defensive home buying

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SmallSaver
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Joined: Mon Mar 26, 2012 11:34 am

defensive home buying

Post by SmallSaver » Mon Apr 16, 2018 12:06 pm

Somewhat related to this recent thread. I'm thinking of buying a first house in the near future. I'd like to do this for lifestyle reasons. I'm not trying to time the market or predict the future, but in my market prices are high (relative to income) and I think it's not impossible that we're near a market peak and prices may decline in the short term and stay relatively flat in the long.

I'm not going to lose a lot of sleep worrying about the future, but I do want to make a decision that's robust to this possibility and I'm interested in strategy. 30 year? 15? Bigger down payment? Smaller and more to retirement? Take on a bigger mortgage but then stay in the house instead of "moving up" in 5-7 years? Not trying to over-optimize, I just like to work out the broad parameters and then spend my time thinking about other things.

Thanks,

chevca
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Re: defensive home buying

Post by chevca » Mon Apr 16, 2018 12:26 pm

If you're not trying to time the market, not trying to predict the future, and not going to lose a lot of sleep over what the future might bring,.... then just buy in the present. :happy

If you can afford a house you can see yourself staying in for 10 plus years, go that route. If you're just looking for a starter house, remember the average is like 5 years for living in people's first homes.

You ask good questions. But, they're pretty area and personal situation dependent. There are many reasonable answers to those questions depending on one's situation.

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whodidntante
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Re: defensive home buying

Post by whodidntante » Mon Apr 16, 2018 12:31 pm

I usually get lampooned when I say this, but housing is a risk asset. You can have all sorts of outcomes ranging from total loss to making a gigantic amount of money, and beyond upkeep and insurance there isn't a whole lot you can do about it after you buy. You are a participant in the housing market. Many people will see modest appreciation which may not even keep up with inflation, and they'll spend far more than that to keep the place maintained, insured, and on property tax. Now you are in a hot market. I've seen those get cold but it could also stay hot for years and years.

The decision to take a mortgage and the term of the mortgage is totally unlocked from what happens to the price of the house unless you are in a state that allows you to walk away from an underwater mortgage and you are willing to hose your credit for several years. A 30 year mortgage wouldn't protect you from your house value getting cut by 40%. Get the terms that make sense in your situation. I like to get a 15 year fixed mortgage because the rate is lower, but then I don't prepay it. Fifteen years is plenty fast to payoff a house.

I used to hear the advice about moving up in house every five years prior to the housing crisis. It never made sense to me. Transaction costs in real estate are high and you'll find six things to do once you move in that cost money. It also implies that the market will go continuously up and we should be leveraged as much as we can stand. I tend to buy a house that is slightly above what I expect to need, but not lavish. I would like to keep my housing expenses low. Buy when you are ready, and take the loan terms that make sense for you.

Dottie57
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Re: defensive home buying

Post by Dottie57 » Mon Apr 16, 2018 12:38 pm

Only thing I can suggest is to buy a house that fits your needs and that will be sellable in the futur.

Don't spend too much. A 30 year mortgage can be paid off in 15 years if you want. I like 30 year since the payment is smaller if you lose your job.

bloom2708
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Location: Fargo, ND

Re: defensive home buying

Post by bloom2708 » Mon Apr 16, 2018 12:41 pm

If you have 20% down, have accounted for the increase in expenses (property tax, insurance, repairs/maintenance, upgrades, furniture, landscaping, etc) then now is the time to buy.

Owning a home is more expensive than you think. Your home will find new and exciting ways to extract money from your accounts. That doesn't mean you shouldn't do it.

Let's say housing prices drop and go into a prolonged slump. Now you are in the middle of the slump, prices are dropping, do you want to buy in that moment? It is similar to buying after a 20% market drop. What if you are only 1/2 way to a 40% drop?

In HCOL areas, there are factors in play that your finances might not ever be able to keep up with. What if 20% down keeps going up and up? In our area "special assessments" are common. They re-do the street in front of your house and tack $10k on to your special taxes owned. Not so special. I know those don't exist in many locations.

