Some of you may not be interested in this, but since the other shoe dropped—I learned a few days back that I need to be out of the duplex I rent by October 1 (though I have some legal wiggle room to push that date back a bit)—my wife and I are looking to buy our first house. And it seems we are doing so at the precise moment when a number of factors (some favorable, some unfavorable) are converging. From the WSJ, “Full House” (subscribers only):
[…] New home sales in July are 22% below July 2005. The decrease is 43% for the Northeast over that same period, and the inventory of unsold new homes is up 22%. Existing home sales are down to 6.33 million in July from over seven million at the end of 2005. Older boomers are cashing out of valuable suburban homes and heading for condos in the city, or out of high-priced regions altogether.
Why is this happening so suddenly? It can’t be interest rates alone. The 30-year mortgage rate is up less than one percentage point since this time last year, and is no higher than it was a few years ago when this boom was roaring along.
The market spoiler was in place some two years ago. At that time, we felt that the spectacular price increases could not be justified. The psychology of that time could not continue indefinitely, and indeed it has not.
In the summer of 2004, the annual rate of increase for home prices in major U.S. cities reached its peak. According to the Standard & Poor’s/Case-Shiller Composite Home Price Index, based on 10 major metro areas, housing inflation reached 20.4% in the 12 months ending in July 2004. Now, the latest numbers announced yesterday show only an 8.2% increase in the 12 months ending June 2006, and most of that increase was in 2005. Six of the 10 cities actually fell between May and June. By simple extrapolation, if housing price changes continue to decline as they have, inflation will turn into deflation, and 12-month price changes might be squarely in negative territory by some time in 2007.
[…]
Part of what has focused the spotlight on the housing market has been the sheer size of the boom. Ten years ago, U.S. household holdings of real estate were valued at just under $8 trillion, about 40% as large as household financial wealth. At the end of 2005, real-estate holdings were $21.6 trillion, 56% as large as financial wealth. Just in the last five years, the total market value of residential real estate alone has increased by nearly $10 trillion.
New construction, initiated in response to high home prices, has reached unprecedented levels, and new houses are still hitting the market just as demand is dropping. Between 2000 and 2005, housing starts were over two million per year, existing home sales were over six million per year, and home-improvement spending hit $162 billion in 2005. All of this generated income for millions of brokers, builders, bankers, appliance dealers and construction workers, and kept the economy growing at a strong clip. But the housing construction boom can’t go on forever.
This incredible boom has been fueled in part by favorable demographics, low interest rates, a very liquid mortgage market with low down payments and borrower-friendly underwriting (option arms, interest-only, stated-income, etc.), a baby boomer generation with a special taste for housing, a substantial volume of foreign demand, and the poor overall performance of the stock market.
But beyond all these factors there is the simple psychology of expectations that is part of any speculative boom. These expectations can turn suddenly when alert home buyers get the sense that something might be amiss. […]
[…]
Buyers are waiting and low-balling. Sellers want to get a price increase of the kind they’ve observed in the recent past. The result is that fewer agreements are reached, and sales fall. If the housing market were like the bond market and all houses for sale were auctioned every day, prices would indeed fall precipitously. But they are not. The aggregate indexes based on repeat sales have decelerated markedly but are not yet falling.
[…]
As always, the future is uncertain. Many of the underpinnings of the boom are still strong, and the soft-landing scenario so widely promoted by economists and industry leaders is a possibility if the U.S. can avoid a generalized inflation, if long rates don’t rise a lot, and if the rest of the economy stays strong. But that possibility is not enough to give great comfort to all those who worry today about the housing market.
Unfortunately, there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising default and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected. Deterioration in that intangible housing market psychology is the most uncertain factor in the outlook today. Listen hard and watch out.
My wife and I have little choice but to buy in the next month or so. And on the comforting side, I’ve heard several reports noting that now is a good time to buy.
But I worry that if we don’t bid considerably lower than the asking price, we could get caught paying for a house that might actually decrease in value over the next couple years—a response to a speculators’ market that drove housing prices up way beyond their actual settled market value.
Our plan has been to buy an existing home—something built within the last five years—so that we can find extras and amenities already in place (landscaping, finished basements, garage door openers, some appliances, upgraded windows, sprinkler system, etc.). But I wonder, who is more likely to panic first, if at all: homeowners looking to sell while they still can? Or new home builders who maybe sense a coming extended soft market?
How far low below list does one offer in the current market? Should I buy sooner or later? Any advice or commentary is welcome.
Except for the naming of the new estate, which is already settled. We’ll be calling it “Irv” after the forgotten fourth Pep Boy, shot dead by a couple of Longy Zwillman’s goons for having supposedly “made eyes” at the New Jersey gangster’s moll.
Or overcharging for an oil change. I can never remember which.
(h/t Terry Hastings)
Jeff,
A LOT of the problem is that the really hot housing markets are located on the coasts (Boston, New York, Miami, San Diego, San Francisco, and Washington, DC all spring readily to mind). Denver (and surrounding communities) didn’t really suffer the huge price appreciation problems and speculation problems of the coasts.
That being said, there are a large number of folks in the Denver MSA who took out interest only mortgages or ARMs that the couldn’t afford, figuring they’d refi or sell before the initial rate expired. When they didn’t (or couldn’t) they were forced into foreclosure. Places like Brighton and Reunion (out by DIA) are suffering the effects now and people are taking whatever they can get.
Also, with all of the development in and around Denver, homeowners in growing areas have to undercut builders to get out of their houses. You can find really nice 2-5 year old houses (with lots of improvements – particularly finished basements and rear landscaping) in communities being developed for LESS than new homes.
Whatever you decide to do, use a Realtor. For buyers, there’s no charge and Realtors are required to act as agents for you. If you don’t like the one you’ve got, you can fire them without cause and without financial penalty.
New home builders may have a larger cushion to play with (namely, their profit.) Current homeowners trying to sell can’t really sell below their current mortgage. I say the worst thing is trying to buy a newer house. Most likely, the people paid top-dollar, and haven’t really paid much of it off.
I’m in the position of Home Seller … we’re going to try to put it on the market in a few months. Must. Move. From. Detroit.
Rent, rent, rent.
The housing bubble is just beginning to bust, and sellers are reluctant to admit their McMansions are worth less than they were a year ago.
“now is a good time to buy” – nonsense. Now is exactly the worst time to buy.
As they say in the stock market, “Don’t catch a falling knife”.
From your article:
Buyers are waiting and low-balling. Sellers want to get a price increase of the kind they’ve observed in the recent past. The result is that fewer agreements are reached, and sales fall. If the housing market were like the bond market and all houses for sale were auctioned every day, prices would indeed fall precipitously.
People are choosing to sit on houses and make payments for a year or more, rather than sell them for what they are really worth. It’s stupid behavior, but there you go.
You, however, (if you pay what people are asking now) could get burned if you had to sell in a couple/few years. So low-ball several places, and don’t be afraid to walk away from offers if the sellers don’t want to give you what you want. We went through several contracts on this last purchase, which is frustrating and a little stressful, but worth it.
Don’t rush. If you had to put stuff in storage and live in an apartment for a couple of months, the world wouldn’t end.
Builders rarely, rarely sell for less than asking price as they are quite invested in maintaining their price per square foot in the development. That’s been the case everywhere we’ve moved around the country, and was certainly true in CO.
The people who bought recently can sell for less, and unless they were idiots who did an interest only loan, they could even sell for less than they paid without having to show up at closing with a check in hand.
