I have spent more time than I wish to admit thinking about how to determine if it is a good time to buy a house or not. The economic ramifications for the rest of your life are quit large when buying a home. Being able to buy at the bottom can be very beneficial, whereas the top can be costly. I believe the only way to lessen the impact of these concerns is to come up with a reasonable budget to spend on the home. If you spend the max amount a mortgage company approves you for, then the housing market prices can greatly affect your life. If you are able to spend substantially lower than this, it is not as critical. Granted in some expensive housing markets it can feel that there is no other option than max loan to buy a home.
Buying for lifestyle vs Investing
A true home that you live in should be thought about as a lifestyle choice and not an investment. Therefore, you need to go into it knowing it will not make you money and decide in accepting that if you still want to own rather than rent. If homeownership is important, then you must understand that you may be paying a higher price if the market it elevated. You may even know that the market is in a bubble and buy anyways. Why? Because you don’t want to wait another year, or two, or five for a down market. If you want to own the house then you have to accept the prices they cost. I can argue that you may be better of continuing to rent, but if you get satisfaction owning the home then you just need to make other trade offs for it. I just hope you understand what you are giving up before you make the purchase.
Important question to Ask
The only question you must ask is “Does this house serve my needs?” Even better, “Am I excited to live here?” If the answer is yes to both and it is in your budget, then it is hard to go wrong at this point.
In regards to the housing market if you purchase at the high of the market, but are not highly leveraged and can easily make your payments, then you are not affected. Granted if the market drops heavily a few months after you buy, then you would have been better served to have waited, as you could have saved a lot of money. But remember we are deciding ahead of time what we can afford and selecting what we like at the current market price. So it should never be about making or losing money. If the market does drop substantially after the purchase it will be disappointing, but instead of saving money the thought should be, well we could have had a bigger house, extra bathroom, in a better part of town. Obviously these are important considerations, but if you feel good about the place you buy and are happy there when you purchase it, then these things should not be an important concern.
You may not be able to buy your dream house and stay in your budget, but if you can buy a house that serves all your needs, you will less likely be upset in a market decline. If you buy a house you don’t like to save money for fear of a market drop, you are assured to not like where you live even if the market goes up.
Be wary of the nice Price
If you are truly an investor buying to flip, or rent out, then there may be many homes that happen to be a good value, but not a good fit for where you want to live. For investors this is okay and what allows them the opportunity for financial gain. However, for the rest of us that are looking for a place to live we must realize the difference. Even if a home is available at a price much lower than market rate, if it does not satisfy your needs then it is not a bargain at all for you and should be avoided.
Fear of missing Out
Another concern people have is that if they don’t buy something now that they will miss out being able to buy ever. i can’t guarantee that this won’t happen, but I think it is important to believe that if you save your money and make diversified investments that you will have an opportunity. Even if home prices keep going up, if your stock, bond, and other investments go up too you can keep up to an extent. With the leverage that mortgages allow it is possible that the home prices will still outpace your investment returns. I believe while this is a risk, it is better to take, than buying something you do not like. Now consider the alternative if home prices substantially drop in price? If you purchase something you only would be happy to live in for a few years, you may be forced to stay much longer than intended. If you continued to rent instead you would have an easier time living somewhere else if desired
Risk in starter House
The concept of starter houses sounds great in theory, but it just doesn’t make sense. Anytime you buy and sell real estate you pay heavy transaction costs. If prices are going up and you trade in your home for a gain, the more expensive home you are buying has likely appreciated at a similar percentage, but at a larger absolute dollar figure. So while it helps buoy you to an extent to the housing market, other investments in stocks and bonds could possibly do just as well anyways and save on transaction costs. You can even invest in REITS, which are investments in real estate. They will not track your local market, and may include commercial segments as well, but may be loosely correlated with home price appreciation or depreciation. The trouble with a starter house similar to the fear in missing out, in that you may end up living much longer in the starter house than you originally wanted. If you can find a small affordable rental and save extra money each month, this can help make up for rising home prices while you continue to save money and wait for the right home and price to become available.
While, the housing market economy can make a huge difference in how far your money will go in purchasing a home the most important consideration remains; Does the home fit your needs, do you like it, and can you afford it. If not, then renting is a great alternative option.