Should we not buy a house right now?
February 16, 2010 4:02 PM   Subscribe

Should we not buy a house right now?

Wife and I are tired of renting and would like to get into a place of our own. We are always on pins and needles renting and hate the looking once a year 'Are we staying or are we going' thing. We are 23/24 and will not be moving away from this area for a long time, if ever.

We both have full time jobs, with an 8 week old. Rent is $1250/m for us in Portland, OR (Beaverton to be exact). We are wanting another child ~2 years from now so we will be up to 4 in our household. Since houses are not like rentals, we would need to future proof a bit.

Would it be worth it right now? Should we wait? We dont have much for a down payment ($3k), and dont know where to start really. We kind of want to take advantage of the buyers market and our tax consultant is urging us that this is a good time for us. What are your thoughts?
posted by anonymous to Home & Garden (23 answers total) 4 users marked this as a favorite
$3,000 for a downpayment is not enough, especially in a town like Portland, OR.

You should have at least 20%, though I would argue that the less debt you take on the better.

I don't know what tax consultant would say that it's a good time to buy, especially with a $3,000 downpayment. I say this because interest rates are at historic lows; they will increase at some point in the future when inflation hits. Higher interest rates will affect you in one of two ways: it will either make your interest payments significantly higher if you get a variable rate mortgage, or it will make the loan that a potential buyer of your house much more expensive.

Either way, your real return on your investment will decline.

I would continue to rent, accumulate capital with which to make a downpayment, and wait out the rocky economy.

No tax consultant who says "now's a great time to buy" is thinking much beyond the tax deduction on the interest payments. This is not a sufficient justification to make a major purchase.
posted by dfriedman at 4:08 PM on February 16, 2010 [3 favorites]

I've found this rent-or-buy calculator from the New York Times to be useful. It's as detailed an customizable as you want it to be.

For your situation, with some reasonable assumptions, it's telling me that buying will only be better if you can find a house for less than about $250,000, and even then, you won't start seeing the benefit for 20 years. If you can find something for about $150,000, you start seeing a net benefit after about 3 years.

This is assuming you can get a 30-fixed with $3,000, which you can't, so the real situation will be worse for buying.
posted by mr_roboto at 4:15 PM on February 16, 2010 [1 favorite]

My honest answer is: if you have to ask on Ask MeFi, the answer is "no, you should not buy."

My slightly more reasoned answer is: consider the price to rent ratio in the area you'd rent and the area you'd buy (note, these are not necessarily the same). Figure out how much it would cost to rent a place you'd like to buy and vice versa. Use a calculator like this one to figure out what sort of timeframe would be required for buying to be net beneficial. I think you'll find, with that low of a down payment, that renting in the short term is beneficial.

I also agree with dfriedman that no tax consultant should recommend you to buy without knowing substantially more about your personal and financial situation.
posted by saeculorum at 4:17 PM on February 16, 2010

Consider an FHA loan; I understand they changed their rules recently (so speak to a real estate professional), but they typically require very low downpayments -- as in 3.5% for a fixed-rate 30yr.

Contact your bank; they can give you a better idea of what they'd be prepared to do for you, loan-wise. Just based on personal experience, mortgage brokers have given me circa 0.15% below what my bank would do, which gives you something of a ballpark estimate on rates.
posted by aramaic at 4:21 PM on February 16, 2010 [1 favorite]

Off the top of my head, many many tax preparers and internet financial advice articles are suggesting now as a good time to buy due to the First Time Homebuyer Credit, which expires in early 2010. I know that as much as I have expressed that I don't want to own a home, I get pressure from every tax and financial planning corner to take advantage of that.

Beyond that, I can't really tell you much. What would be your monthly budget for mortgage, tax and homeowner insurance? Have you used an online calculator to determine what your mortgage payments might be? How will you finance the down payment, will parents help? What kind of protection will you have for continuing to meet mortgage payments if either of you loses your jobs? Are the houses you can get for what you can afford to pay appealing to you? If not, are you willing to move farther from work if that means better houses in your price range? Would doing so offset the increased transportation costs if that happened? Are you comfortable taking on the time and expense of landscaping and outdoor maintenance?

Once you've worked through these thoughts, you want to figure out how to finance a down payment (as little as 10%, possibly, if you have immaculate credit, but more likely 20%). You want to get a credit report and make sure everything is in order there. Then you want to figure out what amount you want to finance (keeping real estate agent fees in mind), and start applying to reputable mortgage lenders. Concurrently you can start seeking agents to look at houses.