Jeff,
If you get pre-approved you should have the upper hand at this time. Since the Denver area is seeing a population growth your investment should be okay over the long term. Although you might feel some angst over the short term. I would suggest paying the extra money for a broker (a real estate agent that is on your side), they could save you quite a bit at the end of the day.
Good Luck,
Lloyd
Barbula is exactly right. Keep renting, don’t buy an asset that’s sure to depreciate in the short term. It could take a while for the market to hit bottom. Wait and be ready.
Depends where you want to live.
Are you looking to move out of the city?
I’d look at purchasing a piece of property that I liked and putting up a pre-fab job on it until I had enough scratch to have a house built.
Jeff, I’d suggest heading for The Housing Bubble Blog.
A great deal of information has accumulated there, so a few evenings of back reading will supplement scanning the daily posts. (The site’s search routine seems flawed, so use an elbow grease approach too.)
You’ll come away with a strong sense that this market has a long way to fall before it hits bottom, which won’t be reached for some time. The likelihood of precipitous decline is largely due to use of unconventional financing instruments, which have reached a level sufficient to put the housing market all across the country at enormous risk. Together with the magnitude of the price run-up during the past few years, the unprecedented financing aspect serves to separate the potential for a downturn from prior situations. Interest rates are not high by historical standards, and may not become so, yet massive disaster looms.
One other thing: my own seat-of-the-pants sense is there’s a recession coming, as the downturns in housing and other sectors ripple and echo through the economy. This will further reinforce the housing downturn.
Also, have your realtor pull all the listings in you price range that have been on the market for more than 60 or 90 days. Those folks know they missed selling during the summer months, which is the best time to sell a home. They are looking at sitting on the house for 6 months of fall and winter before things heat up again in the spring.
So low ball several/lots of them that would meet your needs and have decent resale. Somebody will jump.
word is working—and make sure your realtor is working hard for you. If they aren’t responsive, get a new realtor.
I concur. And if you absolutely insist on buying, buy something cheap with an eye on upgrading when the market tanks.
tw: Year, maybe two, tops.
People have been saying this for at least 3 years. So much for their brilliance.
If you need a home, get a home. Just don’t leverage your family beyond capacity.
See also.
That link conatins some good info from the Denver’s Economic Development Corporation.
Your home is not the stock market. Many of us confuse that. I bought at the wrong time thought I paid too much 15 years ago. If I hadn’t done that I could not afford the home I am in today. Worrying about a bubble in a median price home is a waste of time. You seem like you are buying a home for an extended period of time. Choose wisely buy something that willn’t require you to find a special buyer later and you will be fine. Don’t take all the money the mortgage lender wants to give you and you will not be overextended. Too many run on sentences, but there are always people saying you are better off renting. They are invariably trying to time a market. Most of us are not that smart. Would you time the stock market?
If you’re looking at your home as a home and a long-term investment, don’t bother to try to time the market. Just buy it at a reasonable price.
If you’re looking for a quick turn-around on your house, now is NOT a good time to buy.
I’ve experienced many a boom and bust. It sure seems like real estate prices should drop significantly. Nevertheless, all the pundits and the bean counters can’t calculate one thing–the human desire to own your own home.
If you’re not going to leverage yourself beyond your means, do it. Find a realtor who’s a “buyers agent” exclusively. Don’t fall for the crap realtors give out. Almost every transaction I’ve been involved with has been tainted with conflicts of interest from realtor scheming (despite their bullshit) to work both sides of the commission. In other words, they’ll work both sides of the trade whenever possible to the exclusion of the best deal for you. They’re whores!
Real estate is local, like the first poster said. Try to find a good realtor who can give you an idea of where the market is going in various places you’re looking.
Jeff,
If you are looking for something like I got – the house I will have to be wheeled out of to one of two places; the old soldier’s home or the graveyard – then just get it and don’t fret the short term.
It doesn’t sound like that is your situation tho’ – looking for a “starter home” so to speak. Then the best advice I have seen is from the funkychicken – grab a realtor and have them spray out low offers on anything you like. Someone will bite.
Rent? Crazy. Of course, you didn’t say how long you intend to stay in the home. If you only plan to buy a starter home and stay for a couple of years, sure, continue to rent. But if you’re looking to move into a community and establish yourself there over many years, then buy.
Find yourself a buyer’s agent who works for you. All other realtors represent the seller even if the house they sell you isn’t their listing. A buyer’s agent will be able to give you much more information that will help you determine how low you can offer on a house. This person should be able to look up tax records for you as well. They’ll be able to tell you how long the current owner has had the house and what they paid for it. That way you can do the math on purchase price, years of ownership, visible upgrades, asking price and what the seller will see in appreciation.
A house is worth what someone will pay for it. Nothing magical in that formula. How low you can go depends on the situation of the seller. Some people are flipping homes and need to pay back those 90-day notes. In the process they are trying to realize a ridiculous profit. Some people are selling a family home and can afford to wait for the perfect offer.
Buyer’s agent. That’s the way to go. Anyone else in the business will not be working for you.
TW: Ownership is freedom.
jeff is correct. I was going to write that if you don’t plan on leaving Denver within 3 years, renting is pretty dumb. We may not like the tax code, but we are stuck with it for the forseeable future. You might as well build up equity and get some tax benefit. It’s also fun getting to customize your home without worrying if a landlord is going to make you tear out anything you’ve done.
Don’t do an interest only loan or any of those other stupid things, and you will be just fine! The people who get hurt if the housing market slides are those who did some assinine 125% market value “home equity loan” and then bought a new car or went on vacation with the money. You don’t seem like that type.
At this time of the year, there are deals to be had in real estate. You just need to find a seller who isn’t tied up in the emotion of the price they get. Believe it or not, it may take a few attempts to find one. But find one you will! And carpets, wallpaper, horrible paint colors, and even lousy kitchen and bath fixtures are cheap and relatively easy to change.
Major John. Thanks
Major’s wife, ya know. We do become experienced hands at the moving and home buying things.
I started toward my real estate license, but then realized I prefer to have somebody else do all that work at crazy hours for me.
One last thought: Unless you plan to homeschool, you’ll need to consider the school system as well. It may seem far-off, but due diligence on the school will save you much heartache later.
I wouldn’t try to time the nadir of the housing market bust, but buying a grossly inflated and expensive commodity at the peak of a bubble is shear stupidity – regardless of whether you intend to stay there 30 years, or 2 years.
Rent, and invest the difference from PITI(principle, interest, taxes, insurance) in a nice bond fund. In two/three years you will be in a much better financial position, and the McMansions will still be there, only cheaper.
Prices won’t bust below replacement cost of the structure. Any speculation is in the lot value and the location has a lot to do with that. A new home from a builder is extremely unlikely to appreciate in three years (why would someone buy your used home for the same or more than they can a new one for from the same builder just down the road). Pre-approval, not prequalification, on your mortgage is a big negotiating advantage. You’re actually shopping with cash and can close quickly, giving you a leg up over others that aren’t.
The sagely negative warnings never fail to crack me up. A strong undercurrent to a few of them is “I didn’t make a lot of money in the real estate market, so these people that think they did are in trouble. It must be a devil’s bargain. The fools!”
The markets that were superhot will see price depreciation, as inventories are huge right now. But the key factors are:
1. A comparison of the average income in your area with the media price of a home, to determine how overvalued your market fundamentally is. Calculate the debt to income ratio a person would have to undertake given today’s interest rate, with a 30 year fixed. If its untenable (say, far above 35% or so), I’d be hesitant.
