedge fund with RE derivatives) going bust. So, after a big crash, there won't be much to stop the damage from spreading. I don't see the feds pulling a Chrysler or LTCM save again -- not when you combine how much money is leveraged, and how much debt the US has.

5) If you have cash, and we don't hyperinflate, the best time to buy is after the crash, when whoever gets stuck with the non performing property will take much less to get at least some liquid capital for it. Then, you get much more property per dollar.

6) Time and Newsweek just put up "Invest in Real Estate" covers. See "The Magazine Indicator." ;)

Caveats:

1) After the crash, getting a loan will be harder. If you can stay working, make the payments, and not get hit by a balloon clause designed to force equity into your house, buying an inflated house now may be better than not getting the load at all later.

2) Taxes: If the tax situation is right, buying, even at inflated prices, becomes logical. Remember: The cost is the total cost that you will pay to have the house. If you pay less income tax because of the loan, that reduces the total cost. Of course, if you're stuck with a high valuation post-bubble, property taxes may really suck.

3) The future? Who knows what will change. That's always a risk, and you cannot change that. This is why we have insurance, it's called "I will throw away foo dollars to mitigate this risk."

My position:

In many, if not most, it is currently too expensive to rationally buy. Furthermore, I think buying in distant suburbs is doubly stupid, since I'm convinced that with rapidly increasing transportation costs, exurbia and far suburbia will become untenable.

I'd buy only if 1) I really wanted that house, that was 2) in a city, close to non-car transportation, 3) had real tax advantages, and 4) presuming I could get a fixed 30 year loan, and 5) wasn't that inflated. These houses, nowadays, don't exist in the markets I'm interested in.

If this was 2000, I'd be saying buy now. It's not -- it's 2005, the world has changed, and I honestly think that in many markets, buying is a bad bet.

In Smallville, AT, though, where there isn't really an active market for real estate, and prices have only increased slightly, and people are still buying houses to live in, not to sell, this may not apply. But, for Ghugle's sake, get a fixed rate loan? If nobody will give you one, this is a very unsubtle hint that you cannot afford the house.

How I could be wrong: There is no bubble. I think that's silly, but I've been wrong before, heck, just a couple of days ago.

If the increases in price are normal, then you want to buy -- since the price will only continue to rise, the best way to real wealth is real estate.

I really don't see it, esp. with the leverage involved thoughout the market.
posted by eriko at 6:00 AM on June 8, 2005 [1 favorite]

I think the writing is on the wall: notice that virtually everything you pick up in the store says Made In China? With manufacturing being offshored en masse, where is the wealth going to come from to sustain these market prices? I think that and the new bankruptcy laws now coming in effect will have dramatic consequences.

We recently bought extremely cheap rural land to keep out of the bubble (and to put equity in actual acre-for-acre land), and are building our own place. No regrets yet.
posted by rolypolyman at 6:19 AM on June 8, 2005

Another "just-a-guy" thought:

Suppose you buy this place and sell it at a loss of $10,000 after 2 years (after broker's fees, etc.)

Your net loss would probably be lower than if you'd kept on renting for that long.
posted by bugmuncher at 6:27 AM on June 8, 2005

If the increases in price are normal

Very good post, eriko. Just wanted to respond to this particular hypothetical with a link [PDF] to the housing price increases over the past few years, for those of you living in a bubble that are either unaware of the situation, or aware and trying to delude yourselves.

Here are some numbers from that report:

HOUSING PRICE APPRECIATION FROM SAME QUARTER ONE YEAR EARLIER

year...Q1...Q2...Q3...Q4...year avg

1990: 5.06% 3.61% 1.65% 0.24% : 2.64%
1991: 0.59% 1.06% 0.72% 2.56% : 1.23%
1992: 2.47% 1.80% 2.83% 1.87% : 2.24%
1993: 1.04% 2.12% 1.70% 2.06% : 1.73%
1994: 2.70% 2.19% 1.84% 0.83% : 1.89%
1995: 0.72% 2.14% 3.45% 4.53% : 2.71%
1996: 5.41% 3.70% 2.51% 2.59% : 3.55%
1997: 2.28% 3.01% 4.14% 4.59% : 3.51%
1998: 5.24% 5.21% 5.10% 4.97% : 5.13%
1999: 4.47% 5.05% 5.25% 5.19% : 4.99%
2000: 6.27% 6.64% 7.04% 7.58% : 6.88%
2001: 8.10% 8.21% 7.90% 7.53% : 7.94%
2002: 6.56% 6.65% 7.18% 7.49% : 6.97%
2003: 7.15% 6.47% 5.98% 8.07% : 6.92%
2004: 8.41% 10.05% 13.40% 11.88% : 10.94%
2005: 12.50% : 12.50% (1 qtr)

See a trend? These are what we call unsustainable increases.
posted by Civil_Disobedient at 6:40 AM on June 8, 2005 [1 favorite]

Should you by a home? Yes.

