Should I Buy a House Now?
The Current Housing Situation in Light of the Mortgage Bubble
In today's housing market, many people got burned. Inflated home values caused by cashing out home equity loans and greedy Wall Street banks giving loans to people who could not pay them back under good circumstances led to a housing bubble. This condition caused many people to be underwater on their mortgage by owing more than the house was worth.
In addition, many people lost their jobs and fall into the yet to find work or underemployed categories. Many of those severely underwater just walked away from their mortgages. Many of those who lost their jobs also lost their ability to pay their monthly mortgage payment. This situation hurt the credit of those who suffered from the housing bubble. In addition, banks have foreclosed on many properties, leading to depressed housing values. If you put all of this together, many Americans are afraid to buy a house.
When Should You Buy a House?
In light of the current mortgage mess, the question then becomes, "Should you buy a house?" The answer depends upon your current economic situation. If you are unemployed, it's probably not the best idea to buy a house unless you have a large chunk of cash stashed in a buried sock in your parent's crawl space. If you are employed 30 hours a week making minimum wage, it's probably not a good idea to buy a house at this time.
Buying a house is a good idea if you are gainfully employed and the cost of buying a house is less than what you are paying for rent. Rent goes up just about every year. A fixed-rate mortgage is just that, fixed, unless you initiate a refinance. That 2-bedroom apartment that costs $750 today could very well cost well over $1,000 in ten years with inflation. The $750 mortgage on a 3-bedroom, 2-bath house in a rural area will still cost about $750 in ten years (although insurance and taxes can vary over time, the mortgage will remain constant).
The money paid out in rent is gone. It goes to the pockets of the landlord. If the landlord owns the property outright, this is money in his/her bank account free and clear, less applicable taxes and insurance. This is why some real estate investors are among the wealthiest members of American society.
On the other hand, the money that you pay out in a mortgage helps your lender, but only in terms of interest. If you pay $100,000 for a house, it is likely to maintain that value or even rise if taken care of. When you go to retire and sell the family house for a smaller home, you will get whatever the buyer pays. If the house sells for $150,000 after 20 years and you own it free and clear, the vast majority of the $150,000 goes into your pocket. When leaving a rental, you get nothing.
Real Estate Market
Now Is the Time to Buy
Some people may feel that it's a bad time to buy a house because of the economic uncertainty. Actually, it's probably more likely that right now could be the best opportunity to buy a house that will be available for some time. Here are a couple of really good reasons why it might be time to buy.
- Interest rates are at a record low. Fixed-rate mortgages are going for well below 4% right now. In the late '70s, people were happy with double-digit mortgage rates. They have been hovering around 3.5% for months. You can literally save thousands, if not tens of thousands, of dollars over the life of a loan with such a low rate.
- Houses are on sale. Back when the housing market was on fire, people were trying to upgrade to bigger houses that they could not afford when they lost their jobs. Many of those houses are now either foreclosed or their owners are selling for quite a bit less than they did five years ago. Prices have not gone up to pre-crash levels. Therefore, houses are on sale. Investors like to buy low and sell high. This might be the best environment for housing.
- Buying can save hundreds per month over renting and you actually have equity that you can sell at a later date and get some, if not most of your investment back.
- Tax breaks are another good reason to buy. There is a mortgage tax credit that allows you to deduct the cost of mortgage interest from your income. This can cut your tax bill at the end of the year, and renters don't get this benefit.
While there are a few good reasons to buy now, there are some things to remember when going to buy. Here are a couple.
- After the crash, banks are not taking liar loans. In other words, you actually have to have the income that you say you have. You will also be more likely to need a significant down payment. This was not the case during the housing boom.
- Do not buy in a really depressed area. Some cities are dying and their tax base is drying up. It is not likely that you will benefit by buying in these areas. Check the overall market in a neighborhood and find some comps to see what a fair price is for a property.
- While it seems that the worst of the housing bubble is over, things could always take another nosedive. It's important to remember this and weigh your options.
- If you are only planning to be in an area for a short time, it might be better to rent, rather than pay thousands in closing costs and broker fees twice--once when you buy and once when you sell. Also, it is possible that you would be stuck with the house for a few months, which could wind up doubling your housing expenses.
It is best to think these things through and weigh your options. If in doubt, check with a financial adviser who will be able to speak to your specific situations.