2. How much the area has appreciated, how fast, in the past few years. Overheated markets in CA are more likely to take a hit than Texas or Colorado.
3. The demographic trends in your area.
Buying a home (because you, you know, need one) and getting hit with a 10% dip in value over a year isn’t a catastrophic deal when your area’s growth is far outpacing the national average, and population increases are expected to soak up excess inventories within 2 years. The place should resume rational appreciation or hold value just fine if you live in a growing area. Then again, you could also rent for a year and wait for the settling.
Getting specific, these statements from funkychicken are both harsh & silly:
The amount of principal put into a conventional mortgage within the first few years is almost nothing, and would be a tiny sliver of any conceivable price decline (or appreciation). people who get interest only loans aren’t idiots, unless they plan to own a property for a long time or did a floating rate or negative amortization loan just barely within their means, in the anticipation – nay dependence – of seeing spectacular short term gains.
Otherwise, getting a 30 year fixed on a transition property is actually “idiot(ic),” or at least a reflection of mathematical laziness or acknowledged lack of discipline with money management.
It’s not stupid behavior, it’s waiting for demand to catch back up with supply. As they say in the stock market, buy low and sell high. This is actually behavior that’s beneficial for the economy, as it slows the downward spiral and bolsters the possibility of the “soft landing” narrative.
And compounding the “not stupidity” is a phenomenon called “renting it out,” which floats your investment during market conditions unfavorable to sellers. As individuals like Jeff opt to rent in order to wait it out, this drops the number of foreclosures and defaults to those who really extended themselves to a ridiculous degree, dependent on short term gains.
The folks advising to spray out offers are right, you never know when you’ll fall in a pit and crawl out with a chest full of gold. My youngest just bought his first home in Portland and happened upon a land baron that was selling all 12 of his houses ‘cause he was getting out of the business. Didn’t owe anything on them and was happy to share the wealth. My son picked up between 50-100k of equity overnight. If you make an offer you wouldn’t mind following through on the worst they can do is say no.
Bonds aren’t doing that well either, right now. A lot would depend upon the Fed, and reading those folks’ tea leaves is quite difficult.
Barbula,
Just curious: do you have a family, with kids? It’s one thing to take your advice when you’re an adult who enjoys playing the real estate game, but quite another when you have a family that takes a higher priority. Kids aren’t monopoly pieces.
You asked:
How far low below list does one offer in the current market? Should I buy sooner or later?
Good question, and the reason I keep talking about emotion. A house is just a commodity like anything else. You offer what you think it is worth. If you go much below 85% of asking price, an emotional seller is likely to get angry. See, you are commenting on their home not just a product they are trying to move. Shrug. That type of seller is likely to give you trouble during other negotiations, so just offer what you want, and the ones who boo hoo or freak out, you didn’t want to deal with anyway.
It’s been my experience that builders won’t come down on prices, or won’t come down much. What they will do sometimes if sales are slow is give you extras, like a fence, or upgraded flooring and appliances for “free.”
I’ll just copy/paste from finescotch as he is right:
Also, with all of the development in and around Denver, homeowners in growing areas have to undercut builders to get out of their houses. You can find really nice 2-5 year old houses (with lots of improvements – particularly finished basements and rear landscaping) in communities being developed for LESS than new homes.
OH, and for the doomsayers, they’ve been around for years. The Denver economy is OK? You should buy. Renting is paying somebody else’s mortgage and putting equity in their pocket. Which is fine if you are only going to be in the house for a short amount of time. If you will stay put, buy.
All of the above seem to be in agreement, so, the other hand:
– The longer you wait, the harder it is to get into the market, both from a qualification standpoint and from a “affording the mortgage and upkeep” perspective.
– People have been predicting a catastrophic housing bust for several years now. Depending on the market, it has either not materialized or not been near as bad as was expected. (For example, I traded up one year ago in a popular (but not CA Bay area) market, and, while my price as tracked by Zillow.com has been more volitile, it has trended upwards at or above the historical rate.)
– The longer you wait, the higher the interest rate.
– Don’t forget to figure in the tax advantages of owning a home, including deducting for mortages, home improvements, a home office and depreciation.
– Older homes with more charm and better craftsman ship hold thier value better than anything built in the past 5 years. Yes you get more sq ft per $ in newer homes but quality does have it’s own quantity. ( Again, my new house is smaller than my old, but of a higher quality and, I swear, it “lives” much, much better. Better neighborhood too.)
– Newer developments will tend to be much more level from top to bottom end. But, you could buy a beat up house in a really good neigborhood, one that would be above your reach normally then slowly fix it up. (This is bottom ending. You never want to top end, i.e. buy the best house in a neighborhood.) Small amounts of capital expenditure reap much larger gains on your investment this way, as you are using the neighborhood as a amplifier to your money.
-They aren’t making any more land, so general economic theory suggests that buying something that has a finite supply can’t be all bad, in the long term.
– Moral dilema (OK, snark): If you really believe in Bush’s economic program, is it consistent (non-hypocritical) to bet on a recession and housing bust? I mean, you have all that extra money from the tax breaks, shouldn’t you be re-investing it into the economy by taking on a mortgage? And, if you do decide to sit on it, aren’t you doing exactly what non-supply side economists say is happening with the surplus capital? So why do you hate America?
And, if anyone disagrees with the above, I bought in 1988, and have increased my purchasing power by 830%, , while my salary only went up 330%, so what do I know? Another look, I could cash out right now and have 450% of the original home’s purchase price cash in pocket (zero down on the first home).
The most important thing i can tell you because everyone else has given you pretty good advice is that when you do find a house and you make a bid, GO TO THE INSPECTION. And tell the guy who is doing it to be as anal as possible every little thing.
For example, my dad bought a house that had aliminum , instead of copper, wiring and never knew it UNTIL he had a problem. It was on his inspection report but he never read it.
Me, I used mine to drop the price of my house sevral thousand dollars in negotiations for things that i fixed in one day for a couple hundred bucks. I also got a new roof out of it.
This is probably a better time to buy a new house than an existing house that’s 5 years old, people who over-bought and didn’t re-fi their 5 year ARMS are trying to sell in droves but are selling at a price point that’s too high.
If you want my advice, pick a nice older residential neighborhood. Maybe a close-in suburb where the houses are 20-30 years old. Buy something that was built after the lead paint laws were put into effect, so anything from say 1978 on.
These houses are being put on the market by the ton by pre-boomers on the way to Florida or that shiny new patio home development on the golf course.
In a 20 year old house, you’ll get (hopefully) copper pipe, cast-iron stack. usually a new water-heater. Maybe (if you’re lucky) a newer AC and furnace. Lots of upgrades from new (crown moulding, cased windows) things that new and newer construction just don’t do anymore for reasonable money. The yard should be in good shape, if a bit overgrown, and look for a kitchen that’s been re-done in during the ‘90’s maybe 5-7 years old.
Bathrooms are gonna look dated and small, but you can redo a bathroom by yourself, or you can pay Joe Designer $25k to do it for you.
I’ve bought four houses over the last 10 years, one old one, one new construction and two from the early 80’s. In fact, I’m in an 80’s colonial now, bought it at the top of the market and it was still reasonable, didn’t pay extra for the brick front or the finished basement, or the surround sound wiring in the family room.
Dead quiet too. And I’ve got four boys AND work out of my house.
Advice is free, and usually you get what you pay for, but I’m sure I’m right on this.
PS: in older neighborhoods there’s always one terrific old guy who has every tool ever made and a fridge full of beer in his garage who likes your kids but hates all the other kids in the neighborhood.
