Should we buy now or save more?

Asked by Alli, Union City, NJ Mon Aug 13, 2007

My husband and I are confused on what to do, we are tempted to get a home in this market but what is more benefical; equity or a bigger down payment?

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18
Melissa Manc…, Agent, Plainville, MA
Tue Aug 14, 2007
BEST ANSWER
Hi Ali: when buying in this market, your down payment is your equity, as you can’t rely on appreciation at this moment. If you plan on staying where you buy for a long period of time and can wait for the decline and then the increase to roll around, I would recommend buying now, as the interest rates are still low, and there is no guarantee on where they will be in the future. This could drastically affect your buying power and monthly payment if it increases significantly. Just quick calculation for you; for every $10,000 you save (or put down), there will only be about a $70 a month reduction in your mortgage.
1 vote
Deborah Madey, Agent, Brick, NJ
Tue Aug 14, 2007
I am assuming you are currently renting from the question. Each situation is different, but here are some of the general guidelines that influence my advice to individuals. It is a good time to buy for first time home buyers and for up sizing. It is not the time to downsize and move to a smaller home, if your primary motive is the financial health of the housing market.

First Time Home Buyers: The fact is that most people will not bank the difference between their rent payment and hypothetical mortgage payment. In theory, the concept of pay yourself first works. In the US, our low savings numbers prove that is simply not true. The vast majority of first time home buyers will rent, without substantially increasing savings and find themselves paying higher interest rates, and perhaps higher prices in the future.

Move-Up Buyers: In most markets, these individuals in the role of seller, will need to accept a discounted number compared to recent history. The net gain on the purchase size of their new property will more than offset the loss taken in the sale of the current residence.

Downsize Buyers: If you have been waiting to move from NJ to TN or NC, and other circumstances now make that possible, put a value on your lifestyle and weigh the pros and cons in your personal life as well as the financial. A down size buyer will absorb some loss in the sale that won’t be offset in the purchase. If your thoughts of down sizing can be delayed with little or no negative impact on your personal life, you might consider holding off. If you are yearning to turn the page to a new chapter, don’t short change yourself out of life you could be living today.

Interest rates may increase, placing homes out of reach tomorrow that are affordable today. First time home buyers, stretch slightly....but keep it within reason. You want to have a life, too. Sellers are negotiable. There are lots of buyers out there who want to buy, but simply remain fearful of the future. When buyer confidence ticks up, sellers will become less flexible with their price and terms. My advice to first time home buyers....Realize that you are in the driver seat, and make conservative sound decisions. If your job is stable, and you are confident in your ability to maintain your house payments timely, then it is a good time for you to buy.

Buying a home is not only about the numbers. It is also about the lifestyle you lead, how and where you spend your time, enjoy your family and friends and build the memories that you will recount years from now. Don’t forget that these intangibles have value also.
3 votes
Jim Walker, Agent, Carmichael, CA
Mon Aug 13, 2007
"This market" is likely to last until sometime in 2008. Even if you don't get in at the absolute very bottom this year, you will be getting in close to the bottom. It is not too early too shop now even if you don't buy immediately. Find an agent that is willing to stay with you for the long term, whether it is two months or two years. Get qualified for a loan using your current circumstances. You might find an ideal house at a great price that is very affordable for you, early on. If you find a gem - think about it overnight at least, then make an offer contingent upon inspections appraisal,and affordable financing available to you.

Ruth makes an excellent point about interest rate. the higher the down payment (up to 20% down) the better the interest rate. If you already have 20% to put down, and good credit, you don't need any more down to get the best possible rate for loans under $417,000 There are also great first time homebuyer programs, often subsidized by the city or state, with low rates and good terms. Not all lenders offer these, you have to ask. .
3 votes
Ruthless, , 60558
Tue Aug 14, 2007
I'm sorry but I really have to totally disagree with Trulia Roger. I'm not an agent, a mortgage broker, banker, economist or even a historian. But:
"Every serious economist out there will tell you nothing beats cash in the bank as a medium-term investment right now." Are you kidding me?!!!

