Are we making a huge mistake?
December 30, 2008 3:29 PM   Subscribe

Is it insane to buy a house in this market?

We're pretty far into the process (just finishing up the post-inspection negotiations), and we really like the house we've bid on. We intend to stay there for several years (at least), if not indefinitely. We can afford it and we have the money to close. Our jobs are both relatively stable. We know real estate is local, and my particular area has declined much less than others. In addition, a whole bunch of new people are likely to start moving in to the area in the next few months, as I live in (or around) DC.

We're not at all eager to back out of this deal. We like the house and the neighborhood quite a bit, its basically as close to perfectly situated as we could want.

But...since we bid there have been front page articles in both the WP and the NYT about the tanking real estate market. We understand that we could end up owing more than the house is worth for a while, but I wonder if there are other things to consider. We will be first time home owners.

(We are not going to try any sort of hardcore renegotiation of our offer. We just don't have the chops for it or the interest in engaging in that.)
posted by OmieWise to Work & Money (17 answers total) 7 users marked this as a favorite has a great read as to why it's still a bad time to buy a house.
posted by magstheaxe at 3:36 PM on December 30, 2008 [1 favorite]

I bought a house and closed 12/3/08. My *only* regret is that I could get much better financing today. I may wind up refinancing if rates drop to two full points below what I am at right now because it will save me so much over the life of the loan.

I may only be in the house a couple of years but I'm confident that I'll at least break even. Denver, central Denver at least, hasn't been hit nearly as hard as the rest of the country. Our job market is tough, but we're a diversified community with jobs in hot sectors like energy and wind, etc.

No, you're not crazy. If you love the house, love the neighborhood and it's a stable neighborhood there's less a reason to worry. Just make sure that your love of the house isn't clouding your vision of the resale potential of the house.

The house I bought has a couple things I knew going into it was causing potential buyers pause. I plan on dealing with those in the short term to eliminate that worry should I have to sell sooner than I might like to.

Good luck!
posted by FlamingBore at 3:41 PM on December 30, 2008

IMO, regardless of whether or not the housing market has hit the absolute bottom, the buying is better now than it has been in years. Mortgage rates are real low, and prices are down. As long as you don't try to turn around and sell the house real soon, you're going to be alright, or at least no worse off than anyone else. Housing prices will go back up eventually. Nobody knows how long, but if your ownership horizon is 5 years off or more, you're probably fine.

Also, if you're able to afford the house and it's not breaking the bank to pay the mortgage, there's a lot to be said for living in a place you love. Sometimes people look at buying a house as purely an investment. Sure, there's that side to it, but there's the Quality of Life side of it too. It's where you're going to live every day for an extended period of time. If buying the house makes you happy, and living there will continue to make you happy, then it's worth it. Just don't buy more than you can afford.
posted by JuiceBoxHero at 3:48 PM on December 30, 2008

If you want tips on how to time the market and avoid any downside, I don't have any. But I will say that you should be willing to stomach some downside if you decide to buy. That's just part of the deal, notwithstanding the insane bullshit of the last 15 years. Outside of the recent bubble, everyone who's ever bought a house has had to deal with the possibility that it may not be a money-making bonanza and in fact could add up to a liability if things go badly. My parents said they saw no increased in value in their first home for 15 years! Mortgage rates were at 24% or something crazy like that.

Today seems like a crazy time to take the risk, but it's always been a risk to buy a house. An insane time to buy was two years ago, when it seemed like no risk at all. That's when I bought, and I recall comparing the interest rate I could get on savings accounts against the modest 10% per year my home was sure to appreciate.... I am now dealing with having suffered some downside, and looking ahead at a much less dreamy future than I'd first imagined for myself when I took this step. There's been some disappointment along the way, but do I regret the decision overall? I don't. I'm still better off than I was shovelling money into rent, I like my home, I didn't over-expose myself with something huge I couldn't afford, and I'm optimistic that the future will be better. I haven't gotten rich off the process, but neither has it ruined me financially. I got the house I wanted.

