Should I Buy a House

Buying a house is a big deal. You want to make sure you don't get sway by common myths and know the real questions that you need to answer to begin to build a plan that gives you confidence.

• Do You Really Want to Buy a Home?
• Should I Wait Until the Housing Market Bursts?
• What If Interest Rates Go Down?
• What Can I Afford?
• What Do I Need?
• What Are Your Other Goals?
• What Does the Future Look Like?
• What Are the Real Risks of Purchasing a Home?

St. Louis Federal Reserve Historical Home Price Tool

Should I Buy a House Strategy Guide

Music: 80s Motivational Chiptune by Shane Ivers - https://www.silvermansound.com

Transcript

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Your first home, you don't have to necessarily have all the bugs and whistles. So I think that's one thing where a lot of people put a lot of stress on themselves and they do push themselves to that upper limit to what financial institutions will allow them to do. And it just creates a lot of financial stress on their life that they don't necessarily need. This is Techy's personal finance bootcamp where I help tech professionals in their 20s and 30s balance a great life to stay without sacrificing their future possibilities. I'm your host, Lucas Casares, certified financial planner and founder of Level Up Financial Planning, where I help educate, coach, and build strategies with my clients to help them take their financial confidence to the next level. Here's an important compliance disclosure. This podcast is for informational purposes only and they're not to be considered recommendations. It is recommended you consult your trusted financial professional before implementing any information obtained from the Techie Personal Finance Bootcamp. Hello, thank you for joining Techie Personal Finance Bootcamp. Sorry for taking a week off from one of the financial episodes, but I'm back with a great topic. I know it's one that I always get from my clients as well as a lot of people I just meet in public. And it's is now the time to buy a house. So this is a little bit different from the last financial episode, which was timing the market, which was the stock market. And that episode, it ultimately came down that no one can do it consistently, and getting it wrong once can really derail your plans. And the problem with trying to time the market is you have to be right both on getting in and then getting out. So this episode we're going to be talking more specifically about purchasing the home, and if now is a good time. It's pretty interesting because a lot of people view the house market to be pretty similar to how the stock market is. And although the long-term growth tends to be similar, you'll actually end up, even if you're renting or owning a home, you'll get the same amount of growth percentage and value over long-term time horizons as the stock market. At least that's how it's been historically in the past. But it is very different in the short term, and it definitely matters if you're not even trying to use your house as a rental, and it's more something that you're gonna be living in. So stock markets are volatile and can jump around sometimes like grasshoppers, which my son has been chasing around the last few weeks around our neighborhood. Homes, on the other hand, though, are significantly more stable, but yet so many people are fearful of purchasing a home and then thinking that it may fall in value. So some are waiting on the sidelines, looking to take advantage of a major drop in home values. So these are things I hear all the time, like that the house prices are too high. I'm gonna wait until the values fall a little bit. I think we're in a housing bubble. These things are so much different than what the stock market is. I think it's safe to say that there very rarely are gonna be a house and bubble. And we're gonna dive into some of those details and some explanations as to why that is. But yeah, it's very rare for there to be a housing bubble, and it took a lot of crazy events for that last one to uh show its head and really cause the issues. Before you even think about buying a house, so you have to really be introspective and think about what like do you even want to buy a house? Because there's a lot of pressure from different things. It could be uh that your parents told you that this is the the way that you need to do it, or they keep asking you, are you gonna buy a house yet? Are you gonna buy a house yet? Uh, it could be just from society in general, you feel that that's just a part of that next step of becoming an adult and kind of uh progressing through your adulthood is purchasing a house at some point. There's also pressure that you might have when you start to see that your friends and colleagues are purchasing homes, and even though they may not be flaunting it or putting it in your face, you just start seeing all these things happen. You you hear about it, and then it starts to make you think, oh, maybe we should do that. I I see it all the time with a lot of my younger clients that they're buying a house, getting married, having kids, all these things are so far down the line from their initial thoughts sometimes when we start speaking, but it it doesn't take too long before some of these things start happening, but because their friends start to do it, start to have kids, start to have houses, and these things because they're in your peripheral vision, they start for you to be able to see yourself in that position. And then it also may make you feel like you should be following those people as well, because maybe you respect them, maybe uh you think they're great people, and so you want to replicate some of those decisions and choices that they're making. And so the same thing happens with purchasing