Am I insane?

My husband and I are now, finally, in a position to buy a house or condo. We live in the SF Bay Area, and prices seem to be falling, putting within our reach places that last year were hugely expensive. Plus we really need the tax break!

So we are starting to seriously explore purchasing a home.

What I can’t decide though is this: Are we not seeing the realities of the situation our country now finds itself (war, recession, massive layoffs)? Is it just nuts to think of making a huge comitment and going into major debt at at time like this? Should we be buying a concrete bunker in the hills instead?

I should add that my job is very steady, with good security and potential for raises in the near future. His is less secure but layoffs are not imminent.

Any insight or opinions would be great, because I really can’t decide if we have blinders on or not.

Thanks!

Twiddle

P.S. Mods if this is better for GQ I’m sorry!

If you are seriously in a position to buy a house in the Bay Area, you are in a better financial position than 75% of the people there. Go for it.

My wife and I lived in Albany for a while, and when it came time to buy a house, we figured we could buy:

  1. A really nice house in a really nasty part of town.
  2. A very boring house in a very boring town (Modesto).
  3. A really nice house in the Twin Cities (where she went to college).

I miss California.

You only live once. You can’t predict property values. Base your decision on today’s equation.

What’s the worst that can happen? You sell at less than the mortgage value and become homeless. You can still buy a house with a bag of fools gold in Tracy.

Take comfort that there’s never a good time to do anything. All you can do is take advantage of the opportunity that has been presented to you. You just hope for the best and try to plan for unexpected events. Good Luck

I’m in the process of working out details to buy a house within the next year. I have almost all my debt paid off (apart from student loans), I’m fairly stable, and so forth. Yes, the world is changing, but if you can afford to buy I say go ahead and do it.

<disclaimer: I’ve never bought a house. But I’m a financial reporter and I get seasoned financial experts to answer reader’s questions, and someone wrote in just last month with almost the same question. Here’s what I learned and can pass on.>
Well, I take it you’re buying this house to LIVE in, rather than as an investment property. That takes a lot of the risk out of the equation, because you don’t have to worry about not being able to rent it out, and you don’t have to worry about the trash you rent it to tearing up the place.

So if you have money to either put down on a home or keep in stocks, here are some ways to look at it, from a purely financial perspective.

Historically, according to Freddie Mac, the prices of single family homes have appreciated between 5% and 6% per year. Stocks have appreciated at around 16% per year since 1975, using the S&P 500 as a proxy.

(I think that’s excessive, and wouldn’t plan on more than 10%, but that’s what the Q1 1975 to Q4 1999 numbers are telling me. That’s measuring from a trough to a mania, though.)

Point stocks.

BUT–we’ve left out the most important part of the equation: rental income on property. Now, if you live in the house, that doesn’t mean there’s no rental income. You can pretty much figure you’re paying it to yourself. So although you’re SAVING rent rather than recieveing it from a tenant, the net effect on your bank account is the same.

Generally, you have had to be able to realize a rental income (or savings) of about 10% of the house per year over 25 years in order to match the return of stocks, AFTER your expenses in insurance, upkeep, property taxes, etc, assuming the rental value of the property increases along with the value of the house. (No locking in 5 year leases, etc.)

See how that works? The 10 spread between the historical returns on houses and on stocks = the amount you’d have to take in or save on rent money.

So in order to be a better investment than stocks over the last 25 years, a 240,000 house would have had to rent for 24,000 per year, or 2,000 per month. Capice?

(If you think the spread between property values and stocks will be closer to 7%, then a house will have to provide rental income or rental savings of 7% of the value of the home.)

Generally, you can do that. Point house.

Also, keep in mind the effect of leverage. If you put a 20k down payment on a 200k house and it goes up 10%, although you only have 20,000 of your own money in it, you potentially benefit from the appreciation of 100% of the house.

Don’t buy a house for the home mortgage deduction, though. Never let the tax tail wag the investment dog, as the saying goes.