Just as no one sees the end of a boom coming, there's plenty of folks around to tell you a downturn has no end in sight. "Where's the bottom?" everyone is saying now. Is the inflection point 6 months away, 2 years away, 5 years away? Is it right now? Nobody knows, and trying to time the market precisely is nuts. But you can be sure of one thing: right up until the point it turns around, there will be people saying "where's the bottom? are we there yet? could get worse!" So even if you luck out and time the market perfectly with this purchase, you're still going to have to be brave enough to do it over some dissenting voices.

What you have to ask yourself is:

1) Can you really afford it? Have you seen ALL the costs?
2) Are you willing to be stuck there for a while?
3) Do you have unrealistic expectations of your home as an investment vehicle?
4) Or is it a place to live that you can afford and will enjoy?

That's all.
posted by scarabic at 4:14 PM on December 30, 2008 [1 favorite]

I know that it's quite possible that buying a house in this market can be a smart decision, depending on the person and the house. My mother just closed yesterday, in fact, and after crunching the numbers, even after property taxes she believes she'll be paying almost $100 a month less for a decent place. It needs some fixing up, unfortunately, but with some hard work she'll have a nice place in a good location in the event she decides to sell.

Also, what scarabic said.
posted by Green With You at 4:22 PM on December 30, 2008

I was a superbear 2006-2008 but I don't think prices are going to zero.

Buying when it's a sure thing is when you're guaranteed lose your ass, but buying when you're not sure it's the bottom is often the best time.

Combating home price declines is an important battlefront on the ever-expanding War on Economics.

If the price makes any sense compared to equivalent rents then move in & enjoy your new home!
posted by troy at 4:48 PM on December 30, 2008

Prices are down, rates are down, you need a place to live. What's not to like?

But seriously, don't let the news scare you into not doing things that make sense to you. That's the kind of thing that makes markets more irrational. Unfortunately, the last ten years excepted, buying a house IS a gamble.

Remember too that a house isn't a money investment, it's a housing investment. Say your house is $300,000, and the median house price is $150,000. Your house is worth 2x the median price of a house. Say in ten years your house is worth $500,000. You just made $200,000! Party!!? No. Because all things being equal, the median price of a house is going to be $250,000 then too. You still own the same "slice" of the housing stock as you did before, and still have the same amount of purchasing power as you did before. What makes it an investment is that, eventually, if you don't keep taking cash out, you will actually own that house and not have to pay for a place to live. The only time a house is a money investment is if you don't live there.
posted by gjc at 5:06 PM on December 30, 2008

We're not at all eager to back out of this deal. We like the house and the neighborhood quite a bit, its basically as close to perfectly situated as we could want.

Buy it then. You're buying a place to live, and so long as you can comfortably afford to service your mortgage, that's what you'll get.
posted by rodgerd at 5:14 PM on December 30, 2008

I'm not smart financially, but I do own a house (my first house) that is *still* likely worth 25% more today than we paid 2 years ago, although we got a sweet deal at the time. At the time, everyone was talking about how the real estate market had topped out and it was a terrible time to buy and we had the same kind of cold feet before signing. But what drove our decision was that we *knew* it was a great place to live, our jobs are reasonably secure and we can afford the mortgage, we had no intention of needing to sell anytime soon, and we just loved the place. Though our property value did rise, at the time we figured that living in the home and neighborhood of our dreams until we grew old together would certainly soften the blow of any short term loss. It sounds like you are in a similar position.

I think you're okay. With all the best information you have today, it doesn't sound like you will be stuck with a house you no longer want and can't unload in a couple years. It's true that your property value isn't likely to double in 5 years like parts of the DC market has done, but it's still DC and there will always be people looking to move there. I wouldn't do this as an investment, but as a long term place to live it sounds great.

This is a fixed rate mortgage right?
posted by Slarty Bartfast at 5:43 PM on December 30, 2008

You gotta live somewhere. May as well be in a house you like.
posted by ook at 7:02 PM on December 30, 2008 [1 favorite]

We intend to stay there for several years (at least), if not indefinitely.