This place can give you perspectives you may not consider. I like the posts that state simply that renting is not throwing money away. In some areas it continues to be the best course of action to allow you to keep your retirement savings on track.

Good luck with your decision!
"We are not here to please, but to provoke thoughtfulness." --Unknown Boglehead

fittan
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Re: defensive home buying

Post by fittan » Mon Apr 16, 2018 1:41 pm

2 things I would add...

First, improve your credit score in the meantime. Make sure you're in the top tier (i.e. 800+). This will make sure you'll get the absolutely lowest rate when obtaining mortgage. A few percentage point could cost tens of thousands over 15 or 30 years.

Second is to only buy when you have at least 20% downpayment.

SmallSaver
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Re: defensive home buying

Post by SmallSaver » Tue Apr 17, 2018 10:45 am

Thanks to all for your replies.

onourway
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Re: defensive home buying

Post by onourway » Tue Apr 17, 2018 10:50 am

Put at least 20% down. Buy only as much house as you need and can easily afford. Plan on spending at least 10 years there.

Then ignore local housing prices entirely.

The people who get burned in housing are mostly those who ignore the above guidelines.

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Watty
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Re: defensive home buying

Post by Watty » Tue Apr 17, 2018 11:19 am

SmallSaver wrote:
Mon Apr 16, 2018 12:06 pm
....I'm interested in strategy.
If you are in an expensive area then also keep an open mind about moving to a less expensive area. I did that when I was ready to buy my first house and it worked out very well for me. Unless you are in some sort of niche job my impression is that regional pay differences are not nearly enough to make living in an expensive area a financially good choice.

You need to keep in mind that in probably 80% of the country you can get a very acceptable house for $200K(or often a lot less) and $500K will get you a large McMansion and many of these are nice areas. When you are on vacation or traveling for work be sure to check out other parts of the country to see if you can find a less expensive area that appeals to you. There are often airfare sales with very cheap flights so consider taking an occasional long weekend trip to see parts of the country that you have not seen before.

There are no hard and fast rules that will work for everyone but one thing that has worked well for me is to have my home paid off by the time I wanted to retire. Having a mortgage in retirement might work for some people but unless you have some special situation, like a large pension, then I would be real cautious about getting a mortgage that will not be paid off by when you expect to retire.

I would also be cautious about buying a home early in your career when you are more likely to change jobs. The problem is that you could have a great job opportunity in some other town or even just on the other side of town, which would be a terrible commute, where having a house would make things difficult. There are a number of times when I have seen promotions and job offers go to someone that could relocate the easiest. In one extreme situation I saw someone get a promotion into an unexpected opening as a facility manager 500 miles away on a Wednesday because he could be there working the next Monday. He flew back a month latter to pack up his apartment. He got the promotion largely because he was the person who could easily relocate.

il0kin
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Re: defensive home buying

Post by il0kin » Tue Apr 17, 2018 11:45 am

Are you in a super hot market?

We are in a hot market, but were able to find a below market value home in an excellent area with great schools because it needed cosmetic interior work/updates. No big deal; I'm handy and we chip away at a room or two each year. Ask your realtor to pull comps from back to the depths of the Great Recession to see what houses sold for. We found that in 2016, we paid only 30k over the lowest comparable sale price in 2010, or 8.7% higher, than a very similar house. That made me feel much more comfortable with purchasing our home despite concerns of an inflating bubble.

We also limited ourselves to under 2x gross income and got a 30 year fixed rate in order to minimize risk of losing the home. We didn't quite put 20% down though, we had it but kept 5% for immediately needed repairs, but justified that because we got an excellent deal on the house so we didn't mind a bit of PMI.

When friends are buying, I tell them to find a home with a good foundation (can be an issue here), in a quiet area, fairly near established shopping districts with a grocery store etc, within a top rated school district. If you do that, it's a relatively safe bet you will not lose your butt. Just be smart about it.