TW:Much better than your current deadbeat neighbor.
Since a realtor’s commission is generally a percentage of the gross, isn’t there a built in incentive to keep the gross high in order to maximize commissions?
Our local assessor’s office has an online database that records all home sales within the county. The query search engine can search by price, location, date of sale, etc. You may be able to get a lot of useful information for free if your county offers a similar service.
Buy the most house you can afford, based on your anticipated monthly cash flow, and hold that property for the long term, as you would any other investment. The tax benefits (deductability of mortgage interest) of home ownership offset the risk that the market might temporarily dip. Besides, you’re probably not looking to sell in the short term, anyway, so why should you care if the market temporarily goes south. Over the medium and long term, real estate is ALWAYS the best investment.
It all depends on what you want to do with the property. If it’s primarily meant to be a house, not an ‘investment’, don’t bother waiting, just get it. If you’re trying to make your primary residence into an investment property, I’d do a lot more research first.
And feel super glad you don’t live in the DC area. We’re seeing new homes advertised for 50k or more less than the same development was selling for a year ago. And resale home sellers advertising “Buy our house, get our Ford Explorer FREE!” That’s how nutty the DC area is right now. Of course, even with the panic, a new house is priced over 400k at the low end.
tw: I’d rather sell my house in the DC area and move to Texas, but I appear to be stuck for the moment.
Gosh Bill. Sorry if I hurt your feelings. And having renters in a house is quite a different thing from sitting on something for 12 months because one didn’t get their exact price.
We own rental property in a military town. For military folks it often is better to rent.
I stand by calling interest-only loans stupid…but perhaps I’ll add the qualification that interest-only loans are stupid for people who aren’t very well educated about real estate and financing their real estate. Better?
I agree. Be at the inspection. Interestingly, Indiana does not license inspectors, yet inspectors there are very anal (thirty-odd page reports) and take hours. Here, where inspectors are licensed, the inspector takes fifteen minutes to walk through, nod, and say it’s fine. Two page report.
As for the buyer’s agent thing, yes, though you simplify the situation when you say the realtor represents the buyer. A realtor knows you will turn around and sell, and will usually do right by you in order to get that commission when you do sell. Get a good realtor, buyer’s agent or not.
Celeste. Ah, sorry to hear you’re in DC. We had several friends heading that way and the market there is nutty. That’s the one place I know offhand where my advice would be to wait 6 months to a year as it does seem it’s going in the tank big time. Our friends who have real estate experts in the family even chose to rent, and they have bought everywhere else in the country.
Family, no kids.
Don’t play real estate games.
Will sell and buy RE within 2-3 years after 20 years in same location.
While kids are not monopoly pieces, neither are they a good excuse to make bad financial decisions.
Anyway, my parents never owned a house until I had left, and I seem to recall plenty of other children who(gasp), had renters for parents. Most of them probably turned out OK.
All things being equal, it’s almost always better to own something than to rent it. But all things aren’t equal right now. RE is way overpriced, and due for a correction.
I forgot to answer your questions in my rant;
1) everyone else said get a buyers agent, they are right, do that.
2) buy what you can afford, only look at what you can afford.
3) buy neighborhood, but check local property tax rates, they can seriously put a dent in what you can buy.
4) Offer 10% less than what you want to pay, then negotiate, but always work through the agent. If they won’t negotiate, it’s not the house for you. ON’T GET EMOTIONAL OVER A HOUSE
5) pre-qualify, that way you’ll know how much you can afford. Plus, realtors like prospects who have already pre-qualified (as if it meant something, even if it doesn’t)
6) Have some earnest money to put up, just in case you find a deal and get into tight negotiations.
7) put as much as you can down.
8) don’t rush, if you don’t have a place in 30 days, get your realtor to find you a place to rent, don’t make a quick decision on something this big (did it once, cost me 10k, see #4)
That’s it for me, good luck. Let us know how it turns out.
Some brief thoughts:
1. If you’re going to be in your location for 5 years or more, probably OK to bite the bullet and buy.
2. If you can stand to rent for another year or two, there may be better deals to be had. Most articles I read indicate that sellers are at this point, still reluctant to drop their prices, and it’s pretty clear that many will have to in order to sell their properties. This process may take a year if not several.
3. If you are thinking about buying a condo I would definitely wait. That market is going to drop faster than the homes.
4. If you do decide to buy, I stronly recommend doing the standard, conservative 30 year fixed with a down payment. Don’t mess with any of the funky mortgages at this time in the market.
5. If you can’t get a 30 year fixed that’s affordable for what you want to buy, don’t do it. You’d be better off putting your money in some other investment as the house appreciation over the next decade is likely to be single digits, if that.
I agree with TerryH – go online and the check your county tax appraiser’s website for recent sales in any area where you have an interest. You will get all sort of data on who paid what for any given property, providing an undrestanding of current markert value in any neighborhood.
As for timing the market, forget it. If you want a house to live in, go ahead and buy one. You will likely be in it for at least a few years and depreciation will not be an issue. The people that get burned are those that are specualtors or those that bought a house and then had to move somewhere else (like an unexpected job transfer)not long after. If you aren’t one of those, don’t sweat it.
Andrew. Heh. Yeah, it’s all about the ownership society. Get with the program!
Far enough to separate the motivated sellers from the non-panicky sellers.
The first house my wife and I bid on after moving to Georgia, the sellers not only rejected the bid, they counter-offered higher than their original asking price. Seems one of them’s mother was in real estate—in California!—and couldn’t believe their own local agent had set a worthy asking price. Their agent was humiliated and apologetic over the whole thing, and I think they were still trying to sell a year later.
Meanwhile we found our present house, made a slightly low-ball offer that was promptly accepted, and we moved in the day it closed.
And that was during a seller’s market.
Moral: All that media blather about national real estate trends amounts to bupkis in any given buyer/seller relationship. Ignore the background noise and focus on the house you want at the price you’re willing to pay. Period.
Alot of excellent advice. In general I’d say be prepared to rent for the next six month to year but also spend that time looking to buy. You don’t want to rush the purchase with a deadline liek the one fast approaching. And buy for the long term, buying a house, anywhere anytime, and holding it for less than a few years is always a risky venture.
Add Total Energy Costs to your assessment of any property. This would include the efficiency of the heating system/insulation quality, the previous owner’s heating and cooling bills and your anticipated commute expenses. An energy efficient house was always a good thing, in the near future it may be really good thing. Our house, in north Idaho, is oil forced air heated. In the last two years our winter heating bill has gone from roughly $250 per month to well over $300 and I will not be surprised if it tops $400 this winter.
Absolutely.
And agents are parasites, I don’t care how nice they seem. Do not give the agent more than 5%, prefereably 4 or 4.5%. The standard 6% in this market is bullshit for what they do.
I’m in a similar boat. Renting now, need to move at some point soon, etc. My decision: rent for another year. Housing prices are going to continue a downward slide, and they’re still insanely high… etc. Best to wait, I think.
Um, Jeff G is the buyer here. The sellers he will deal with already have their own agent, and the amount of commission the agents will make was set by the seller and their agent.
If Jeff G doesn’t get a buyer’s agent, he is just trusting the seller’s agent as his own. If he gets a buyer’s agent he can make sure they are working for him. The buyer’s agent and seller’s agent will split whatever commission was negotiated between the seller and their agent.
And a good buyer’s agent is worth every penny. But you can’t be afraid to make them work hard for you. Get them to pull those tax and sales records. Get them to pull listings based on how long they’ve been on the market. Get them to call the seller’s agents to set up appointments. They also attend closing and make sure everything is kosher in the paperwork.