homes all the time. I mentioned one of the most common questions is should I wait until the housing market bursts? So this actually has less ground to stand on than my previous episode that was on that investment market. The reason is that housing prices are relatively stable and have been just kind of historically. The times that values have actually decreased from the previous year, it's actually only happened six times in the last 54 years, and three of them actually occurred during the last recession. So that's 2008, 2009, and then I think it skipped a year in 2011 from the statistics I was looking at. And I'm gonna put a link in the show notes so you can uh go and run these graph uh illustrations on your own as well, but I'll run you through some of the numbers. So, six of the last 54 years, what that averages to be is about 11% of the time, which I guess you could say that's a relatively high percentage. It definitely matters as far as perspective and how powerful some of those declines have been, which they actually haven't been that large of a decline. So some were as low as 1.2%. So that's that's not a huge drop-off at all in value. And some were definitely on the higher end. So during that last recession in 2008 and 2009, house values dropped 6.68, and then the following year 6.82%. So those are uh significant drops at that point in time, but all the other ones were pretty mild and and really didn't fall that much. So even with those two large drops that I just shared with you from 2008 and 2009, the average of all six of those drops in the last 54 years averaged about 3.85%. So that's that's not that much at all. Uh 3.85% having those home prices fall that much, especially when you compare it to what the growth can be and how often uh growth does occur. It happens 89% of the time. Uh if we just kind of look at the difference there. So I think that that should prove that housing market bubbles really don't exist that much, at least not in the sense that people try to make bubbles seem to be. They make it seem like there's a huge difference, that there's a kind of incorrect market that needs to be adjusted pretty rapidly, and that's when those markets burst. And you would think it'd be like 10, 20, 30 percent. And just comparing this to the the stock market, the stock market when those things have uh major setbacks, it could be as much as 40, 50 percent. And so when we're looking at the worst case scenario in a 6.68%, and then 6.82% after that, still pretty sizable, but it's not all that significant when you compare it to the stock market. So very different, and I'd argue that when they do occur, they're they're very mild and not something to be worried about. I'll talk about a few things that you should be worried about when it comes to purchasing a home a little bit later in the episode. So another fear of people is like, well, what if interest rates go down? And two years ago, well, for the last two years, interest rates had been going up until recently. So starting this year, interest rates started falling again, which was very interesting. And so it is possible that interest rates can go down, but the cool thing is that it's not gonna have as big of an impact as you expect. And let me share with you about the danger of rates going up. So I think the rates going up is more of something to be worried about than if they go down, because if they go down, it's actually a good thing. So if rates go up, the difference of a 1% interest rate on a purchase of a $400,000 home with a 20% down payment would have a payment of $1,528 at a 4% interest rate. So if we compare this, if the interest rate were to go up an additional 1%, it would be $1,718 at 5%. So the monthly difference is only $190, which is pretty, pretty small. It's not gonna break the bank over the course of one year at all for most people. But what happens is you don't just pay that extra $190 just one month at a time or even just for one year. You actually pay that additional $190 over 30 years, and along with that interest, those things add up pretty significantly. And so the total difference in this scenario would be $68,400 that you'd pay over the life of that 30 years. So it does add up just that 1% difference. So it's something to be aware of. And again, interest rates, if they go down, it's actually not something to be worried about, a reason to put off buying a house because you actually have the power to refinance if interest rates go down. So if the interest rates go down, you can take a look at what that new payment would be. If you refinance it, you'll definitely want to make sure that you cover the fees with the savings that you'd have with refinancing to a lower rate. But there's really no downside to interest rates going down potentially for you. It just means that yeah, you're gonna be able to find a better amount, you're gonna find a more affordable rate even after something that you've already known that is affordable for you. So just for a quick reference of how how great it is if interest rates actually went down a little bit. So I mentioned that they went down this year. One of my clients actually purchased a home two years ago and they're starting the process to refinance their mortgage right now from two years ago. And what's crazy about it is they're actually gonna keep the same payment, but actually shave off close to 13 years of payment. So pretty sizable savings when you factor that that in all those monthly payments that are gonna be saved for 13 years. And it's all because of just the that slight change that occurred over the last year or so in interest rates. And so, just for your reference point, I don't think I've mentioned the year, it is September 2nd, 2019, when I'm recording this. So, everything that I talk about in this