That seems as credible of a statement as a real estate agent saying now is the best time to buy. Much of the downturn in the real estate market is fear and panic. That is what caused banks to fail!!! Sylvia is absolutely correct that foreclosures are mostly the result resetting ARM and people getting loans that should not have gotten them.

At least with real estate, you have something to show for your investment. It wasn't just in the depression that banks closed, in 2001 Superior Bank closed. Anyway, as I said, I'm not a banker or a historian and I don't even know enough about the Superior Bank situation other than the shock I got when I saw a line of people screaming at the door of their closed bankrupt bank. It was so surreal that I expected to see Jimmy Stewart and a movie crew.

Oh, I just keep digressing but Enron, Anderson Accounting, the US Government!!! Didn't we get out of debt as a country only to turn around and get further in debt? I wouldn't even claim T-bills or Savings Bonds are your "safest" investments. But back to "cash in the bank", It's the BANKS that loaned the money on the real estate that you are saying is a bubble waiting to burst.

I'm sorry, give me a roof over my head any day over a piece of paper. At least POSSESSION is nine tenths of the law. More tangents, Y2K!!! All your financial records whipped out because of a computer glitch.

I'm looking at potentially loosing up to $100,000 in my real estate investment. But I'd rather negotiate with the bank for a short sale than have had $100,000 worth of my retirement funds in Enron stocks or in a Superior Bank savings account or in cash in my mattress the day before the house caught on fire.

Don't be AFRAID to buy a home.
Ruth
Web Reference:  http://www.oak-park-il.com
2 votes
Jim Roth, , Chicago, IL
Tue Aug 14, 2007
Alli, find a good lender in your market - get your arms around what you and your husband can afford and what that looks like in the form of a house. You may be pleasently suprised or very discouraged by your buying power. A good LO (loan officer) should be able to give you sound advice on the advantage of buying today vs. saving more money for a down payment. The real estate market is what is - the mortgage world is totally redefining itself - learn what your options are today.
1 vote
Trulia Roger, Home Buyer, Alameda, CA
Tue Aug 14, 2007
Thanks for the clarification, Ruth. As far as savings, I'm squirreling away every penny I have left (after rent, which is less than 50% of what I'd pay in mortgage, HOA dues and maintenance; living expenses; and health care) and investing most of it in CDs over 5%, and a diversified portfolio of holdings in aggressive and conservative mutual funds and individual stocks.

The interest I earn on my cash and other liquid savings almost covers my rent! And it's real money, as opposed to the paper equity everyone has been borrowing against to pay for their humvees and big screen TVs. When prices drop and credit is hard to get, a lot of folks are realizing what they were spending wasn't real money, only potential profits to be realized if and only if they sold their home.
1 vote
Ruthless, , 60558
Tue Aug 14, 2007
Oh good, I'm not in trouble. I know I was not very clear. I was hoping someone like Jim would come along and understand the point I was trying to make and clarify it.

Let see if I can do this. You own a home in Florida and love it there. A bad hurricane hits and rumors fly that the insurance companies are going to discontinue all insurance in Florida. You know you must have insurance to keep your mortgage. You panic and put your house up for sale for a "priced to sell" price of $500,000. Your neighbor asks you why you are moving. You tell him and he puts his house up for sale too. Next thing you know, every house in town is on the market. Your house is no different than the house next door and there is only one "sucker" out there who hasn't heard the rumor. So you drop your price hoping to attract the buyer. Your neighbor doesn't want to be stuck, so he drops his price even lower. It is basically a reverse auction.

Now, someone sells their home for $350,000. The rumor turns out not to be true but you already bought a house in Georgia. You have to sell now. But people are afraid to pay more than $350,000 for your house since that is what the last house sold for.

People are hearing that the real estate market is "crashing" because of all the increased "foreclosures". When in fact they are two completely different things. For the most part, the foreclosures are a banking problem caused by the ARMs. But people panic and try to sell their homes causing a crash.

As for me potentially losing $100,000? I could also MAKE $100,000. As a matter of fact, I already did several times over the past 15 years because of real estate, which is why I can afford to lose $100,000. But I don't have a crystal ball so I have to be pessimistic right now.