Note, the above is based on advice given to me by parents. I considered this same question over the past couple months, and personally answered "Oh hell no, I don't want a house and all that pain in the butt and expense." We have different personal circumstances, etc., so that doesn't mean its not right for you. But I will tell you that a relative who is an International Monetary Fund economist has told me the old idea that owning is a great investment and is always more financially responsible than renting, is not really always true anymore.
posted by bunnycup at 4:22 PM on February 16, 2010 [2 favorites]

Remember that you'll need more savings if you own a house; you need to be able to replace the boiler when it suddenly dies in a cold snap, etc etc.

Aside from emergencies, you'll need to be paying attention to regular maintenance; I read somewhere that 1% of the house value per year is a reasonable estimate for this. Of course you can let it slide, but then you get a big surprise in ten years when everything has rotted!
posted by emilyw at 4:26 PM on February 16, 2010

I've sprung that NYT calculator on a number of people who find staggering the length of time one would have to own to compare to the benefits of renting. Where I live, and with certain basic assumptions about the housing market, it is economic to buy only if I were to stay in the property for something like 17 years. I am considerably older than you and I still can't imagine staying in one place for the next 17 years. Combine that with the fickle economy, one-- potentially two--kids, and I would be surprised if this is actually a good idea for you at this point in your lives.

And $3,000 is pretty much nothing, I'm sorry to say. As has been observed above, the deposit tends to be 15%-20% of the purchase price. Don't forget fees, mortgage insurance, inspections, etc. I'd just rent.
posted by Admiral Haddock at 4:28 PM on February 16, 2010

Let me explain my comments above in more detail.

(1) Interest rates. It is true that interest rates are at historic lows. It is also true that if you can lock in a fixed rate mortgage, you will pay substantially less in interest costs over the term of the loan as compared to someone who takes on a variable rate mortgage. However. The calculus is not so simple. (Nothing in finance ever is.)

(2) Inflation. The Federal Reserve has flooded the nation's banks with money. Those banks, for a number of reasons, have not started lending out the capital in large quantities (the so-called credit crunch). This has kept inflation under check. Ben Bernanke's big project (he is the head of the Federal Reserve) is to somehow convince the banks to lend to small borrowers, while at the same time heading off inflation by buying bonds on the open market. Pretty much everyone agrees that this is an impossible task, and that the US faces inflation in its future.

(3) Why does inflation matter to someone thinking about buying a home now? Because higher interest rates down the road make taking out a loan more expensive for other people who may want to buy your home in the future. This will diminish the value of your house to a potential borrower, because the costs associated with his loan, namely, the interest payments, just went up.

(4) As with everything finance-related, you may not care about any of the above. You may merely care about the interest payment tax deduction, the first-time home buyer tax credit, and the emotional benefit you get from owning your own home. These are all good things, and if they are the litmus by which you make the decision to buy, bully for you. But the above are vitally important considerations, in my opinion, and too few people take them into account.
posted by dfriedman at 4:28 PM on February 16, 2010

Why does inflation matter to someone thinking about buying a home now? Because higher interest rates down the road make taking out a loan more expensive for other people who may want to buy your home in the future. This will diminish the value of your house to a potential borrower, because the costs associated with his loan, namely, the interest payments, just went up.

Home ownership is typically considered a hedge against inflation. Remember, in an inflationary economy, rents go up. Fixed-rate mortgages, however, do not.
posted by mr_roboto at 4:32 PM on February 16, 2010 [4 favorites]

As a recent home buyer I would say it is a good time to buy if you have enough down. If you can't save the down payment, you probably shouldn't be buying. Renting is not the end of the world, although living in a large apartment complex can be unpleasant. If you want some of the house privileges without the hassle of buying rent from the right person. There is a blog called get rich slowly that is based in portland, and it has been having a good discussion about this issue for the past couple of weeks. check it out.
posted by bartonlong at 4:43 PM on February 16, 2010

What we did to build up a down payment was to borrow a bunch of money to put into a one year term deposit. Then we worked and saved like crazy to pay it off. The bank didn't have any problems giving us the loan because they were holding the term deposit as collateral. One year later, we had a big down payment and a credit history showing that we'd payed off a big loan. In our case, the term deposit actually paid more interest than the loan was charging.
posted by bonobothegreat at 4:45 PM on February 16, 2010 [1 favorite]

I think considering buying with only $3k to put down in a town like Portland is crazy talk. Insane no-money-down mortgages and such are how we got into this mess in the first place. And $3k is essentially no-money-down.
posted by Justinian at 5:26 PM on February 16, 2010

For perspective I will tell you that we bought dumb: much nearer the top than the bottom of the market, nowhere near the suggested amount of savings for down payment and closing costs. We've lived here going on 8 years and we love living in our house. I don't have a single regret.