episode, you'll want to have that as that focal point as far as the period of time that all this information is relative and actually accurate. So, once you get those fears out of the way and those kind of big questions I think tend to scare people, the most obvious one is what can I afford? And it's a basic question that everyone should ask before you start to search for a home because you don't want to have bigger eyes for what it is that you want to buy, but unfortunately not be able to stomach it or actually be able to afford what the price would be for some of those things. So you definitely want to find out what your price range is, that's gonna help significantly. But this question is actually more important than what if the values go down or if interest rates drop. And it's not just from the fact that you could afford something for that month, you could afford the monthly payments. But if you purchase a home and can actually afford to have a significant emergency savings fund to protect against a short-term unemployment cent. So if a recession occurs or just some weird layoff occurs and you're out of employment, that's where people can find themselves in a tricky spot. Something that was affordable is no longer because they never saved any emergency funds or ride any of those situations out. But it's crazy because as long as you're able to keep your job, it doesn't matter if the home value goes down or not. It shouldn't affect your life. If it goes down, you still are able to make your payments, assuming that you still have your job and you're still making that income. You won't have to move out of your home. And it really shouldn't impact your life in any meaningful way unless you were planning to sell it in the near future. And even if you were planning to sell it to maybe purchase another home, maybe you're expecting a child and you need a bigger home, there's a nice chance that that new home that you will be moving to will also have a lower price point because very rarely, unless you're making geographical moves, if you're just moving within the same town, generally the home values tend to move in the same direction. So if your home price went down, you're not gonna be able to sell it for as much. At least you're not gonna have to pay as much for that new home in that same neighborhood, possibly. So that's uh a good thing to be aware of. And really one of the things that it always shocked me that people had that concern that what happens if I get this mortgage and then the price of my house goes on? Well, it doesn't really matter. With interest rates, again, you're in a position of power and can actually choose to refinance it. So it would make your payments actually more affordable in the future, or you can just choose to pay it off faster. So maybe you're not gonna make it more affordable on that monthly scale, and you're just gonna speed up the timeline that you're gonna pay off if interest rates fall, like my clients are gonna be doing. So it again, it's just it doesn't matter if the interest rates go down, it doesn't matter if the value of your home goes down, as long as you're able to afford it now, you're only gonna be able to afford things more so moving forward. Again, barring a loss of income. So if you're not sure what you can afford, here are some rules of thumb. Obviously, there's a huge long jelly list of online calculators you can use, but a lot of people think down payment is is one of the factors and one of the reasons why they might not be able to afford a home. Typically, 20% is not required though. So I know a lot of people think that they need 20% in order to purchase a house, but there's a lot of programs and just a lot of flexibility there. You don't actually don't need it. But what happens once you don't reach that 20% down payment is there's usually some version of a mortgage insurance that you end up paying in addition to what the normal payment would have been for your mortgage. So it's something to weigh because sometimes you're not able to get that mortgage insurance taken off. But in the case of primary mortgage insurance, something that my family had and a couple of my clients have had, after two years, you may be eligible to have that removed, that additional cost. So it's pretty sweet. Um, I actually have a strategy guide on it. I will make sure that makes it into the show notes so you can check that out if that's ever been a concern for you. So another way you can estimate roughly what you can pay is looking at some of the debt ratios that financial institutions like to use, which would be no more than 45% total debt to income. And so how you do that is you take your total debt and you divide it by your gross annual income. And as long as it's 45% or less, typically you're in the safe zone for most financial institutions. Obviously, this is due to change. If any strange things occur, they start to make any changes to how they analyze debt and things like that, that could possibly change, but that's been a pretty hard and set role for a while now. Another factor in your debt, and kind of comparing that to your income, if you compare all of your home costs for like your mortgage and things like that, the property taxes and insurance, you don't want that to be any more than 28% of your income. And so what you do, you'd add up those housing expenses, your mortgage payment, your property taxes, and your home insurance, and divide that by your income for that uh gross annual amount. So make sure that those are well within range. And even if they are, maybe you're at that top and I would say be careful, that's where you do run the risk. Maybe you can afford it as long as everything else goes really well. But if something doesn't, maybe you're not able to save, maybe you're not able to create an