The housing crash has changed the rules for home buying.
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The 2008 financial crisis that caused the housing bubble to burst still has markets reeling and slowly digging their way out of depressed home values, foreclosures and shadow inventory. But other markets have been able to bounce back more quick and bidding wars are breaking out.
When it comes to trying to time the housing markets, experts wish you luck. “The rear-view mirror is the only place to see peaks and valleys,” says Larry Foster, senior vice president and regional manager at Long & Foster. “Real estate is a hyper local thing—some places are suffering and may not have hit bottom.”
In some markets houses are cheap and rents are high because residents are more interested in renting than owning and there’s a shortage of inventory. If you’re trying to determine if you should rent or buy in the current economic climate, experts suggest evaluating your financial situation and your long-term goals and career plans.
Record-low interest rates are attracting homebuyers, with Freddie Mac reporting a 30-year fixed mortgage rate sitting at 3.53% as of July 19.
Beyond evaluating your finances and long-term goals, experts say why you want to buy a home is also important. Don’t just buy a home because you expect it to appreciate, warns Daren Blomquist, vice president at RealtyTrac, buy because you want to put money you would have spent on rent into a home. “We’re reverting back to old-fashioned sensitivities on why you should buy a home. You need more money, and it’s not a get-rich-quick venture that we saw in the bubble years.”
Before purchasing a new home, experts recommend considering these five questions before making the leap.
Question No.1: Do you have at least 20% saved for a down payment?
Experts agree that buyers should put 20% down on a home purchase. “The new rules for the new market—these are the old rules we used to follow in the 70s and 80s,” says Michael Corbett, Trulia's real estate expert. “You put 20% down, you hold the property longer term, and you don’t overspend.”
Your down payment will determine the size of your mortgage and the amount of your monthly payment. “You really want to put down enough [money] to manage a payment,” says Michael Goodman, certified public accountant and president at Wealthstream Advisors, Inc.
Question No.2: How long am I planning to live in this house?
Don’t buy unless you’re planning to stay in the property for five to seven years, says Corbett. “Really, we don’t have a lot of concrete stability yet. You want to give yourself a little bit of a safety net.”
The longer you live in your house, the more likely its value will increase. Foreclosure prices are still trending downward in some markets, says Blomquist. It’s a good sign when foreclosure prices increase since other home prices will be trending higher as well. “We’re getting close to a bottom in many markets, but [we’re] not quite there yet on a national level. We’re not going to see sustainable home price appreciation for another couple of years.”
Home price appreciation will help you recoup your initial investment when you sell. Since buying has a lot of upfront costs, to include a 7% commission to the real estate agents, in order to break even, your house value would have to increase at least 7% by the time you sell, says Corbett.
Question No. 3: What are the true monthly costs for owning a home?
The cost of owning a home extends far beyond the monthly mortgage payments. “Add in about 30% more to cover the full price—taxes, insurance, hazard insurance depending on where you live, HOA fees for condos and general maintenance that you wouldn’t have when you’re a renter,” says Corbett.
Other expenses to consider are whether you’ll have increased commuting costs and, if you have children, whether they’ll attend private or public schools, adds Goodman.
How much you spend on your mortgage payment depends on what else you want to achieve in life, such as long term savings goals like retirement and discretionary savings goals like vacations.
Depending on your salary and goals, Goodman suggests keeping housing payments between 25% and 50% of your income, with a higher percentage of income for when your only goal is your house. When you have a larger monthly payment, find places to make cuts in your budget, he says. Even though you may want to spend more of your income on your mortgage, you still need to qualify with a lender for that payment.
There are benefits to owning that will affect your tax liability and, ultimately, your budget. “The tax impact is huge,” says Goodman. Look at your tax incentive to buy and, if you have difficulty reviewing these on your own, consider seeing an accountant to understand how your tax liability will change.
Question No. 4: Do you have an emergency fund on top of what you’ve saved for a down payment?
Goodman suggests having about six months of expenses saved before buying a home. If you have a steady income, a slightly smaller reserve would probably be sufficient with a larger reserve of more than six months of expenses being more suitable for people with unpredictable incomes.
“Your emergency reserve shouldn’t change if you buy or rent but should match expenses,” says Goodman. “You have new expenses that come up when you buy, and you have to factor all those into your budget.” As well as having a down payment and emergency fund, Goodman suggests having additional cash for renovations, projects, and moving costs.
Question No. 5: Do you have job security?
Experts suggest renting if you don’t have job stability. “The nice thing is that we’re in a safer buying environment with much more stringent lending practices,” says Corbett. “Banks have to qualify someone for worst case scenarios.”
Even though buying may be attractive at the moment, renting does have some incentives. “If you have a [rental] deal that’s so good, stay in your rental but take the difference and save it so if your deal goes away, you have savings,” says Goodman.
Buying a home is a big decision. “There are a lot of markets where it’s cheaper to buy versus rent assuming you have the capacity to qualify,” says Blomquist. “Homeownership isn’t the American Dream for everybody, and it’s okay to rent.”