Beyond the "Bubble"
Residentially speaking, there's never been a more confusing time for Americans. Mixed messages abound. If you're a renter, you wonder if it's time to buy. After all, house prices keep rising steadily. What if you wait so long that you're priced out of the market? Plus, interest rates are still manageable.
On the other hand, if you already own a home – especially one in a hot market – you wonder if it's time to sell. What if the much-dreaded "bubble" bursts before you get your piece of the pie? And even if it doesn't, don't you deserve to "trade up"?
Take a few minutes to benefit from the cool head and sage wisdom of financial counselor/real estate guru Eric Tyson, author of Home Buying for Dummies, 3rd Edition (with Ray Brown; Wiley, 2006), House Selling for Dummies, 2nd Edition (with Ray Brown; Wiley, 2002) and Real Estate Investing for Dummies (with Robert S. Griswold; Wiley, 2004). Tyson urges prospective buyers/sellers to think it through carefully before taking the plunge.
"It's easy to get so caught up in hoopla and hysteria that you make an emotional decision or a too quick one based on false assumptions," Tyson says. "Don't do it. Buying a home, whether it's your first one or a trade up, is a big deal with big implications for your economic picture and your quality of life. Think it through."
Tyson offers a few tips to help you do just that, no matter which side of the (white picket) fence you're standing on:
If You're a Renter Thinking of Buying
First, be sure you really want to buy and aren't succumbing to peer pressure.
If you're a relatively young renter, you may have the impression that home ownership is the "grown-up" choice. Nonsense, Tyson says. Buying a home is a personal choice and it isn't necessarily the path to fun. In fact, as he and his co-author point out in Home Buying for Dummies, a study by Peter Rossi and Eleanor Weber of the University of Massachusetts found the following:
- Homeowners are less social, on average, than renters – spending less time with friends, neighbors and co-workers.
- Homeowners spend more time on household chores.
- Perhaps for the preceding reasons, renters have more sex and less marital discord, and cope better with parenting than homeowners do!
"None of this is meant to suggest that you shouldn't buy a home," Tyson says. "But do consider the impact that the increased responsibility will have on your lifestyle."
On the other hand, don't underestimate the financial benefits of homeownership.
For most people, owning actually is less expensive than renting. Obviously, there are tax benefits. The IRS and most state governments allow you to deduct, within certain limits, mortgage interest and property taxes when you file your annual income tax return. And generally speaking, the value of a home appreciates as the years go by, turning your home into a "forced savings account" that you'll be glad for in the future.
Here's a guideline that may change the way you view your seemingly cheap monthly rent. To figure out the price of a home you could buy for approximately the same monthly cost of your current rent, simply do the following calculation:
$________ per month x 200 = $ ______________
Example: $1,000 x 200 = $200,000
See? If you are paying rent of $1,000 per month, you would pay approximately the same amount per month to own a $200,000 home (factoring in tax savings).
Don't let "lock out" fears rush you into buying.
From time to time, particular local real estate markets experience rapidly escalating prices. During such times, some prospective buyers panic, often with encouragement from those with vested interests in converting prospective renters to buyers. Escalating housing prices make some renters feel left out of the party. But here's a word of sanity: Never in the history of the real estate business have prices risen so high as to price vast numbers of people out of the market. In fact, patient buyers who can wait out a market that has increased sharply in value are often rewarded with steadying and, in some cases, declining prices.
If You're a Home Owner Thinking of Trading Up
Make sure selling is right for you holistically, not just monetarily.
Don't let a "hot housing market" cloud your judgment. If you were lucky enough to buy a nice house in a thriving market 10 years ago, the temptation to sell and clear a tidy profit can be huge. But because you can sell doesn't mean you should. Do you really want to uproot your kids from school? Are you ready to break ties with the neighbors you've come to know and like? Are you likely to fall into the trap of choosing a trade up that's too "up" for your budget and bank account? Consider all angles before you make your decision.
"Nothing's wrong with spending money to trade in one house for another, but before you set those wheels in motion, think about the impact of that kind of spending on other aspects of your life," Tyson and his co-author Ray Brown write in House Selling for Dummies. "The more you spend on housing, the less you'll have for other goals that you may have defined for yourself, such as saving for retirement, taking annual vacations and spending less time working and more time with your family and friends."
If you do decide to sell, don't get greedy and grossly overprice your house.
You may be tempted to do so in hopes that an uneducated buyer may pay you more than the property is really worth. The danger in this strategy is that you won't find a fool who will part with all that money for your overpriced property, and no one else will bid on it. Then, as you lower the price closer to what the house is really worth, prospective buyers may be wary of buying your property because of the extended length of time it's been on the market. In the end, you may have a hard time getting 100 percent of what your home is really worth. Price to sell and you won't regret it.
Finally, don't you become the aforementioned fool who buys an overpriced trade-up.
"Some housing markets are over-inflated at the moment," Tyson says. "And many people who successfully sell an overpriced house assume that they can trade up in the same or an equally hot market and repeat their success in a few years. It ain't necessarily so. Suppose prices fall and you can't recoup your investment? You might be stuck with a house you can't afford to sell. Add a job loss or a new baby to the mix and you might end up with some serious buyer's regret."
The bottom line, of course, is to be sure that any house you buy – be it your first or your fifth – is priced at what it's really worth. Assemble an all-star real estate team and get a good Comparable Market Analysis (CMA) on any house you're considering buying so you'll know the fair market value. And don't just take your agent's word for it. Read up on the "value" subject yourself.
"An educated home buyer is a happy home buyer," Tyson says. "Do your own due diligence. I always say there are two areas you should never enter into uninformed: medical procedures and real estate. The former represents your health, the latter represents, in many ways, your wealth and your happiness. Do your homework, no pun intended. Bubble or no bubble, you'll be glad you did."