Buy what you can afford and what you are comfortable with. If it’s a home first, and not a stock to you, then do now what you are comfortable with and start living the dream. No one commenting that the market is going down or is going up is so sure of themselves that they’d sink their life savings into a bet on it either way. If you get an agent, get one who has 20+ years of experience, the agent market is full of folks who just picked it up during the boom, these were the same folks saying it’s a no brainer to do interest only loans (yes, I know that’s a good idea if you plan to sell before the entry rate expires, but these were pushed on everyone) so that their client would buy a more expensive house. The entire industry is flooded with incompetence as the boom enticed lots of newcomers to the game (realtors/loan offices/mortgage brokers/appraisers).
I bought 4 years ago in the DC area and really thought I was buying at a peak and was told then by the clairvoiant not to. I agree with a previous poster that the area is currently headed down, but am I shorting mortgage or builder stocks cause I’m sure? No. My house has doubled in price and is now heading down. Do I care either way? No, it’s a good family neighborhood and I never intended to sell before the kids were out of the house anyway. But man has it been rich watching everyone else move up to mcmansions and freak out over it all.
I don’t think you have to be in a rush to buy. It will only get better.
Neighborhoods (and developments) tend to be generational. At your age, with your family, you should be looking for an old neighborhood that is just turning over into a mom-pop-kids neighborhood.
I’d look for an old home, rather than a new one. You can always do all the other stuff separate (wiring, windows, roof, siding, etc.)
Top priority if I was in the housing market (aside from a trouble-free neighborhood for the child and preferably other kids around) would be heating issues.
As I understand it, the non-adult in question is still a ways away from first grade. No need to buy; rent, he’ll never know the difference. Low-ball for what you want, repeatedly, eventually you will get what you want. Just because you don’t “need” to deal, you are in control.
The buyer’s agent won’t cost you a penny, so this is true. Just don’t use their inspector or mortgage guy.
All this (and lots more)is available from zillow.com, free.
Jeff
I didn’t have time to read all the posts – sorry if this is redundant.
Wait if you can. If you must buy, buy an older home where the owners have enough equity that they can get out fast. Or consider a brand new home (see below).
I say avoid using a real estate agent. You do pay – they charge up to 6% and the seller pays the fee. But basic economics tells us that fee will be built into the price. I’ve bought and sold 3 homes in the last seven years – once with a full service broker, once on my own, and once with 1% realty (they only charge 1%). When purchasing with no agent I took the 6% off the price and saved that money (and 2% when using 1% realty – the sellers agent go the other 3%).
If you must buy now: The worst you’ll hear when bidding is no. No sense not bidding low.
The WSJ reported in the last couple of weeks that many new home builders are moving their homes at auction. And new home builders often have up to a 40% margin built into the price. If they need to move inventory you might be able to find a sweet deal.
Jeff, you’re getting great advice from a lot of people here. I would echo the buyer’s agent comments (this will also spare you any contact with the seller in many cases, so you can throw the emotionalism stuff out the window); definitely tag along on the inspection; go to http://www.greatschools.net to look at NCLB or state scores for the local elementary schools (note that some agents won’t give you listings by school district, so you may need to get those area maps from the school district itself); figure in local taxes; and don’t get emotional over the house yourself either—great if you love it, but be prepared to walk away from anything. Avoid sales where your realtor is the listing agent like the plague. Those guys’ll turn on you in a heartbeat. Don’t even have them show your their properties.
Real estate is a fundamentally geography-specific item, obviously. What is a bubble in some places might not be in others. Check with the local economic development authority, chamber, school district, etc., on population and income growth in the area.
As a homeowner of 20 years, I agree with Jeff and Major John re the folly of market timing. The cycle repeats itself every 10 years or so no matter what you do, and you still need a place to live. Illegal immigration is slowing down (everyone has already left Mexico) so that will slow prices down. (I’m sure that’s why politicians like immigration–more property taxes–but that’s another post.)
Rule number 1: buy a house you would want to live in whether it appreciates or not in the next five years.
Rule 2: Buy the worst house on the best block. You can always paint and landscape and recarpet. You will want to do that anyway, and Home Depot will be there to clean out your pockets…er, help you. If you buy a new house with lots of extras, remember you will be paying interest on those extras for 30 years.
Rule 3: Stay away from interest-only or “creative” loans. Who needs the pressure?
Rule 4: When you find your house, you’ll know it, just like you knew when you found your true love. Have fun!
Advice on your mortgage:
1. Do a 30 Year Fixed Rate
2. Don’t pay points or origination fee for a lower interest rate. It takes at least 5 years to recoup these costs in lower payments. Right now you can get 6.125% with 5-20% down.
3. Have the seller pay your closing costs & prepaids. Your realtor can do this later in the process after you negotiate your best price by increasing the sales price that much. In this way, you are essentially financing your closing costs, and it only increases the payment about $6 per $1000 added.
Screw the market, buy a house you want to live in indefinitely and can afford(they’ll take me out of here feet first).
I’d hold off for a bit on buying, Jeff. Not because of any predictions about the real estate market, but because you’re in a position that if you commit to buying now, you need to have a seller accept your offer in a week or two in order to close by early October. That’s just not enough time to find the right place.
If you don’t want to rent for a full year, see if some other landlord will let you go month to month, or maybe sign a six-month lease. Given that we are about to enter the slow season for renting, you should be able to find someone who is willing to work with you in order to avoid having a property empty all fall & winter.
Good luck. I just closed on my first home about 3 weeks ago. The whole process of buying is quite an experinece (in ways both bad and good).
Jeff,
My only suggestion is get out there and see as many houses as you can and keep a list of number of bedrooms, baths, lot size, and price. It will become clear where the price range is for what you want. Then bid low, but be patient. It takes time to find the right house. Consider going into a temporary housing (with your stuff in storage) to give you more time to look and relieve the pressure to make a quick decision.
If you do decide to rent, Jeff, my Dad has a couple of places in Centennial. Let me know and I’ll put you in touch with him.
That, and I know a really rather decent realtor. She’s a friend of my brother’s and is doing some scouting for us.
If you can put 20% down with a fixed 15 yr mortgage, you’ll be a happy man before you know it.
Yes, and zillow.com is good, as noted upthread. I’ve used that to scout around in Centennial, myself. Zillow, however, may tend to lag the market, so you’re going to want to rely more on the more recent sales data than on zillow pricing.
I doubt you’re going to see prices dip much; what’s more likely to happen is you’ll see the emergence of some good deals as a result of speculators being burned, and a few isolated cases of people having to settle so they can relocate. I did hear that Denver’s leading the nation in foreclosures, though; no idea if that’s really true.
Also don’t know if this is applicable to Denver, but in Orlando there’s been a plateau due to the consumption of inventory. There’s so much movement into Orlando that the boom is expected to pick up about where it left off, once the inventory is consumed. The reason for the inventory is complicated, but it has something to do with speculation. Basically, speculators would buy new construction far in advance of the completion date. What’s happening now is those who are getting stuck are having to slash price and only realize a fraction of the expected gain.
Make sure there’s a nice bit of shade and a wading pool for the armadillo.
My advice….rent for a while.
Even in the hottest or coldest of markets, there will be pocket communities wherein the market is hotter or cooler than the surrounding areas.
A few important notes to consider when shopping:
You have a child, so if you intend to stay put for a few years, the schools should be of concern.
