Today's market can be confusing. There's an article at least once a week in every major publication either about "The Pending Bubble Burst" or "Home Prices Reaching New Heights." One article seems to imply that the market is going to crash, the other makes it seem as though the market is still moving up.
As a home buyer, especially a new home buyer, this does little to help decision making in the home buying process.
The truth of the matter is much of what's discussed in the news should have little bearing on whether or not MOST first-time home buyers should purchase a home.
The secret is not what is happening to the market, it's what's happening with YOU (the Buyer)
A Brief History
My parents bought their home in 1980. At the time interest rates were climbing and prices were stagnating. It got so bad in the early 80's that it became almost impossible to afford a piece of property unless you had large amounts of cash. Can you believe interest rates were once at sixteen percent!
In fact, in those days, 100% financing was unheard of. The mortgage broker did not exist and it was paramount that a buyer have at least a 20% down payment in order to buy property. Most first-time home buyers relied on family members to loan them their down payment.
My parents probably paid about $70,000 for their house which is now worth 10 times that in today's market. Over the 28 years they've been living there, I've never heard them talk about interest rates or home prices (other than to say how they've gone up so much in 28 years). I'm also confident that they could have cared less about the Japanese bubble boom and the crash that happened soon after in the 90's.
Answering (honestly) these three questions can help you determine whether or not it's time for you to get into the real estate market.
Why am I buying a home?
There are many good reasons to own real estate, especially in Hawaii. The market here moves quickly and buyers (especially first-time homebuyers) can be priced out very quickly. I believe that owning a piece of property is essential to being able to stay here indefinitely.
Some good reasons to own real estate (in today's market) are as follows:
- The pride of home ownership. The feeling of winding down in your own place every night is a psychological boost. It's also nice knowing that the improvements you make to your property will always be yours to enjoy.
- Control of your property and payments. Not having to worry about a landlord moving you out of your place is a comforting thought. Although there are improvement and maintenance costs of owning a property, the mortgage payments should stay relatively the same for the length of the time you own your property as opposed to rent which will probably go up every year.
- Tax benefits. For those who are beginning to make a good amount of cash, the interest paid on a mortgage, real property tax, and some closing costs can be deducted at tax time.
- Long term appreciation. Over long periods of time, Real Estate (especially in Hawaii) has had a good record of appreciation.
Some not so good reasons:
- Short term appreciation. Unless you're interested in becoming a professional investor, I'd stay away from this one.
- "All my friend's are buying." There's no reason to keep up with the Jones's
- You, your friend, your Mom heard of a "good deal" down the road. Usually if it sounds too good to be true, it is.
How long do I plan to stay in the home?
In the last run up we've had since 2003, it was ok for people to buy a property, live in it for a year, and sell it for a profit. Right now the area that your "starter home" is in may have prices that are stagnant, or may even be declining.
Selling a property will cost money (roughly 7% of the sale price). This is to pay for escrow fees, a termite report, a survey, Realtor's fees, etc. Therefore, your property must appreciate 7% just to break even.
If you think you will be moving (especially off-island) in the next 1 – 3 years, it may be better to not make such an investment. The cost of selling alone may put you in the red.
For those that plan to stay planted for at least 5 years or more, chances are that owning will work out better than renting.
Can I afford what will suit my needs?
A buyer with no down payment may want to reconsider a large mortgage which could not be covered if a spouse is out of work for an extended period of time.
If the market in your area fails to move upward, you may owe the bank more than what the property is worth. Without having a savings buffer or equity in the property, the situation could become serious.
A good Realtor will be able to guide you in determining the price range you should be looking in, and what inventory is available in that price range. Your Realtor will probably know of a good lender who can pre-qualify you for a loan.
Don't only buy what you can afford but buy what you "need" rather than what you "want" and in a good area to assure price stability and future appreciation for re-sale. Also, come to grips with what you can "afford" as this determination will uncover your "sacrifices" that you may need to make. Balance is key.