I think the key factors for us are that even in a seller's market we bought a reasonably priced house, we took on a debt that represented a reasonable expense for us (though I suppose this may not be so much the case any more, I really believe taking the amount the bank offered to lend us would have unquestionably translated into rapid financial ruin), but we bought a house we genuinely love, and we bought a house in a place we planned to live for a long time.

If you are realistic about what you can afford (seriously considering things like increased utilities, PMI, insurance and maintenance expenses), if you are prepared for the reality that house buying involves trading greater autonomy in your living space for having to expend substantially more time and labor maintaining your living space, and if you are able to be patient looking for a house you genuinely want to live in, buying now could be an okay decision even if it isn't the best one financially. You pay extra money for stuff you value. I think people with 40-plus inch television sets or luxury cars are crazy but if they can afford it and it makes them happy then it is a fine decision.

There is certainly no harm in doing things like getting a book (I found Home Buying for Dummies honestly helpful) and starting to figure out the process of buying a home. You can make realistic projections of what you can afford and start checking out what kind of house that might actually buy you where you want to live. Think realistically about how you feel about things like mowing the lawn and painting because you are always always always fixing or taking care of something on the house. You've got to love not having people outside your family living in the same building as you a whole lot to justify it, if you ask me. But again, I've got nearly a decade of being very happy in my living arrangement (despite it being a rotten time economically for it considered as an investment) and I don't begrudge a penny we've spent on our house. I will say I think if we were seriously underwater on the mortgage or facing a looming savage price hike from an ARM or something the stress of that would likely quickly start to outweigh these benefits.
posted by nanojath at 5:27 PM on February 16, 2010 [3 favorites]

I would save more money on top of the 3K and make sure that you have a lot more set aside separately for an emergency fund.
posted by anniecat at 5:28 PM on February 16, 2010

(though I suppose this may not be so much the case any more, I really believe taking the amount the bank offered to lend us would have unquestionably translated into rapid financial ruin)

To clarify this muddy statement, what I'm saying is I imagine banks maybe aren't being quite so profligate in offering people money these days, but when we got pre-approved the bank offered us literally twice as much money as it made sense for us to spend based on our incomes and existing debts. Buying the sort of house that money could have gotten us would have killed us financially within a few years.
posted by nanojath at 5:32 PM on February 16, 2010

I'm basically agreeing with anniecat - I completely understand hating living in a rental, but you need a lot more than $3k in the bank to buy a house and be financially secure. Houses don't stop costing money once the mortgage is paid, you have an increase in utilities, plus maintenance, repairs and you need to have a good nest egg of savings on top of that. Come back to the topic when you have $20k, at the very least, and look around you to see if there's anyone you can lean on for extra financial support. At the moment, it really doesn't sound doable.

> "There is a blog called get rich slowly that is based in portland, and it has been having a good discussion about this issue for the past couple of weeks. check it out."

Which is here - JD is absolutely brilliant at what he does, and is apparently working on a book. There's also a wide circuit of frugal bloggers out there on this internet who have helped us budget our household and seek out a cheaper/more sustainable way to live. Frugal Girl is a good person to start with.
posted by saturnine at 5:48 PM on February 16, 2010 [3 favorites]

Have you considered living in a housing co-op? (Sorry if you have and ruled it out, but if you haven't...) I live in a co-op in Toronto (Canada) so it may work differently in the US... I tried googling housing co-ops in Portland, OR and didn't come up with much. But some did come up in Eugene, OR, for what it's worth!
posted by foxjacket at 5:54 PM on February 16, 2010

Housing has been so volatile over the last several years, the only way you'll know for sure is to find an agent and/or mortgage broker who's willing to pre-qualify you for an amount. They'll tell you what you can buy now, or what you'd need to do to get to a point where you can buy.

Instead of worrying about a "20% down payment", consider the amount you pre-qualify for versus the going price for the kind of home you'd be willing to live in. If you can borrow $150,000, but the only houses in your area at that price don't meet your standards for whatever reason, you know you need to come up with more cash, or find ways to qualify to borrow more (lower other debts, get a better-paying job, etc.).

Here's a map of home prices in the Portland area last fall. My gut reaction: if you're expecting to have a mortgage payment that's roughly the same as your current rent, you're going to be scraping the bottom of the barrel. But again, you won't know for sure until you talk to pros in your area.