And are you saving that cash as Deborah pointed out? Or are you throwing it away on rent and only earning 2% interest and inflation is eating up 4% of your savings? I've very glad you didn't take offense to my previous post and I hope you don't to this one either. I don't have the facts and studies to prove it, but I can use the same old line why real estate is historically the best investment, "It's not like they are making any more land."

Don't be afraid to buy a home.
Ruth
Web Reference:  http://www.oak-park-il.com
1 vote
Trulia Roger, Home Buyer, Alameda, CA
Tue Aug 14, 2007
One quick clarification: if you are educated about your options, are planning to hold on to your property for several years, can afford the maximum payment on your mortgage without stretching too much, and if you want all the benefits of homeownership (like the ability to pick your paint and carpet colors, or not being afraid your landlord is going to sell the place you're renting and having to move at a moment's notice), then by all means it's always a good time to buy. Nothing anyone says here or elsewhere applies to everyone. Every property and life situation is different and the "right time to buy" is strictly in the eye of the beholder.

That being said, I'll say 2000 was a great time to buy, and late 2006 was a great time to sell. That's what I did and look forward to doing again when the market makes sense :)
1 vote
Sylvia Barry,…, Agent, Marin, CA
Tue Aug 14, 2007
I was not going to reply because a lot of good reasons have been given, but I do want to respond to Trulia Roger (yes, we love you, but we will still respond)

I totally agree with the only if the do your math and only do it if the numbers are right, but i do want to clarify the statement about buying ' NOW' in 2004, 5,6,' and got into trouble because of ARM resetting, foreclosure, ...etc.

I think that was caused more by the lending practice, creative financing and how those ideas were sold to clients and how dicipline and realistic the clients are, but not beacause whether this is a good time to buy or not for somebody or not.

I had one couple who actually bought at the height of the market. They were very conservative to start with. We looked at places but I knew they would not buy until they were O.K. with the payments, 30 year fix with 10% down (they had to sell a house out of town for the downpayment).

Well, after they talked to the mortgage broker about options, they did a complete turn around, went with 100% financing, ARM. To say that I was shocked, is an understatement. I asked them many times if that's what they really want to do, the answer was not only affirmative, they were very happy. For them, they have good jobs, stable income, expected to receive raises, no pre-payment penalty, and they want to stay in the same house for years. They are also diciplined enough to pay the mortgage plus.

I advised them that that the housing market might go down and they might want to wait. However, they were fine with that because they want to stay long term and they know that the market will come back - we are in Marin. They went into the deal completely educated. To say they might not be worried today, they are probably worried; but will they come out O.K and more in the long run? I have no doubt.

So the answer to whether 'we buy now or save more', really depends on your short term and long term goal, the house you are buying, your own financial stability and job outlook, the knowledge about the financial world and housing market in general and yes, you have to love the house and the area you are going to move to.
1 vote
Trulia Roger, Home Buyer, Alameda, CA
Tue Aug 14, 2007
I'm not a pro or an agent, but my take is that if you buy now, you'll be paying a lot more than you will next year, or possibly the year after that. The numbers still don't make any sense in a lot of states. Just look at

http://patrick.net
http://thehousingbubbleblog.com
http://piggington.com
http://getforeclosures.blogspot.com/

for a sobering critique of the "now is a great time to buy" line. It seems "now" is always a good time to buy. Agents were telling me it was a great time to buy in 2004, 2005 and 2006 as well, and now tens of thousands of buyers who bought in 2005-2006 are upside down on their homes with ARMs resetting at 40% higher monthly payments, foreclosures are on track to hit 2 million this year, and even highly paid stockbrokers get denied loans at reasonable rates.

Just do the math and if the numbers don't work out for you, keep saving. Every serious economist out there will tell you nothing beats cash in the bank as a medium-term investment right now.