SmallSaver
Posts: 100
Joined: Mon Mar 26, 2012 11:34 am

Re: defensive home buying

Post by SmallSaver » Tue Apr 17, 2018 11:20 pm

Watty wrote:
Tue Apr 17, 2018 11:19 am
SmallSaver wrote:
Mon Apr 16, 2018 12:06 pm
....I'm interested in strategy.
If you are in an expensive area then also keep an open mind about moving to a less expensive area. I did that when I was ready to buy my first house and it worked out very well for me. Unless you are in some sort of niche job my impression is that regional pay differences are not nearly enough to make living in an expensive area a financially good choice.

You need to keep in mind that in probably 80% of the country you can get a very acceptable house for $200K(or often a lot less) and $500K will get you a large McMansion and many of these are nice areas. When you are on vacation or traveling for work be sure to check out other parts of the country to see if you can find a less expensive area that appeals to you. There are often airfare sales with very cheap flights so consider taking an occasional long weekend trip to see parts of the country that you have not seen before.

There are no hard and fast rules that will work for everyone but one thing that has worked well for me is to have my home paid off by the time I wanted to retire. Having a mortgage in retirement might work for some people but unless you have some special situation, like a large pension, then I would be real cautious about getting a mortgage that will not be paid off by when you expect to retire.

I would also be cautious about buying a home early in your career when you are more likely to change jobs. The problem is that you could have a great job opportunity in some other town or even just on the other side of town, which would be a terrible commute, where having a house would make things difficult. There are a number of times when I have seen promotions and job offers go to someone that could relocate the easiest. In one extreme situation I saw someone get a promotion into an unexpected opening as a facility manager 500 miles away on a Wednesday because he could be there working the next Monday. He flew back a month latter to pack up his apartment. He got the promotion largely because he was the person who could easily relocate.
Thanks. I'm pretty committed to the place (one reason I'm thinking about buying) and it's an odd market - 30k people and no roads out, so not a lot of location flexibility. I hear you about wanting to have the home paid off by retirement - definitely a goal.

SmallSaver
Posts: 100
Joined: Mon Mar 26, 2012 11:34 am

Re: defensive home buying

Post by SmallSaver » Tue Apr 17, 2018 11:22 pm

il0kin wrote:
Tue Apr 17, 2018 11:45 am
Are you in a super hot market?

We are in a hot market, but were able to find a below market value home in an excellent area with great schools because it needed cosmetic interior work/updates. No big deal; I'm handy and we chip away at a room or two each year. Ask your realtor to pull comps from back to the depths of the Great Recession to see what houses sold for. We found that in 2016, we paid only 30k over the lowest comparable sale price in 2010, or 8.7% higher, than a very similar house. That made me feel much more comfortable with purchasing our home despite concerns of an inflating bubble.

We also limited ourselves to under 2x gross income and got a 30 year fixed rate in order to minimize risk of losing the home. We didn't quite put 20% down though, we had it but kept 5% for immediately needed repairs, but justified that because we got an excellent deal on the house so we didn't mind a bit of PMI.

When friends are buying, I tell them to find a home with a good foundation (can be an issue here), in a quiet area, fairly near established shopping districts with a grocery store etc, within a top rated school district. If you do that, it's a relatively safe bet you will not lose your butt. Just be smart about it.
It's funny market, not hot really, just expensive relative to income and has been for a while. One reason I think flat prices are not unlikely. Don't mind a bit of sweat equity and it sounds like 20% down and not overbuying are the name of the game. No surprises, but maybe I just needed to hear it again.

il0kin
Posts: 150
Joined: Mon Feb 26, 2018 8:19 pm

Re: defensive home buying

Post by il0kin » Wed Apr 18, 2018 12:04 pm

SmallSaver wrote:
Tue Apr 17, 2018 11:22 pm
il0kin wrote:
Tue Apr 17, 2018 11:45 am
Are you in a super hot market?

We are in a hot market, but were able to find a below market value home in an excellent area with great schools because it needed cosmetic interior work/updates. No big deal; I'm handy and we chip away at a room or two each year. Ask your realtor to pull comps from back to the depths of the Great Recession to see what houses sold for. We found that in 2016, we paid only 30k over the lowest comparable sale price in 2010, or 8.7% higher, than a very similar house. That made me feel much more comfortable with purchasing our home despite concerns of an inflating bubble.