Are low- or no-money-down mortgages still available? Are there special programs for first-time homebuyers? You won't know until you ask--locally. Example: when I was first home shopping, my first-timer status and limited funds shut me out of the market, except within the city limits of Minneapolis and Saint Paul, where there were a variety of special programs available. Availability of these would change from season to season or even month to month. This was before the "bubble", incidentally. Decent, experienced realtors and brokers should know what's going on.
posted by gimonca at 7:24 PM on February 16, 2010 [1 favorite]

Probably been covered already, but you need to factor in all of the associated costs of home ownership: insurance, maintenance, renovations. It's not cheap.
posted by KokuRyu at 7:26 PM on February 16, 2010

Is it worth it? Yes. Can you do it right now? No. I think it's pretty clear to you that you won't be able to buy a house with only $3000. There was a time you could get away with it, but it is unlikely you can do it now. Even assuming you could get a fixed interest loan (which is the only kind you should consider) with zero down payment, the money you have on hand probably will not cover all the associated costs. Plus, with an 8 week old baby, do you really want to deplete your cash reserve entirely?

So to answer your implied question of where to start, start by talking to your friends and coworkers. Get recommendations of real estate agents, banks, mortgage brokers.

Next, figure where your credit stands. You could go to your bank or a mortgage broker and find out how much you would qualify to borrow, how much you would have to put down, what rate you qualify, and what your credit scores are. If by some miracle you qualify for a loan with your $3k, find a house and buy it. More likely you will need to save a little more and do some credit TLC, but at least you will know where you stand and if there are problem with your credit you will have time to correct them while you are saving. For example, I always watched my credit pretty closely and my score was relatively high. I had no credit cards but had gotten a car lone at one point to built my credit. But when I started looking into mortgages my last reported loan was just over 7 years old and suddenly none of the agencies could compute a credit score for me. This gave me time get a credit card to jumpstart my credit scores before applying for a mortgage. This step also gives you a better idea of what properties you could buy and which ones may be out of reach.

Next is to find a house. Using your rent as a baseline you will probably be looking at a house in the $200k or less range. If your having trouble saving money with your current rent, you'll probably want to go even lower. What you want to do is look at your mortgage payment+Property taxes+insurance+PMI+HOA and compare that to what you would be paying in rent. Also keep in mind general maintenance and that your utility bills might be higher. Start looking at as many houses in your range as you can. Go to every open house you can make, even ones out of your price range. Get a real estate agent if you want and go to the houses you think you'd buy if you had more to put down. The idea is that when you are finally ready to buy you'll have a firm grasp of the local real estate and what houses are actually worth.

As a suggestion, in your case I would probably recommend a 3 bedroom Townhouse or condo. The advantage of the townhouse/condo for you is that they are usually a lot cheaper than a house to buy, the utilities are probably a little cheaper, and you don't have to worry about the time/cost of yard maintenance. Disadvantages are of course sharing walls, no room for expansion, etc. Just a quick search found this example. It seems like a decent place, probably similar to your apartment or a little bigger. Even with 0 down at 5% interest your combined payments would probably be just over $1000. of course this is a short sale, which may be another option for you to be looking in to.

In my area the houses tend to sell for 93-94% of the asking price. However, this other 6-7% roughly amount to the total of the closing costs, inspection fees, prepaids, etc. Once we figured this little gem out it helped us to figure a reasonable offer and how much we would need up front on top of our down payment. A real estate agent in your area could probably help you figure this number out for your area, if they are willing to is another story.

My final advice is for you not to look at buying a house as an investment, but as regulating your living expenses. As others pointed out, rent always goes up, but your mortgage payments should be fixed (excluding taxes and insurance). If the US is about to be hit by the massive inflation everyone is expecting, your mortgage payments will look ridiculously low in a few years. The only reason to put 20% down is if your credit is so bad that the bank requires it, or to avoid paying PMI. I would recommend putting as little down as your lender would allow. Make sure there are no penalties for payments on principle so if it makes sense for you in the future you can add to your equity and eliminate your PMI.
posted by Yorrick at 8:36 PM on February 16, 2010 [1 favorite]

Oh, and good luck!
posted by Yorrick at 8:38 PM on February 16, 2010

They call personal finance "personal" for a reason: because you need to factor in not just dollars and cents, but also things like your goals and what gives you peace of mind. It sounds like you really want to buy, so I'd change your question to: is there any reason now is a terrible time to buy? and how can we buy? Nobody can time a market, and there are worse things than buying at an imperfect moment. Which is worse: realizing later you spent ten percent more than necessary, or keeping your life on hold indefinitely waiting for the perfect time?
posted by salvia at 10:28 PM on February 16, 2010

It looks like most of the downpayment assistance programs in Oregon are out of funding. Also it is my understanding that real estate prices in general have not finished their decline. However the Portland area will probably holds its value better than many places.

Your first step is to see if you can get pre-qualified for a loan. After that I would start watching the foreclosures there are some really good deals right now.
posted by psycho-alchemy at 3:48 AM on February 17, 2010

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