(note: this is a personal opinion that doesn't necessarily reflect Trulia's or anyone else's)
1 vote
Pam Winterba…, Agent, Danville, VA
Tue Aug 14, 2007
It's a great time to buy. Interest rates are still at a 30 year low, prices are very negotiable and the tax benefits of home ownership are abundant. My guess is we are good thru the 2008 elections. Hope this helps.
Web Reference:  http://pamwinterbauer.com
1 vote
Ruthmarie Hi…, , Westchester County, NY
Mon Aug 13, 2007
With respect to tax savings, you should remember that the bottom line has to include the loss of the standard deduction. You also need to consider that there may be more than the mortgage payment and property tax to deduct if you are new to itemizing. Things such as charitable contributions will now be deductible once you start itemizing. The overall picture matters and must be carefully weighed along with the interest rate you can get for the downpayment you are able to produce now vs. later.

One thing is certain, this is probably one of the best times to buy (depending on your location.) You have more room to negotiate as most of the country is in a buyers market. Ironically, the best time to buy anything is when most people are sitting on the fence. That can make it scary. But if you wait for the market to hit bottom, you will miss the bottom because you can only truly see the bottom in the rear-view mirror. The other wild card is interest rates. They are still very favorable. The market may hit bottom but if interest rates are higher, you could still end up paying more.
1 vote
The Hagley G…, Agent, Pleasanton, CA
Mon Aug 13, 2007
Also keep in mind the tax benefits you'l receive, and how that savings looks at the end of th eyear. It's a great time to buy.
Web Reference:  http://www.cindihagley.com
1 vote
Linette Carr…, Agent, Wilmington, DE
Mon Aug 13, 2007
My opinion is that prices haven't been this negotiable in a long time and interest rates are still very good. If you have saved enough money to put down a deposit on a home, your credit is in good shape and you can afford the mortgage payment, do it. By the time you save more money interest rates could go up ro the market could swing the other way and you will lose the buying power that you now have.
1 vote
Ruthless, , 60558
Mon Aug 13, 2007
It all depends on what you do with your money. If mortgage and interest payments are less than
paying rent and the income you receive on your "down payment" money, then you should consider buying. If you can get a better interest rate with a higher down payment, then you have to weigh the overall impact.
Ruth
Web Reference:  http://www.oak-park-il.com
1 vote
Ruthless, , 60558
Tue Aug 14, 2007
I agree that people (Americans mostly) are spending fictional money. But one of my comments about "having something to show for your investment" requires an economist and historian to properly explain. My parents had told me about a cousin living in Argentina during this uncontrollable inflationary period. He, and any Argentinian with money, was buying whatever they could before the paper wasn't worth anything at all. A set of golf clubs might not be a good investment but at least you have something to show for it.

But your comment, "And it's real money" doesn't mean it's not paper/electronic that could be worthless tomorrow.
Ruth
Web Reference:  http://www.oak-park-il.com
0 votes
Trulia Roger, Home Buyer, Alameda, CA
Tue Aug 14, 2007
I suspected this would cause a heated debate, and as such I'm not going to add fuel to the fire, but I'll just say I'd rather save 5 figures in cash every year from the mortgage I'm not paying on a place that's worth $100K less than I paid for it, and collect interest, than pretty much do anything else having to do with real estate at the moment (other than enjoying some schadenfreude about the tailspin the market is in at the moment)...

What I'm not understanding is the following:

Ruth said: "Much of the downturn in the real estate market is fear and panic. That is what caused banks to fail!!! Sylvia is absolutely correct that foreclosures are mostly the result resetting ARM and people getting loans that should not have gotten them." It seems you're saying fear and panic caused the downturn, and then you say that resetting ARMs and bad loans that caused the downturn. Could you please clarify what you mean? I don't think I understood the point.

Thanks, all, I look forward to more interesting points on this!
0 votes
Ruthless, , 60558
Tue Aug 14, 2007
So many people will tell you to get pre-approved from a bank and find a Realtor to show you the market, which is extremely important. But you also want to look at your credit score (as some commercials have made the public aware of) and make sure it is the best shape possible. And you want to talk with your accountant and financial adviser to see what the pros and cons are for you. Just having the down payment is a small part of the overall picture. Talk to friends and family who own homes and get their opinion since they know you. They might tell you, if something breaks you'll be lost because you can't even change a light bulb or you are so handy that you have a better chance of getting your equity through sweat than your paycheck from your real job.
Good luck,
Ruth
Web Reference:  http://www.oak-park-il.com
0 votes
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