What you might strongly consider, however, is relocating to another part of the country. There are many parts of the country with strong economies and low housing markets. I'm here in Columbus, Ohio and scratch my head and wonder when I see the quoted home prices on either coast.

You do realize that you could get a beautiful, large and new home an virtually any midwestern city for around $300,000.

Just saying.
posted by cptnrandy at 6:51 AM on June 8, 2005

Couple of random thoughts:

We bought in the Boston area in 2003. Despite the crazy market here (and the fact that our place is pretty small), we are a 4-minute walk from the train, with excellent schools, in a place we love and are prepared to stay in for a while, in a neighborhood where we've gotten to know the neighbors and the local shopkeepers; in short, a place where we're thrilled to be raising our daughter.

Yes, I'm very concerned about a bubble, but frankly, the themes above trumped it. If you feel strongly about the area, by all means be cautious, but I wouldn't necessarily let the fear of the bubble keep you from buying.

(And in taking an honest stock of our overall financial situation, if things get ugly enough for me to lose my job, than we aren't renting, we're moving in with family, so I figured we might as well get the tax break while we wait for the apocalypse!)

You do realize that you could get a beautiful, large and new home an virtually any midwestern city for around $300,000.

I know, and it drives me crazy! But relocation isn't always an option. I've lived all over, but my wife simply couldn't be more than a couple hours' drive from her family. Our friends are here, our jobs are here, we love the ocean, etc. etc.. I'm not trying to discount the many things that make you love where you are, but for us, moving simply to get more house might save us money, but I don't think we'd be happy.
posted by jalexei at 7:15 AM on June 8, 2005

If you buy, try to ensure that you're paying for the property, not fancy appliances in the kitchen and marble in the bathrooms.
posted by aramaic at 7:18 AM on June 8, 2005

$550k for a 2/1?!?

I'd move before I spent that kind of money.

Anyway, all I know is that I don't want to be holding the bag when the correction comes. Imagine your $500k house, and the market corrects by only 20% (which is nothing compared to the run-up lately), you'll be $100k in the hole right away. Someone tell me how that is better than renting?

The market is unsustainable. When interest rates cool, the music will stop, and somone's going to be standing without a chair to sit in. All of these speculators who haven't sold will be the ones standing, and they'll be selling in a hurry.. And that's how market collapses begin.

(see NASDAQ circa 2000)
posted by eas98 at 7:20 AM on June 8, 2005

This is a little off topic, but when you say "starter home," do you mean a new house in a housing development that's on the smaller side, or an older house that could use a little work but has been fairly well-maintained? I'm partially asking from sticker shock at seeing a house go for that much money, but also because this could be another option. I've seen a lot of newer housing developments where the buildings just haven't been built to last.
posted by mikeh at 7:37 AM on June 8, 2005

My personal experience, if that helps: I bought a condo 1.5 yrs ago just outside of Boston (sounds like we have similar housing markets). My mortgage/taxes/condo fee are only a bit over $100 more than I was paying in rent.
The place is around the same size as what I was renting, but atleast I know the rent won't go up and I was able to write off a ton more on my taxes.

I know I won't make a lot of $$ on this place, but knowing I'll atleast get some money back when I move feels good. I remember having a landlord print out my rental fees for the year and I almost choked, seeing it as one lump sum.

Just my own experience -- not saying I made the perfect choice, but it's been good thus far (it's gone up in value, too).
posted by jdl at 8:28 AM on June 8, 2005

This is a little off topic, but when you say "starter home," do you mean a new house in a housing development that's on the smaller side, or an older house that could use a little work but has been fairly well-maintained?

Could be either, but likely it's the latter. Mostly, as far as a "starter home", I mean a small house for a small family (2 adults, one dog, thinking about kids in next few years, but only thinking). In this area, you're unlikely to find anything new. This is a pretty well settled area (some of these towns were incorporated in the 1600s), so the only new thing one would find would certainly be a huge house (that a smaller one was torn down to replace).

Relocation? Just for a nicer and less expensive place? Don't be ridiculous! ;-) Seriously, I wouldn't move for the similar reasons to jalexei. Excellent public transportation, to NYC and to Boston and DC, roots in the area, friends, family, work, access to the ocean and weather that I dearly love (well, 9 months of the year) and people/etiquette that I "grok". I've lived in the midwest (Chicago and St. Louis) at a couple of points earlier in my life, and I was pretty miserable in both places. Just not for me. Us yankees do put up with a lot of bullshit to live where we do, but to live anywhere else borders on unthinkable! (not to derail my own askMe thread... just this subject comes up a lot).
posted by psmealey at 8:34 AM on June 8, 2005

Hi neighbor!

My wife and I were in the exact same boat last year. We live in Fairfield County, CT; she works in Greenwich and I work in Stamford. We love it here and don't want to move despite the outrageous housing prices. We ended up buying great 2BR condo in Norwalk w/ a pool and a nice big deck and we are very happy we did. We also are 2 adults, 1 dog and planning kids in the near future. We figure we'll stay here for about 5 years or so.