Also, transit time to/from work should be considered. I know lots of people who bought that ‘fabulous’ new home just twenty miles away who now spend two hours a day commuting…time they could spend with their family. And…God forbid there’s an accident along the path…you can forget getting home in time to catch Katie’s new gig.
The neighbors. Is it a transient neighborhood; military, college? Do all the neighbors work in the same industry? If so, then a downturn or a relocation could mean everyone selling at once which would result in a lowering of your property values. Your property value is only a good as the selling prices of your neighbors homes.
Is there something unique about the neighborhood; waterfront, waterview, great parks or cultural access?
Condos…if you consider buying, try to think of what sets that particular condo apart from the other hundred or more in the development. If you go to resell, you don’t want to be in a bidding war to see which seller can go lower.
and…condo fees. Some fees are utterly ridiculous, like the $400 month fee for exterior maintenance in a community with mostly paved surfaces and very little landscaping. Of course…there’s a dock facility…for canoes.
How far are you willing to live from friends and family? My best friend is now thirty miles away, just in the next town, and we now see each other no more than once a month because it’s not like we can just swing by on our way home from work.
Don’t buy emotional. It’s true…or was in my particular circumstance, that you know your home the moment you walk in the door. You may know that the home is perfect for you, but unless your willing to stay put for the years it will take to recover any emotionally heightened $$ offer, just say no.
Basically, there are far more important concerns than whether the housing market is moving up or down. The truth is that nearly everyone has bought a home in either an upturn, or a downturn, and most people end up the better just simply by taking the leap. In an upturn, the houses cost more, but the interest rates are generally lower. As interests rise, the house prices tend to drop. Unless your flipping, it’s a wash over several years time.
Rent for a few months and do a TON of drive throughs and open houses. Drive through during the workday, at night and on the weekends. Look for children playing in the yards. Look for flooded streets after a heavy rain or after a melt.
And then, go with your gut, knowing that you’ve done that all you can to make the best decision possible.
You won’t believe the feeling the first time you pull into your own driveway, turn the key to the front door, and then close it behind you.
If you don’t make carpet angels sometime during that first night…it just won’t feel like home.
Good luck!
Jeff, As a long time lurker and having been entertained for free by you, I will give you a great deal on your mortgage as I am in the Denver Tech Center. Contact my e-mail if you are interested.
Judd
I’ve been reading Patrick’s Housing Crash Blog. I’m also a renter, who has no hope of buying a house in a low crime area in and around San Jose. (My problem: I moved to the California from Europe in 1997 and then to the Bay Area in 2000. Prices were so high then I couldn’t even begin my climb up the housing ladder.)
My conclusion is that if a relatively well paid engineer with a Ph.D. can’t afford a house, then most people can’t (unless they are leveraging equity that built up over the period of the housing boom, roughly 1997-2006). I do believe we are seeing the beginning of a correction in various markets, including Miami, Las Vegas, San Diego, Denver, Boston, etc. If a general correction is starting to take place, the best thing to do is to procrastinate. I’m holding off any decision until 2008, at least.
TW: At least that’s my opinion today
FYI
http://www.zillow.com
I just sold my father’s home in NJ.
Recent experience suggests:
1) Realtors make nothing unless there is a transaction. Jacking up the gross doesn’t get them transactions.
2) A transaction is different from trends and averages. Whatever the trends, it is your particular transaction that counts. All flipped pennies do not land on their edge, even though the law of averages says they must. The house you select should have attractive resell potential, so that when it comes time for you to sell; you are one of those that make a transaction, not one that gets stuck inflating the average.
3) Get and pay attention to the inspection; use it to cudgel the seller.
4) You are not dealing directly with the seller, but with their realtor. You can’t insult a realtor. They’ll let you know what the seller can’t or won’t accept. Don’t be afraid to submit it even if the realtor has doubts about it. It’s the realtor’s job to coddle the seller, not yours.
5) A buyer’s agent should be able to run “comps” for any prospective property you might be interested in. The comps (comparable transactions) should be examined for reasonableness. A realtor can stack the deck by giving you incomparable properties as a comp (uncomp comp?)
6) Don’t trust: verify
tw: In real estate it’s about location, location, location. It’s all about the areas you choose.
Jeff,
Considering you only have 30 days, try to rent for the near future (3 to 6 months). This will take the time pressure off. Even if you found a house today, it could take as much as 30 days to close. No need to rush.
Another resource for homes is bank foreclosure and repossession. If the bubble burst in Denver, there are likely some homebuilders who got caught in the pinch. You could buy a completely new home at a very reasonable price since the banks will be happy to settle at cost (what the home builder financed on their construction loan) without the markup. Contractor markup on new home sales ranges from 20%-40%.
The same goes for homes that are not completed (lacks paint, trim, final flooring, doors, etc). The banks will sometimes lose some money just to unload the liability. It’s more difficult to sell an unfinished house. That obviously depends on how much effort you want to give. You could buy the home from the bank (and defer the realtor cost) and then receive prices from a qualified contractor to finish the work.
At the end of the day, you could have a new home for 60%-70% of what you would have paid otherwise.
This isn’t speculation. I’ve done this before.
Jeff,
I second the “Worst house, best block” suggestion.
As you walk through existing houses, don’t worry about superficial stuff like painting. But, do note major improvements that will need to be made (carpet, deck, appliances). Make your bid accordingly.
I also second the “10% below what you would pay” suggestion. Know the most you are comfortable spending (might be what you’re pre-qualified for) and REFUSE to spend a dime more.
It’s a buyer’s market pretty much everywhere, so sellers can be creative with their incentives. A popular one now seems to be paying for the buyer’s closing costs. That keeps the transaction price high but lowers the amount of money the buyer needs at closing.
Finally, check out http://www.coloproperty.com. It’s certainly not exhaustive but it should give a good idea of the housing market depending on where you’re looking.
An article in today’s WSJ titled “Upsides to the Housing Slowdown,” concluded with the following advice:
The best advice I can give is to buy as much house as possible on a 15-year note, then appreciation doesn’t matter as much since there is extensive principle reduction immediately. Also, the payment on a 15-year is not double the 30-year but about 1.5x’s the amount. I wish I had realized that earlier on because you are so far ahead of the game in 5-10 years than you would be on a 30-year note.
Judd
Absolutely. The amount of interest you pay on a 30 year note will make you sick to your stomach.
T/W cost Freaky.
John Lynch said
3) Get and pay attention to the inspection; use it to cudgel the seller.
LOL shame on you
Excellent advice throughout your post, BTW
Great advice everybody! I don’t think one single possibility has been missed so Jeffy must surely have a far better grasp on what to do than he did before he asked. I’m a contractor and my wife is an agent, so I’m gonna chirp up myself
1. The government still subsidizes home ownership so you might as well take advantage
2. Buy the house to live in for at least ten years. Long term trends in real estate are very, very stable.
3. Do not under any circumstances buy a condo or co-op.
4. Most real estate agents are scum. Or stupid. Trust nothing they say, whether buyer’s broker or not. The onus is on you to perform due diligence. And above all avoid the “ladies who lunch” gang of dilletantes.
5. Buy a house you like but don’t fall in love (until you close) and always be able to walk away from a deal.
6. Don’t worry about insulting the seller. This aint no tea party.
7. If you’re at all handy, think older. But don’t overestimate your ability. If you’re not, I’d look brand new. Second owner of a 5 year old or less house is often not a good place to be and the warranty is gone.