This is the key, particularly in a (possibly still) sinking market. As long as you plan on being here for several years (which in my mind, anyways, is >=5) then it's a good decision. Nobody can time the market exactly. Most people (I think, anyways) would think that the market can't continue to decrease for the next 5 years, and frankly if it does then there's way more problems than your house losing value.

It's true that your property value isn't likely to double in 5 years like parts of the DC market has done, but it's still DC and there will always be people looking to move there. I wouldn't do this as an investment, but as a long term place to live it sounds great.

posted by inigo2 at 7:16 PM on December 30, 2008

What are your mortgage terms like? What percent are you putting down? The more you put down, the less vulnerable you are. I assume your rate is fixed, but if it's adjustable, think about the fact that rates are expected to rise.
posted by lunasol at 10:50 PM on December 30, 2008

If you like the house and the neighbourhood, and plan to stay there for several years, then no, you aren't making a mistake. I think that after the recent housing boom/bubble, lots of people are under the misapprehension that houses are purely a short-term profit-making exercise, and that if you can't make hundreds of thousands within a couple of years then its a bad investment. Houses are a long-term investment, but mostly they are a place to live. So I say go ahead.
posted by Joh at 12:25 AM on December 31, 2008

You say nothing about the terms.

Therefore, it is not possible to say anything meaningful about whether it is a good or bad idea.

I will buy any house for any price at any time - on my terms. This is a valid standing offer to anyone who reads this. The terms really matter.

If you're locking in a 30 year fixed rate right now and you qualify for prime, you certainly couldn't pick a better time to be doing that.
posted by ikkyu2 at 1:17 AM on December 31, 2008

Ultimately, the primary reason that we buy houses is to live in them. If you're satisfied with the terms you're getting now, and you like the place, then you're doing great - and, you should ignore the dire headlines.

Now, if you were buying the house as an investment piece, I'd say to run for the hills. But, if you just want to live there, you shouldn't worry.
posted by Citrus at 6:53 AM on December 31, 2008

Response by poster: Thanks for all the responses. They were all good and provided food for thought. (It didn't hurt that most accorded with my own opinion.)

It's a 30 year fixed at a great rate, just to satisfy those questions.
posted by OmieWise at 9:24 AM on December 31, 2008

If you understand statistics and are handy with Excel, here is what I did:

We are making an offer on a townhome on Monday. To figure out whether the price was reasonable or not, I got on the county assessor's website, made a spreadsheet of a convenience sample of sale prices by recording the the last sale price and date of all the other homes in the community, plus other available quantifiable information (square feet, bedrooms, etc.). I knew that the local market started going crazy in 2003, so I did a regression analysis of the pre-2003 sales to see what the pre-bubble long-term trendline was for home prices in the commmunity. It turned out the only statistically significant variables were years since the community first went on the market and number of square feet (number of bedrooms was not statistically significant after I controlled for the interaction between square feet and bedrooms). I was able to create a model with an adjusted r-squared of 0.74, which means it explains 74% of the variation in home prices in the community. According to my model, the house is overpriced relative to the pre-bubble long-term trendline by $5000, so we might be underwater for a bit when the market finally bottoms out, but we'd also waste at least that much on rent if we waited for the bottom, so we're going ahead with the purchase

I also researched the rental market and found that equivalent rentals (including one that was in the same community, same street, same number of bedrooms and bathrooms) rent for $200 more a month than our expected total monthly mortgage payment, homeowners association dues, property taxes, and homeowners insurance. So unless rental market prices drop by over 25% it would be pretty difficult for us not to at least break even or profit by renting it out if we want to move before prices recover to what we paid for it.

I came to the conclusion that it was not a great investment and was not going to make it rich, but it would be a decent place to live (which is our primary motivation for buying a home), would be better for our current cash flow than our alternatives, and would not lose us much or any money even if prices dropped farther.
posted by Jacqueline at 2:13 AM on January 1, 2009 [1 favorite]

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