I agree that there may very well be a housing bubble. However, I strongly feel that because of our proximity to NYC, it's less likely to affect us, and I've read a few articles online that agree. Historically, the radius around NYC has always been a strong market, and I see no reason for that to change (barring something like a larger scale September 11, but there's no way you can plan for that).

FYI, another condo in our complex (identical to ours) just listed for $30K more than what we bought ours for 6 months ago. It remains to be seen what it will actually sell for, of course, but I take it as a good sign anyway.

Good luck!
posted by widdershins at 8:59 AM on June 8, 2005

I'm in agreement with eriko, I'm hoping my purchase in Canada three years ago doesn't get turned upside down and we haven't had the growth here that most places in the states have had. For lots of scary we're in a bubble articles read around on http://thehousingbubble.blogspot.com. Coupled with the rising cost of gasoline things could get really ugly in the next couple years and I think are going to be at least a might unpleasant.

widdershins writes "FYI, another condo in our complex (identical to ours) just listed for $30K more than what we bought ours for 6 months ago. It remains to be seen what it will actually sell for, of course, but I take it as a good sign anyway."

This is actually a bad sign. Assuming (for easy math) your condo went for 300K thats a 20% annual increase which is totally unsustainable, see C_D's table. And there are a lot of people who can only afford the property being sold because they intend to flip it in six months. When prices peak they'll then plunge very rapidly.
posted by Mitheral at 9:35 AM on June 8, 2005

Housing prices seem to move in roughly 7 year cycles of boom/bust. We've been in a boom for longer than that currently, and a correct is almost certainly going to come.

Your question though is not should I wait for the correction. Your question is how likely will it be that I will want to sell at some point where my home is valued lower than what I paid for it. If you're planning to stay with your home for 7 or more years, then buying even at a peak isn't going to be a major problem for you. If you're going to be in a home for less time than that, then buying now might not be the best idea.

If you're not going to buy now, then what you should do is determine the total monthly cost of the amount of home you think you can afford (including insurance, and taxes and maintenance and), and start saving the difference between that and your current rent (here I assume your rent will be lower, if it's higher, then all bets are off and you should consider buying now anyway). Don't touch this money. When you're ready to buy, you'll have an even larger down payment which will be nice given that closing costs always cost WAY more than you're expecting.

By the way, in Torrance, CA where I am, I've seen the sales prices of comparable condos drop by about 10% in the past year. I'm still well ahead given when I bought, but the market certainly seems to be cooling here at least.
posted by willnot at 9:42 AM on June 8, 2005

We're considering buying another farm as those prices are starting to fall already and selling our Stepford-mistake house while the market is still bubbly. The prices really are unsustainable. Our next door neighbor just sold his house for 25% more than he paid for it 3 years ago.

That said, half a million for a 2/1? That's nuts! I mean, I love all you blue state people, and I dream of your wonderful utopian northeast with your modern trains and wireless hubs...but Jay-zeus...there may be too many people there already if you're willing to pay that kind of money for housing. Let's assume a 2/1 has about 1500 square feet. You're looking at a cost of $333.00 per sf. That's crazy talk.

What about buying land and building your own? We did that and managed to bring our house in for $85.00 a sf. And that includes things like garden tubs, chef's kitchen, marble countertops, wooden floors, 22 foot walls of storm proof glass. Building requires a lot of work on your part, to supervise the entire project, but you end up with exactly what you want. (Hopefully).

If you like doing things around the house, and you are looking for something less expensive, maybe consider buying and refurbing an old farmhouse/inn/cool colonial era building of choice. You can often find them for next to nothing, but that require insane amounts of refurbing. It's a good project, and again, the house will be exactly what you want when you're done.
posted by dejah420 at 8:15 PM on June 8, 2005

One objective measure of whether housing prices are unreasonable is the ratio of rent (annual) to housing cost. For example, if a house costs $580,000 to buy, and $24,000 per year to rent ($2,000 per month), then the ratio is 24X. San Francisco is an extreme case, for the moment - I think it's something like 35X, whereas the norm (in prior years, and in most of the country) is something like 20-25X.

Put slightly differently: the higher the ratio, the more likely that owners who aren't occupants won't be able to cover their mortgage costs (from rental income) when interest rates rise (as they will, sooner or later). So the owners (aka investors) are likely to try sell (to cut their losses), which will depress prices,which will put owner-occupants at risk that their equity will vanish.

If you find a place that you expect to live in for the next ten years, of course, then the fact that your equity has vanished isn't necessarily a problem. But if you do need to sell (a bigger house, for the kids, for example), then you could be facing a very significant loss.

Also, for what it's worth, local housing bubbles in the Las Vegas area (in the last two years?) and in the Denver area (currently) apparently did pop, although nationwide it is certainly true that housing prices are still going up significantly.
posted by WestCoaster at 8:46 PM on June 8, 2005