Q: With housing prices dropping, we’re hoping to buying our first house. Is now a good time to buy? What do we need to do to avoid the housing crisis?
A: There are two issues here. Is it a good time for anyone to buy a house? And, is it a good time for you to buy a new house.
Generally, any time is a good time if you have the money and you plan to stick around for 5-7 years. The longer you plan to stay, the better.
Although the “housing crisis” may cause some homes to depreciate, these foreclosures are different from a natural disaster which would actually destroy homes. Instead, for every foreclosed home, “one family moves out, and another moves in,” according to economist Steven Landsburg.
Multiple foreclosures nearby could significantly affect your house’s value, so you shouldn’t count on appreciation or buy a house without a full down payment. A home should be a shelter first and an investment a distant second.
How to tell when you’re ready to buy a house
You’re buying for the right reasons. Although a house might turn out to be a good investment and some people do invest in real estate, for most of us, a house is a place to rest our head. You are much likelier to be happy if you buy a house for the purpose of shelter and you stay in it at least five years.
You can afford the house. Houses are expensive. They cost a lot up front, they cost a lot to maintain, and your mortgage payments are very much like rent payments to the bank.
Opinions differ on mortgages, but homeowners are better off when they have the full 20% down payment and the cash on hand for closing costs. A down payment reduces interest expenses and protects home owners from dropping valuations.
Taking a 15-year fixed rate mortgage will keep your true costs down, protect you from spending too much, and will give you the freedom pursue other financial dreams sooner. Unfortunately, many mortgages haunt people up to–and even beyond–retirement.
You can get a reasonable mortgage rate. Most of the housing crisis is due to “homeowners” buying houses before they were ready. If your credit score is damaged or you are carrying other debts, you should take a couple of years to aggressively pay down your debts and make a habit of paying your bills on time.
The American dream is a wonderful goal, but one that can quickly become a burden if you are trapped by debt or an aggressively rising interest rate.
You have an emergency fund. Although many people skip this step, many disasters could be avoided if people had a rainy day fund equal to 3-6 months of income. Home owners face all kinds of small to large disasters. When something breaks (and something will break), you’ll be thankful you were prepared.