Housing is Bananas

Real estate right now...the desire, the anxiety, the dream. It comes up in almost every conversation I have with clients and close friends. The media blasts headlines each day about how nutty the market is...indicators in all directions tell us that it's competitive and daunting and possibly out of our reach.

I've long been a skeptic of the conventional wisdom that homeownership is the best path to wealth. There are plenty of reasons why owning a home should only be considered when you are absolutely certain that you'll stay in that house for several years (7-12 depending on the location and carry costs).

I recently lent my opinion to a Wall Street Journal article that addressed the insanity of the current housing market and how a buyer can feel confident they're making the right decision.

The article recommends a few considerations before you get serious about buying a home.

  1. How much can you afford?

  2. What if you qualify for a higher amount?

  3. Will owning a home compromise your quality of life?

  4. What does it cost to wait?

  5. Why are you buying a home now?

Mortgage lenders have a set of formulas they use to pre-qualify clients for a purchase but you may be approved for a larger loan than you need. The best way to project the cost of homeownership is to start with a baseline.

Review 6 months of bank statements and credit card bills to get an average cashflow of all your income and expenses. Assume your cost of living will remain the same (i.e. food, travel, healthcare, shopping, etc). Next, factor in a higher house payment including all home expenses such as property tax, insurance, HOA dues, maintenance, utilities and any renovations. This exercise will give you a better sense of how much you can afford to pay for a home.

If the bank will loan you $800,000 but you only feel comfortable borrowing $700,000, then don't shop for homes in the $750,000 price range. Look at $600,000 to begin with because most homes are being over bid.

If you need to reduce your disposable spending to afford your house payment, be realistic...most people cannot reduce their spending radically. 5-10% is a sustainable amount.

Make sure your motivation for buying a home is based on your own goals and values. Don't get confused by FOMO. It takes 7-12 years to make a real return on real estate. If you aren't ready to settle down or you foresee your housing needs changing significantly (i.e. you're having another child or an aging relative may move in with you) in the next few years, you're better off waiting it out as a renter.

A solid financial plan that includes saving for retirement and other long term goals will give you the insight needed to make a well-informed decision regarding home ownership.


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