8. Never, ever buy the most expensive house on the block. Pick something low to mid.
9. Have fun! It’s a whole different ball game when it’s yours.
Yet another voice heard from
Corollary: Don’t believe the inspection. Inspectors sometimes don’t see what’s right under their noses. Case in point: my house. From where the inspection sticker is attached in the attic, you can clearly see where an entire wall of the house is not attached to the roof, which is a code violation.
TW: don’t get pressured into buying too hastily.
Finally, there are a LARGE number of first time buyer programs out there from a lot of different sources. Investigate your options.
Oh…and the 15 year vs. 30 year note…
Go with the 30 year with no pre-payment penalty.
If times get tough, it will help to have a bit of leeway on the monthly payment. If you have extra, put it down on the principle and you can effectively create your own payoff. Sure, the interest rate will be slightly higher on the 30 year, but there’s little chance you’ll hold on to the same mortgage for 15 years, let alone 30.
As for the worst house on the block…it’s a good idea, but not always practical. With a family to consider, do you really want to move into a home where you have to start worrying about the additional costs associated with the time and money it takes to rehab? Slapping paint on the walls and replacing a few light fixtures is one thing, having to rope off an area of construction materials to keep your son safe is another. Besides, the ‘worst house’ applies to those interested more in profit than pure enjoyment.
Buy a house in the middle of the market. One where you can move in and begin to enjoy it immediately. Unless you’re a real handyman, prepared to deal with plumbing and *egad* electrical issues, the fixer-upper route is not for the first time buyer.
Jeff,
Long time luker here who has lived in Denver for 20 years. A few comments:
Colorado is the forclosure capital of America, Aurora is the foreclosure capital of Colorado. In the lower price range east of I 25 (<$300,000), there are some really good deals to be had as homes are sitting on the market for 6 months to a year. Denver’s boom started in 1995 and ended in 2001 with the tech/telecom meltdown and has been pretty sluggish since. The housing bust that we are hearing about is mainly on the coasts. Denver is a very wierd market right now as some areas are strong (wash park,Lowry, pretty much anything central in a yuppified area) while the suburbs go from OK on the west side to downright disasters out east. If prices are going to fall in Denver, the cental market will take the biggest hit because that area is the area with the greatest appreciation. The bubble burst in the burbs 3 years ago If you are planning on living in the house awhile do not try to time the market. The best time to buy a house is in the late fall between thansgiving and x-mas as the sellers are really desperate at that time and are willing to deal. If you find one of those sellers, really stick it to them!
Whatever you do, Jeff, be sure not to be in Denver Public Schools district.
I’ll second that emotion. I don’t mean to offend anyone here, but more than often that’s the truth if you are on the buying end. On the seller’s end, sometimes you need the exposure that the agent can offer (a heavily viewed website). The ONLY time I use a realtor is when I’m selling, and it is on a ONE TIME SHOWING basis where I pay 2% or less for realtor fees.
FOR SALE BY OWNER websites are everywhere these days. This is another way to avoid the realtor and save 5% to 7% on the buy price (which the owner will not have figured in). If you go that route, you’ll need to be more diligent researching home prices in that area (Assessor).
Jeff,
On the “worst house, best block†school of thought, check the FSBOs for people trying to flip houses.
If you’re lucky, you’ll find one of the thousands of first-time entrepreneurs trying their hand at flipping houses. The more inexperienced they are, the more you can bet that their credit cards are maxed out and they have no way of paying the next mortgage payment.
Bid low. Deal direct.
If the seller doesn’t react to your offer with rage followed by uncontrollable weeping, you bid too much. Point to every flaw in the house, regardless of how small. Shake your head and roll your eyes at the appropriate times. Remember, your mission is to simultaneously obtain housing while destroying a fellow human being.
Have fun. The deal isn’t done ‘till the money changes hands.
At the closing, it will be you, your wife, your attorney, the seller, his wife and his wife’s divorce lawyer. You are fully authorized to inflict some last minute pain and suffering by demanding an adjustment for some imaginary defect. Make the seller bark like a dog (tell him it’s a religious thing) and heap on anything else you can think of.
It’s a buyer’s market – and you’re the buyer.
If you enter this experience as if every home seller is liberal, you will not only save money but enjoy doing it.
I can’t comment much on pricing because I live in the Los Angeles area. Bought almost 6 years ago but still kick myself for not buying something newer (’64 built).
I will say that after you buy the most important thing to remember is: you OWN it. Drainage/grading issues on the property? Buy a shovel. Electrical problems? Find the panel & buy some pliers. Sprinkler & planter issues? Buy some gloves and find the local gardening shop or nursery.
Even if you can have the work handled by contractors you will still need the basics: a good ladder, hand tools, tape measure, etc. You’ll eventually get used to your wife wanting more holes in the wall – I mean pictures on the wall.
You’ll always find stuff years later that will have you scratching your head, but definitely look for the important stuff like water & weather penetration issues and stupid electrical tricks. With a newer house you won’t encounter many aging problems so hopefully anything that will cause problems later will be obvious.
And when the kid(s) get old enough, remember to buy an extra shovel.
jwest,
You are delightfully clever AND cruel – any chance we could hire you?
Are telling him to act like a Jooo?
jwest, that’s the best advice given yet.
Had to come back and remind you that within one year of buying said manse the following things will happen (in no particular order):
New Baby
New Job
New Car
AC will go
Washer will overflow
Septic will go or sewer will back up
Fridge wil go, freezer will defrost while you are out and flood kitchen
Dishwasher? Guess what.
three words: School Bond Issue
Gutters? How come the house doesn’t have gutters?
Reassesment
You need a sidewalk!
All of the pin oaks in your yard are diseased.
You are diseased (god forbid)
Remember the fireplace the inspector said was fully functional? Guess again.
Someone lost control in the snow and plowed your lawn.
And many more!
And if you can only do 10% down, see if your credit will allow you to do a 80/10 mortgage. You won’t pay PMI, which is robbery, and the 10% note is only a couple of points higher than your primary.
I did an 80/10 w/ a 15 year note and got a wonderful place. And my mortgages are ~$100 more than I was previously paying in rent.
Which brings up another point. In all the money you throw away in rent, you could accually absorb a small decrease in the price of a home over the short term. And if you live anywhere long enough, your home will appreciate.
… And what everyone else has said…
Got burned w/ a prepayment penalty on my first car. Never again.
This could be a fun project provided you follow JWest’s advice and do your homework.
.
No problem, they’re unharmed (my feelings).
And interest only loans are good for the nominally educated and above, yes. In the correct circumstances.
Regarding this following advice by another commenter, affirming trying to get a 15-year note vs. a 30-year note:
It’s not the amount of interest, it’s the pace at which you pay it, what rate it’s at, and what your capital can be doing otherwise that scores a greater return.
A common thread through all of this “common sense” financial advice (get a 30 year fixed!) is a sort of conservatism 20 steps removed from putting money under one’s mattress.
Yes, if you don’t want to worry about aggressively growing capital and savings, and simply want a simple, sound financial path, it’s not terrible advice to avoid debt and minimize interest.
But if you’d prefer something a bit more ambitious than working like a bee until you die, slowly socking away 10-15% of your income, paying down your mortgage and clipping coupons for a special Friday treat at the Sizzler, it’s not a bad idea to pay very close, comprehensive attention to the rates at which your money goes out the door vs. the rates at which your various investments bring money in the door. There comes a point where money is so cheap (as it has been in the past few years), it makes sense to borrow and invest (widely) as much of it as you can handle.
Get a full inspection, including one for mold (an overblown “defect” but it works re negotiating the price downward when you inevitably find some)
Figure out what you want and what you will pay and stick with your price.
