How First Time Home Buyers Can Navigate An Expensive Market
The Housing Market - So Hot Right Now - It's 10-40% Higher Than In 2008
This topic makes me want to listen to Eddie Vedder, Society.
Buying a house in this market is tough, especially for first-time homebuyers. I went through something similar when we bought our house three years ago. At that time, I couldn't believe how expensive our house was but now it's a drop in the bucket compared to a similar house today.
"Case-Shiller indexes show prices in Boston, San Francisco, and Charlotte, N.C. about 10% above their previous peaks; Portland and Seattle, around 20% higher, and Denver and Dallas, 40% higher. These are the new boom towns, replacing Las Vegas, Phoenix, and Miami the last time around." - Market Watch
As a first time home buyer these are some of the toughest times to buy a house. Why? Partly, because you don't have the appreciation and equity that is built into your existing residence like someone who bought a house 3 or more years ago. Don't get discouraged by other people's house appreciation. Appreciation equity usually just gets applied to the next house someone buys. It looks good on paper and it can help them upgrade to a bigger house, but it doesn't change their life because it's locked up in a house.
The First Time Home Buyer Advantage
As a first-time homebuyer, you have a huge advantage. You can wait to find the right time to enter the market. Patience is a virtue when trying to do this. Usually, life dictates when you buy a house, not timing the market. I know how hard it can be. When you're ready to buy a house, you're ready. If you can, try not to put too much pressure on yourself to buy a house. If you can live cheap it means you're saving a lot or paying down debt. Both of which are crucial before you buy a house. We waited four years to buy our house after getting married and those years have set us up for a successful foundation financially.
Pressures will mount. We were nearly in contract on two different houses because we were anxious to make a move and pull the trigger. My advice is to be patient. By waiting a little longer and truly finding a place that met many of our expectations and desires we eventually landed an affordable and perfect home for us. Patience is hard, especially in this day and age, but it will be worth it.
Get Out of Upgrade Mode
Some people will tell you how they sold their house for 30k-100k more than what they bought it for. Well, that's cool, but then what? They likely just bought a more expensive house. Now, if your only goal is to keep buying more and more expensive houses than that might be exciting. But if you're interested in getting rid of your mortgage payment, that's not going to help you much. Don't forget that every time you move it's 3%-7% of the total sales cost you have to pay in realtor fees. That alone can take away up to 18K on the sale of a 300k house.
We don't live in a big house and we love it because it provides us with everything we need. We put a lot of value in its location, love that we live in close quarters because it keeps us connected as a family and we don't often get overwhelmed with the limited storage or extra space because we try to live without a lot of excess. Basically, we have a small, simple home and we couldn't be happier. We have no plans of moving out or moving up.
Rent As D.I.N.K's (Dual Income No Kids) As Long As Possible
We waited 4 years after being married before we bought a house. That was when our savings finally met the standard of a house we were willing to live in for a long time.
Renting cheap is what gave us freedom from a mortgage on an average income.
In America, we are obsessed with houses. I value our home for the freedom and very basic space it brings us. It's not a status symbol. It's not a means to an end. It keeps us warm and provides for our basic necessities.
Why Are We So Obsessed With Houses?
Financial Hipster is about living differently and investing in what matters. There is nothing cool about living in some sweet house you paid too much for.
Houses are often a false sense of happiness that helps us look good externally but brings us little value internally.
We need to think differently about how we spend our money. We earn more as millennials than our parents did growing up. We have high expectations for what we should be paid. That's okay. But if we can learn to live closer to the standard our grandparents lived, we'll be financial superheroes. And better examples for our kids and the younger generation.
No one gets rich from your house, let's be clear on that. People get rich from investing in businesses and investments. People pay for their house with those returns. Don't think of the price of your house as a measure of your wealth. Houses are a cost that everyone has to pay for. Don't forget you have the freedom to decide how much you want to pay for it. People who bought their house 5 years ago may brag about how their house has appreciated 100k or whatever the number may be. That appreciation is great, but unless you downsize or buy an equal house, that money doesn't change their lifestyle.
If You Have To Buy A House, Buy Wisely
Always put 20% down to avoid PMI. PMI is private mortgage insurance that makes buying a house even more expensive than it already is. Buyers will have to pay PMI on their loan until they have the 20% equity in their home. Also, try to keep the payment to 25% of your gross income. There are also many debates about using a 30 year vs 15-year mortgage. If we were going to take out a mortgage we were only comfortable with taking out a 15-year mortgage for 100k. Then we could have made sure our house was paid off in a timely manner, saved interest, and would have freed up our funds for a kids education before they went to college.
"Quit trading space for time."
- Rent as long as possible - Maybe even until you can pay cash for your house. If you talk to most newlyweds or hear about how people paid off 100k of student loans, etc. It's usually during this time in their life. Save when you are young while you can before you buy a house. If nothing else you can more comfortably afford a nicer house. Or you'll be eliminating debt. Both are huge for your financial future.
- Save until your house payment equals what you can responsibly borrow - For example, if you are comfortable with a $1,500 mortgage payment and property taxes cost 5,000, insurance is 1,000 and you take out a 15 year loan at 4.2% you can afford to borrow 125,000. You can buy a 300,000 dollar house if you want, but you'll have to save 175,000. *View screenshot for more info
- Consider using a Roth IRA - Here is a post about how you can use your Roth to withdraw up to 10k of tax free, penalty free earnings to help pay for your first home. It's not right for everyone, but it can be a great option if you have a Roth and it's been open for awhile.
- Compromise - Be okay without having 100% of what you want in a house, if you do, you'll likely still have 100% of what you need. For example, we still scrape off our cars in the morning because we have a one car garage. A slight inconvenience, but we don't feel poor.
- Focus on what matter to you - Quit comparing yourself to other people and focus on what matters to you. We bought a house in a location that mattered to us. It was close to a lot of things because we valued walking, biking, etc. Invest in a house for what matters to you, not what matters to other people.
- Location - Real estate really is about location, location, location. We don't live in the nicest place, we paid a premium to live in a location where we wanted to live. Focus on the location you want to live, not your house.
* Mortgage example
Be Content And Confident In Your House
Buying a house is a big deal. Make it one. The harder it is to buy and the more you put into saving for it, the more you'll enjoy it. Too many people view a house as a thing you just buy. There are a lot of good lessons to be learned by living more like our grandparents generation. They didn't move houses every 5-7 years, they usually bought one or two houses their entire lives. As you can see in the screenshot above, even borrowing only 125k for 15 years you are still paying almost half of your payments in interest for the first 5 years, then you start paying down more towards your principal. So why can't our generation live like our grandparents and stay in our homes? Why do we feel the need to move so much?
If you absolutely have to move, pay attention to where you are buying, what you are buying, and understand why you are buying and you'll be nailing your home buying experience in no time.