We also limited ourselves to under 2x gross income and got a 30 year fixed rate in order to minimize risk of losing the home. We didn't quite put 20% down though, we had it but kept 5% for immediately needed repairs, but justified that because we got an excellent deal on the house so we didn't mind a bit of PMI.

When friends are buying, I tell them to find a home with a good foundation (can be an issue here), in a quiet area, fairly near established shopping districts with a grocery store etc, within a top rated school district. If you do that, it's a relatively safe bet you will not lose your butt. Just be smart about it.
It's funny market, not hot really, just expensive relative to income and has been for a while. One reason I think flat prices are not unlikely. Don't mind a bit of sweat equity and it sounds like 20% down and not overbuying are the name of the game. No surprises, but maybe I just needed to hear it again.
How do you define expensive relative to income? I think the general formula is median income vs. median sales price. I just looked at median income ($75,000) and median sales price ($269,000) for my county. So, that puts median purchase at at 3.59x income. Of course, there are value areas where one can buy a decent home in a safe area with decent schools for more like 150-200k, which is definitely more in the affordable realm.

Real estate is such a location specific thing. One county over in my metro area, I couldn't find data, but would guess the median home sale price is 1/2 or less of my county. I would NEVER buy a home in that county despite there being some new home developments that are very nice. Too much poverty and crime within just a few miles of those new developments.

Anyways, I think you've got it fairly well thought out. Good luck on the search.

SmallSaver
Posts: 100
Joined: Mon Mar 26, 2012 11:34 am

Re: defensive home buying

Post by SmallSaver » Wed Apr 18, 2018 10:21 pm

il0kin wrote:
Wed Apr 18, 2018 12:04 pm
SmallSaver wrote:
Tue Apr 17, 2018 11:22 pm
il0kin wrote:
Tue Apr 17, 2018 11:45 am
Are you in a super hot market?

We are in a hot market, but were able to find a below market value home in an excellent area with great schools because it needed cosmetic interior work/updates. No big deal; I'm handy and we chip away at a room or two each year. Ask your realtor to pull comps from back to the depths of the Great Recession to see what houses sold for. We found that in 2016, we paid only 30k over the lowest comparable sale price in 2010, or 8.7% higher, than a very similar house. That made me feel much more comfortable with purchasing our home despite concerns of an inflating bubble.

We also limited ourselves to under 2x gross income and got a 30 year fixed rate in order to minimize risk of losing the home. We didn't quite put 20% down though, we had it but kept 5% for immediately needed repairs, but justified that because we got an excellent deal on the house so we didn't mind a bit of PMI.

When friends are buying, I tell them to find a home with a good foundation (can be an issue here), in a quiet area, fairly near established shopping districts with a grocery store etc, within a top rated school district. If you do that, it's a relatively safe bet you will not lose your butt. Just be smart about it.
It's funny market, not hot really, just expensive relative to income and has been for a while. One reason I think flat prices are not unlikely. Don't mind a bit of sweat equity and it sounds like 20% down and not overbuying are the name of the game. No surprises, but maybe I just needed to hear it again.
How do you define expensive relative to income? I think the general formula is median income vs. median sales price. I just looked at median income ($75,000) and median sales price ($269,000) for my county. So, that puts median purchase at at 3.59x income. Of course, there are value areas where one can buy a decent home in a safe area with decent schools for more like 150-200k, which is definitely more in the affordable realm.

Real estate is such a location specific thing. One county over in my metro area, I couldn't find data, but would guess the median home sale price is 1/2 or less of my county. I would NEVER buy a home in that county despite there being some new home developments that are very nice. Too much poverty and crime within just a few miles of those new developments.

Anyways, I think you've got it fairly well thought out. Good luck on the search.
Thanks. For the record, closer to 6x median household income to median home price. It's rough out here. I'm far from high income but lucky to make more than median, but I keep living places with similar dynamics and it's skewed my perspective on real estate.

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