emergency savings if you're too close to those upper ends of those ratios. So just because you can technically approve it in the eyes of the financial institution, you still have to weigh everything out and make sure that you're in a good position and comfortable regardless of what the future may look like. And so when you're thinking about that new home, that purchase that you're gonna make, it's super exciting, but there's a lot of variables, there's a lot of complexity to it, and it's really up to you. So you get to set what those parameters are that you're looking for in your desired home. And a couple of the things that a lot of people like to think about would be the size, the number of rooms, if it has a garage or a driveway, uh yard, what size yard that you might want, the types of finishes with the countertops, is it in a good neighborhood, do they have great schools and commute times at work? All these things are typically high list items that really indicate which house you should be looking at, which one you shouldn't. They also could be increasing the price of the homes dramatically. So sometimes you might have to tweak on what's the most important to you and what's the least important to you. And it's a good idea to get these things figured out roughly before you start because you don't want to pick out that amazing house and then realize like, oh, this actually doesn't fit some of these needs that we have. We have all this stuff coming up, and it's just not really gonna be a good long-term home. So that's one of the potential things that could go wrong with purchasing a home is purchasing the wrong one and then really not enjoying it at all because it's not what you're needed, it's not what you actually thought it was gonna be as far as beneficial for your lifestyle. And make sure when you're thinking about the things that are gonna be in the house and and the futures of the house, make sure you compare them to your other goals as well. So just because you can afford a home doesn't mean it's gonna jibe with you being able to achieve some of your other goals. So there's there's a lot of goals, especially if you're early in your career, that you might have to to pick and choose how you're gonna set up your plan and make sure that all these things end up working out within a reasonable time frame for you because weddings can be expensive. Uh, I just wrote a blog post on managing your finances during a career change of coding. And so most of these goals, though, they won't supplant your goal of purchasing a home, but it can severely delay them or require you to concede on some of those wants and needs that you have for your first home. And just remember, too, it it's just because homes are tend to be more long-term investments, more long-term decisions. You can have a second home. You can end up uh selling your home, you can end up turning into a rental. There's lots of things you can do. Your first home, you don't have to necessarily have all the bells and whistles. So I think that's one thing where a lot of people put a lot of stress on themselves is they do push themselves to that upper limit to what financial institutions will allow them to do. And it just creates a lot of financial stress on their lives that they don't necessarily need. And some of the the wants and needs are very low value providing things. It's like, ah, it would be nice if, but those nice ifs cost a lot more money sometimes. And if it means that you're gonna be stressed out or you're not gonna be able to hit some of these other goals, just make sure you weigh all of these things and know that you can have a house and not have it be the perfect house ever because you still have a career to move forward in and still have a life to grow. I know that my wife and I's first house, it was perfect. We thought it was amazing for what we needed, but then when we were getting ready to start our family, we just knew it was gonna be way too small. And so, yes, it was stressful kind of trying to figure out going from the first house selling it and then buying the new house. But if you work with a competent realtor, they'll give you confidence and it's it's actually a lot easier than it sounds. So your first home doesn't have to be the only home you ever own. And I know that may be the thought that most people have because that's what a lot of our parents or grandparents did. They they bought their home, sometimes they built their home and they lived in it for 50, 60, 70 years. So um that's that's not the most typical thing. And although that that would be a way to save a lot of money, I think it's really expensive to keep upgrading your homes and kind of upsizing your homes, but just know that it you don't have to make it perfect with that first one. You just want to make sure that it's something that you're gonna be extremely happy with and know that uh you could potentially move on in the future. And so, what does the future look like? It is helpful to eyeball these things and so don't forget about them. In in my family's case, it was us adding a few little ones to the equation, and and for you, it might be something else. So it might be that you you have a particular dog, or maybe you want to uh adopt a dog that's a certain breed and it really requires a big yard, or maybe uh you just it needs to be near a park. There's all these different things that factor into what those wants and needs are, and sometimes if we don't have them necessarily right now, it's hard for us to think about it and it's hard for us to incorporate it, even though it could be as soon as a year from that decision. So try to think a little bit out maybe then the next year or two and understand what your life may look like and then. And you can kind of go back to the what are your needs