My hubby and I had some serious financial problems a few years ago and are now re-building. We had bought a house and shirtly after I was pregnant and laid-off and then he was laid off.
We are currently renting.
We make excellent money and are very interested in being homeowners again, but the housing market has been a little scary these past few years (for buyers, not sellers).
I know no one has a crystal ball, but is the market going to normalize? If so, are they expecting it to happen this market, or next?
What should we be looking for, besides the obvious (prices going down)? I am leery of bankers and loans people because we trusted a little too much last time
The housing market is extremely site specific. Not only does it vary wildly from state to state and city to city, but also within neighborhoods inside any particular city, suburb, town or rural area. This makes it impossible to give any guidance for the market in general. Some areas are most certainly buyer’s markets rather than seller’s markets. You need to do some serious investigation to determine what it is where you want to buy.
There are reputable bankers around everywhere. Talk to people in your area about their experiences. If you’re leery of bankers, however, avoid anything but fixed rate mortgages in the current market. For several years lenders offered various adjustable rate mortgages with tricks to make the early payments appear small and affordable, but people got caught by a sudden rise in payments after that period. Those are mostly disappearing, but fixed rate loans will allow you to plan out your budget for years in advance and that will help you.
Other than that you need to be more specific in what you need to know. There are no general rules in housing. It’s all location, location, location.
Even people that are in obvious bubbles can’t always tell those things. My wife and I bought in early 2002 even though Boston prices were at “insane” prices at the time. Those insane prices were cheap by today’s standards as the prices jumped steadily over the next 4 years.
There isn’t any real speculation math to it. You should only buy a house when you need it, when you can afford it, in an area that is suitable. If you don’t plan on “flipping it” (and please say you aren’t) that is all you need to know. The market may have changed what you can afford or where you can best live but the fundamentals stay the same. If you buy a house with a 30 year fixed mortgage, you know all you need going in and the hell with everything else. You have your house and your payment schedule and that is all there is to it. Complications may arise however if you want to sell in 3 years rather than 20 with risks but a long-term buy is pretty straightforward.
The price of houses almost never go down in a way that makes them affordable to people. They may level off and drop a little but they will only really go down in a severe economic downturn. If that happens you probably will not be making good money when that happens.
There are a couple of different things you should think about when deciding to buy. First is affordability: can you afford the mortgage payment? A good rule of thumb is to borrow no more than about three times your annual income. Alternatively, the monthly payments including principle, interest, taxes and insurance should be no more than 28-30% of your monthly income (on a fixed-rate loan)
Since you say you are making plenty of money and are concerned about the bubble in housing prices, it seems you are more interested in learning about the second component: not how much you **can **pay but how much you should pay. Two things go into determining a fair price: utility and (speculative) investment. Utility is the benefit you get from using something. For a fair utility cost, the interest+insurance portion of your mortgage payment should be very close to what you would pay in rent for the same property (the payments you make to principal are like savings unless the house falls in value and the property tax you pay usually just about offsets the tax break you get on mortgage interest). A good rule of thumb here is that the house purchase price should be no more than 100 to 200 times the monthly rent. So if you are renting a house for $1000 a month, a fair purchase price for that house would be $100,000 - $200,000, depending on the area. Look at price to rent ratios from five years ago to get a sense of the fair multiple for your area.
In many parts of the country (including almost all of California), the cost to own is way out of whack with the cost to rent, with asking prices reaching 300-500 times the monthly rental costs. The speculative investment component of the housing market has gotten out of control, largely because of low interest rates intended to deflect the economic impact of the dot com market crash made it cheap and low lending standards and exotic loans made it easy to borrow dangerous amounts of money. Who cares about overpaying utility cost if the house is appreciating at 20% every year? The problem with this, of course, is that it has the flavor of a Ponzi scheme and sours pretty quickly once the speculators (or last greater fools) leave the market and the appreciation rates slow or become negative.
I think we’ll see a significant downturn in the bubble markets over the next two or three years. That downturn plus inflation will return us to historical norms eventually. In the long term, it is better to buy a home than rent, because your costs don’t rise with inflation and you build equity through a kind of forced savings. But you should be sure that you can afford the payments on a fully amortized (NOT interest-only) and fixed-rate (NOT adjustable) loan for the full loan term. And it helps to know that in the worst case – job loss, divorce, or death – you can recover most of the mortgage payment by renting out the house. This you obviously know from experience.