Also keep in mind that you’ll have to deduct the interest rate from the equation. And the amortization tables only work for you down the road. In the beginning, almost everything you pay with each house payment is interest. Only a few dollars apply to the principal.

(See, banks know that you’ll only stay in the house for about 7 years, just when you’re starting to pay more principal down with each mortgage payment than interest. Then they know you’ll go to a bigger house and take a bigger loan. That’s why bank stockholders get rich faster than homes appreciate. <g>)

To minimize that effect, suck up the extra few bucks a month and get a 15 year mortgage rather than a 30 year. The difference in monthly payments is small, and it will save you 100,000 or more over the life of the loan. And give them a good, chunky down payment. Zero down sucks, babe.

And make payments every 2 weeks rather than every month. That translates into an extra month’s worth of payments every year. Good policy, and it pays off principle much, much faster.

Now, if you can make the numbers work–REALLY make them work, and not have to fudge it or force them to work or pretend that they work, then by all means do so. The home you live in is a great investment, according to no less an investor than Peter Lynch. (Saw him say that on TV last week. :slight_smile: )

If not, then wait, and keep shopping. Don’t try to time the market. You won’t outguess it. And right now interest rates are relatively low. Sure, they can get lower, but so what?

And make sure you own the house–it doesn’t own you. Too many people are house rich and cash poor because they bought a house they couldn’t afford, and the payment became a stressor rather than a blessing.

Make sure you have some good, knowledgeable people on your team. The real estate agent is NOT on your team. Have a lawyer and a good trusted and experienced financial advisor on your team, and pay them generously for their advice. It’ll be worth it many times over.

I’d consider David Yeske (Yeske & Company, Inc.) from Marina Del Rey, CA as an advisor, he’s the guy who related most of this stuff to me (which I then had to compress into about 60 words. <grrrrrr> ) He can help you or recommend someone who can.

David Bergmann, also in the San Francisco area, is very good, too.

Hope this helps!

Thanks for the reassurances. Panzerman, you have given me a lot to think about.

Twiddle

This lawyer business that comes up when people talk of buying houses. What is the lawyer supposed to do? Both time I have purchased houses (in New Mexico and California) the contracts were a boiler plate written either by the state or the state realtors association. The only things filled in were a few things specific to the property like easements and such. There just did not seem to be much for a lawyer to do. If sellers wanted some weird clauses I would need a lawyer. But most likely I would not buy.

When I went to the escrow company to sign papers in NM the escrow officer was surprised that I actually read the papers. (Which I find pretty scary but oh well)

Useful advice for the OP. Make sure everything is in writing. Clear writing with good signatures. Be a real asshole about these things. Don’t get worry about letting the deal fall through because you don’t understand what something means or your petty demands for unambiguous answers to questions causes things to take too long. There will be other houses on the market.

My main issue with buying a house in the bay area now is that it might be more or less the top of the market.

As for panzermanpanzerman remark:
(See, banks know that you’ll only stay in the house for about 7 years, just when you’re starting to pay more principal down with each mortgage payment than interest. Then they know you’ll go to a bigger house and take a bigger loan. That’s why bank stockholders get rich faster than homes appreciate.

I fail to see how the bank is making more that say the 6.75% on the loan.
(excluding points fees ect.)

gazapacho

I miss California not a whit. Everywhere I would want to live is too expensive and earthquake-threatened. Plus (and anyone who has never lived in the San Joaquin valley will dispute me, I’m sure), I got soooooooooooo tired of sun!

Minnesota has four seasons. Love it!

Unless you find something that is way below market you might want to wait another couple of months. They get a little cheaper later in the year. But right now its a buyers market so you still have a nice chance to get a nice deal especially if you are buying privately.

Sometimes you see something called ‘median family home price’. This is a joke. First of all, they don’t say what size the house is, it could be a little one room cottage or a twenty room mansion. So don’t buy comparing to that price.