and kind of incorporate those in. Another huge factor that a lot of people don't realize is like you what it what if you don't even want to live here? So wherever you're located now, if that's gonna be where you're thinking about purchasing home, like do you even want to be there long term? If not, it might be a reason to pause and just kind of assess things because although home prices are not volatile, as I mentioned earlier, they do happen to be a lot less liquid. And if you add on a low demand for someone wanting to purchase your home, you could really find yourself in a tough spot wanting to move, wanting to relocate, and not being able to because no one's willing to buy your house for a reasonable price. And there's only so far sometimes that you want to lowball yourself on selling it. So a lot of times you'll just end up sitting in the house until someone actually will do it, or maybe you're in a spot where maybe rentals will still be attractive for someone and you can turn it into a rental for then. Sometimes it may not even be about you wanting to live somewhere or not. It may just factor in that you're early in your career and you want to have the ability to be mobile for your career. If someone's going to give you an opportunity somewhere else, you don't want to have to go through the logistics and the additional stress of selling a home, especially again if it's just not liquid and it's not something that's a good time to do it from a liquidity standpoint, some being able to actually sell it and get a reasonable value for it. So, in closing, I think the the big dangers that I'll highlight, I kind of sprinkled in throughout of purchasing a home is if you lose employment or have to take a lower paying job, obviously, most of those things are not going to be something you factored in when you're determining whether a house was going to be affordable for you. So those could have a dramatic impact. Hopefully, they're short-term type scenarios, and hopefully you've built up a sizable emergency. If you have six months, that that usually should do the job for most kind of gaps in income, but you never know. And so y'all that's always gonna be one of the dangers, but it's something you can't control all the time, and having that emergency saving should give you a lot more confidence in approaching your ability and the the want to actually purchase a home today. So another one is if you actually needed to relocate, just talked about this. But if you have trouble selling your home due to lack of demand, again, that's that's a tricky spot where you may just have to lowball yourself and just take a low value offer just to get out of the house so that you can relocate and not have to deal with the stress. Or sometimes it that may not be an option. You can't go down any lower because it doesn't make sense financially, and and you kind of get stuck. So um again, it's definitely one of the biggest risks to factor in. I then forgetting to factor in the cost of upkeep and maintenance. So you end up getting a gigantic yard. Like, are you gonna go out and mow it? Are you gonna do those things? I have a pretty small front and backyard, and and some summers is hard for me to make sure I'm constantly keeping up with some of those things. But yeah, if you could always pay for someone, but then that's an additional cost. There's all these different things that add up when you're a homeowner. And I didn't cover it here, but yeah, just make sure you factor that into what you can afford and just make sure that you're ready for those things that you're saving for, those unknown expenses, even though you don't necessarily know all the time when they're gonna show up. Emergencies happen all the time. And general maintenance and upkeep of your house shouldn't be an emergency, essentially, because they they are gonna happen, they do need to occur on a regular basis. It's just you don't know the exact dollar amounts or when they're gonna occur. So just make sure you have a separate savings outside of the emergency savings for home maintenance and upkeep, and not on this topic at all, but I'd do the same thing for your vehicles. So hopefully that was insightful. Um, if you're looking to purchase a home, hopefully this put you at ease that there's not necessarily a timing issue as far as trying to time it right. I feel like it's very more likely that things are gonna be more expensive moving forward, at least on the value of the homes. But hopefully, at least in the near term, again, this is 2019. If interest rates stay where they're at or can even go lower, that's obviously gonna be a good situation. But neither of those would be a reason to wait because you can always refinance that if they fall lower than what you end up getting today. And so the big thing is just do some introspective work, do some research, make sure that you're gonna be super ecstatic and happy about your decision to purchase a home. But the the other stuff, the uncontrollable things like the interest rates and the value, not really relevant. And again, with the trying to time the housing market, it's more likely to go up, and when it goes down, it's not really a sizable drop. So I wouldn't be hanging my hat that there's gonna be an anomaly where it's 20% drops because that's that hasn't happened in the last 54 years. So let me know what your thoughts are. Shoot me some comments. Thank you for listening to Techie Personal Finance Bootcamp. Remember, if you like what you've been hearing, to subscribe, review, and share with your friends and colleagues. I'm also still taking suggestions for future episode topics and guests. If you want to take your connection to the show to the next level, you can find me on LinkedIn or on Facebook. Hit you next time on Techie Personal Finance Bootcamp.