Be devious. If you know the seller is desperate but greedy have a friend go in, act excited and sound like he’ll pay full price. After he drops out, show back up with a lower bid and watch them talk it. (No, I never did that, but I know a pair of goniffs for whom it worked.)
Bill makes great sense. I would do a 100% loan with PMI paid by the lender(LPMI). You can get this for 30 Year Fixed @ 6.75% without points or origination without prepay penalty.
If you want to learn lots of new skills–and have an excuse to buy lots of new tools–do what we did: buy a house built in 1899, then rebuild that sucker. 3,000 square feet for ~$40k, 3 1/2 miles from downtown. I love my commute.
On the deal end of things, I really like having a buyer’s agent. Don’t be afraid to lowball on the offers; the worst they can do is say no.
(I do that to car dealers all the time, only in an extreme fashion, like offering $50 for a new Mustang. Cars or houses, doesn’t matter, it helps focus their mind.)
Bill, that is great in theory and works in certain markets. The problem with that right now is the spread between high-risk ARM’s and fixed loans is so small that the reward is not as great as it has been in the past when ARM’s were much lower than fixed loans. I am a big proponent of your theory, but right now it doesn’t cost that much to have a fixed loan compared to an ARM, or interest only or pay-option ARM. The risk greatly outweighs the reward in the market right now.
Judd
My first instinct would be to rent right now. You’ll lose the difference of writing off your mortgage interest for the year, but until Jan 1 that’s not a whole lot anyway. The risk in buying now is to pay right at the peak price while it’s beggining to fall. If you buy a house now and the price falls you could lose thousands rather than saving thousands, and it’ll be years before you have any equity whatsoever in your home.
If you do want to buy a home and you feel adventurous, try buying a foreclosed property. A lot of people are getting foreclosed upon right now, so you can totally score at the auction. The only catch is that you usually need a cashier’s check for the full amount of the house when you bid. Also, you’re not technically allowed to inspect the home before the auction, and it is sold “as is”. You can try creeping around the site and talking to the owner or the neighbors, but soon-to-be former owners aren’t usually helpful. What the hell, you only live once.
TW: moving. Hey’s isn’t that ironic? Actually, no, it’s a coincidenc.
I agree with Judd regarding the ARM vs. Fixed part. Not enough of a difference in the current market to justify the risk. It may not feel like it, but rates are still low. The rates of 2003 & 2005 may have been aberrations.
If you have time to invest in sweat equity, you could buy a lot, design your house and buy a precut “kit” log home. Build it yourself or act as contractor and sub out stuff you don’t want to mess with. It can protect your investment from some of the wilder market swings and give you way more equity for the buck. Experience helpful but not necessary (if I can do it, ANYbody can). The downside is pulling long log splinters out of your various buttocks for years to come, but still. . .
Purchasing a new built home or a home built within the last 5 years: who built the home – skilled labor or migrant workers? Demand was such that short cuts were taken. I’ve read that some communities didn’t have the staffing to oversee the inspections to make sure the homes being built conformed to building standards. Builders have reputations. I’d certainly ask a seller to provide an extended warranty (insurance wrapper) on the home to cover unforeseen failures within the 1st year. Make sure your home inspection, which may note everything under the sun, doesn’t void a warranty. (In our neck of the woods, it’s the failed septic systems.)
Realtors: Seller’s contract with a listing agent who then split the comission with the buying agent. Unless you’ve signed a buyer-broker agreement, the buyer’s agent works for the seller.
If you look at FSBO (For Sale by Owners), these sellers may not be agreeable to paying the buyer-broker fee, typically 3%. If the value is there, buyers of a FSBO will increase the negotiated purchase price to include the buyer-broker fee. If the value is not there, the buyer-broker fee is paid in cash. Before you sign a buyer-broker agreement, discuss how you are going to handle properties you find on your own.
With Realtors, like most professions, its the 80/20 rule. 80% are worthless. 20% can and do bring value to the transaction.
Also, having now been a homeowner for seven years, I’m really starting to think about condos. Sure, you have the association nazis, and the fees, but what you don’t have is seeing your vacation funds suddenly burnt up by a dying tree, a foundation crack, a dead furnace, a dead heat-pump, a dead water heater, water damage around the toilet, termites, a backed up septic tank, faulty wiring, and several other unpleasant surprises. You also don’t have to cut the grass, paint the house, weatherproof the windows, clean the gutters. Most importantly, you’re generally not allowed to make major changes that involve the exterior of the building, which will save you from the shame and frustration of diy unpleasantness.
I have been looking for a house in Denver for the past several months, so maybe I can add some specific insights (or maybe not—you get what you pay for).
The Denver market seems soft, at least for older centrally located houses such as those I am looking at, and houses are taking a while to sell. In the price range I am looking at most of the houses that were around 4-5 months ago are still around, and some have dropped off the market once their six month listing agreement expired. Others have been monkeying with the price, withdrawing it then putting it on the market again, etc., for a very long time (12-18 months).
Many of the recent listings are over-priced according to comparable sales we have looked at. It seems that people are not yet reacting to the softening market and pricing their houses reasonably. They think we are in a real estate boom or something, when most of the boom passed by Denver. For that reason, I also do not expect a bust in this market—more of a flat line for a while, but sellers seem to be pricing higher than they should.
A realtor (mandatory in my view) can tell you how long a house has been on the market, when and how many price adjustments were made, and so on. They can also tell you how much the seller paid for the house and when, and what mortgages are on the property (mortgage history can be confusing with refinancing, though).
I would suggest taking your time, getting a short-term rental, and getting a realtor. Look at a bunch of houses, pull comparables, and look at the mortgage history. You can also see if the person has bought another house already, which means they are carrying two mortgages. if you find a house in one name, google the name and address to try to find a spouse name. Then see if the spouse shows up at another property. That indicates divorce or two mortgages, and either one means a motivated seller.
After doing your homework, make an offer at the low range of what comparable sales indicate is reasonable. Just take your time and remember you have plenty of it and there is a huge inventory of houses on the market right now.
Whatever you do, DO NOT GET EMOTIONALLY ATTACHED TO A HOUSE. Easier said than done once you make an offer, but do try. My wife is hopelessly attached to a house where the seller has been sitting for over a year without selling but is too stubborn to get reasonable. It really sucks.
Final words of advice—get prequalified if you can, get a strong lender letter saying you are prequalified, and, like others have said, go to tehinspection and pay attention. I don’t get too picky, but I do draw the line at significant repairs.
Good luck and good hunting.
Jeff,
Once you have taken the seller like a Viking, it’s time to finance.
Let’s face it, 30 year fixed mortgages are for pussies. You’re not going to pay this (or any other) house off in your lifetime. So, what’s the best option?
Live well. This ain’t no dress rehearsal.
If you’ve followed my purchasing advice, you will have a house that will finance for more than it appraises at. Take the money. Finance 125% of the cost of the house, furnish it and blow the rest on a nice vacation.
Don’t pay more than you have to.
Choose an interest only adjustable rate loan and roll with the punches. It’s like going to Vegas every time the Fed meets. Sometimes you win and sometimes you lose. What you ultimately want is the maximum amount of spendable cash left in your pocket at the end of each month.
But…but….what about my retirement? Shouldn’t I try to pay the house off for that?
Duh. Let the market build the equity while you enjoy life. Your retirement will depend solely on the amount you and your wife inherit – unless you get a book deal. Life is too short to worry about the piss change you will be banking in the first 10 years of principle on a mortgage.