Buying a House? In the Middle of a Housing Crunch?
4 December 2007
7 Comments
Every so often, something happens that makes me wish that I could already be living in a house. Last week, it was an ordeal with getting the apartment complex’s maintenance man to fix our shower; this week it’s the fact that I don’t have a garage or shed that I can store things I don’t need year round.
But patience is a virtue. In this case, it is doubly so because the longer I wait to buy a house, the bigger the down payment I can make, and the smaller the mortgage that I’ll be worrying about. And with all the fluctuations the housing market is going through, it seems likely that waiting will make sure that my major investment will be a little safer.
So imagine my jealousy when one of my friends announced that she was planning to go house hunting a couple of weekends ago. She’s only been out of school for just under a year, so the only thing I could think of was how she could afford a down payment.
After further discussion, it was established that she had only minimal savings but the bank was willing to give her a mortgage. Even so, she still couldn’t afford most houses with in a thirty-minute commute to her work, but she was going looking anyway.
Why?
Her apartment complex is raising her rent. Not quite as high as her prospective mortgage payments, but she’d rather build equity than pay ‘the Man.’ She’s on her own, without even pets, so she doesn’t need more space. She just wants a place that is legally hers.
I’m starting to blame this whole housing crunch on the same logic this girl is using: even if you have to take on debt you can’t afford, building equity is worth it. It’s socially acceptable to be making payments on a mortgage which, if it was translated into credit card debt, would make us question a person’s ability to tie their own shoes.
I’m not saying that mortgages are evil or even unnecessary. But, I think, banks and other lenders don’t take into account whether a borrower can really afford a mortgage anymore, as long as they’re sure that the bank’s bottom line is solid. Worse, most first time home buyers don’t really have an idea of what sort of mortgage is actually affordable. They just want a big shiny new house that ‘belongs’ to them.
You are correct that the housing mess resulted in ignorance. Part of that ignorance has to do with building equity, but there are many other ignorances that contributed. This includes ignorant moves by the financial institutions as well. And, now they are paying for it, justifiably so.
Remember, don’t base your decisions on what others are doing. It sounds like you are on the right track by building your savings and waiting this mess out a little longer. It will pay off for you in the end.
Thursday, wow. Your friend is going to in for a real experience if she follows through and buys a house with someone else’s money. I posted an article last week the sums up her approach nicely, A different kind of renting.
And you’re right about having a smaller mortgage. You will be much happier when the bank is surprised at the size of your downpayment. They’ll be especially surprised when you turn down the chance to borrow more for a more extravagant house!
Oh no! This sucks for your friend. She fell for the trap. Unfortunately the glory of owning your own home and building equity (huh? what equity) lures people into buying. I don’t believe real estate is about timing the market, its whether or not you can afford to buy it. So many people think that if they buy “low” they can sell high, all of a sudden forgetting about the interest, maintenance, taxes and insurance paid into it in the interim. I hope she has the discipline to cut other costs and somehow increase her income.
Banks really are surprised when you don’t want to borrow all that they say you can. I remember when I bought my first house a few years ago, the lender was talking to me and said “you’re approved for $X, slam dunk”. I said ok to that, and then he went on to say “we can go higher if you want, won’t be an issue” (granted we were in a very hot market…houses were going for $20K over asking the day they were put on the market). I laughed at him, and said I wouldn’t even be spending that much. I know what the formulas say I can afford…but I also know how much *I* say I can afford, and it’s less than that. He was just completely shocked. I don’t know if it was b/c of my age (I was 25), or if it was just that I didn’t want to go into huge amounts of debt, or a combination that shocked him…but he was shocked.
Haven’t we learned anything from the mortgage debacle?…
Thursday Bram at Money Socket has a friend who is a year out of college and has started to go house hunting. Thursday logically wondered how her friend could afford a down payment. (Continue reading if you want to skip a perm at the salon, because the …
You should really try to talk her about it and help her work out how much she could afford and tell her that she’s not building equity at all in the first few years. Instead she’s just paying a huge amount of money to rent money. I talked to one of my friends a couple years ago and convinced him not to buy because he had no downpayment and the mortgage would be 3x his rent. He is glad he didn’t do it back then because all the houses are depreciating a lot in value.
Well, my friend has at least decided to think about whether or not she’ll really be able to buy a house — the idea of depreciation scares her a bit. Still, it’s scary to think that she isn’t the only one out there thinking in this direction.
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