Why your first home shouldn't be your dream home
It may pay to settle for less when purchasing your first home.
Since 2000, homeownership rates in the U.S. have hovered around 66% to 67% of the population. In 1900, fewer than half of Americans owned their own home. The biggest surge in homebuying came after World War II, when many young families were encouraged to buy a "starter home."
Attitudes about how to buy a home have fluctuated as much as interest rates during the decades since World War II. Eventually, many first-time homebuyers were encouraged to buy big, in order to stretch their budgets as much as possible and buy the home they wanted to live in forever.
Given the high level of foreclosures and the loss of value in many homes, today's buyers are more wary of taking on a home they cannot afford, but many are still tempted to make their first home purchase a dream home rather than a starter home. (Bing: What do mortgage interest rates look like today?)
A recent Coldwell Banker Real Estate Brokerage survey of its brokers revealed that while affordability was the No. 1 concern of first-time homebuyers, 81% of those buyers consider move-in conditions very important when buying a home. Only 7% were considering buying a fixer-upper.
Jim Gillespie, president and CEO of Coldwell Banker, was quoted as part of the survey, saying, "In the past, first-time homebuyers were willing to purchase older, more basic houses in an effort to save money and break into homeownership. It is important for first-time homebuyers to remember that by considering a fixer-upper for their first home purchase, they can build equity over time and later move up and into their second-stage home that better reflects their expectations."
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The economy and your home
Personal-finance writer Liz Pulliam Weston describes four economic changes that should discourage buyers from overspending on their house payment:
- Inflation: Rising prices, while hard on the household budget, usually came along with substantial annual raises. These days, homebuyers cannot count on a significant raise to make their housing payments easier to handle.
- Two-income couples: Weston says that when more families had a single wage-earner, the other spouse could work to pay for the house if they were in financial trouble. Today, most households have two workers, and that double income is needed to make the mortgage payment. Consider trying to base your budget on one income or perhaps 1.5 incomes to make sure your housing payment will still be affordable if one spouse stops working.
- Lenders: Thirty years ago, it was difficult to qualify for a loan for more than was easily affordable. But as lending practices changed, mortgage qualifications became looser. Standards have tightened today, but lenders will always give borrowers the maximum amount for which they qualify — not necessarily what they should spend.
- Retirement: Thirty years ago, most people had their retirement covered by a pension and could count on Social Security. Today, retirement savings are more typically funded individually in 401(k)s and individual retirement accounts that come directly from your budget.
Each of these changes suggests that today's homebuyers should be shrinking their housing budget rather than expanding it, making sure that they can comfortably keep up with their payments, pay down their principal and build equity in their property.
Calculating your housing budget
Lenders will qualify you for a loan based on your credit score, debt-to-income ratio, income and assets, and employment history. But all potential buyers should do their own calculations to determine their comfort level with a budget. While lenders these days generally prefer to limit housing expenses (principal, interest, taxes and homeowners insurance) to 28% of the borrowers' monthly gross income, you should think about your individual spending habits.
A lot depends on your other debts and expected income and expenses. Most lenders prefer to keep total debt to income — including all the minimum payments on revolving debt or other loans, such as auto or student loans — to less than 36% of your gross income, although in some circumstances, this can increase to 40% or even 45%.
- MSN Money: 7 worthless excuses for not saving
Make sure to budget about 1% to 3% of the home value for future repairs and maintenance. Those costs can quickly derail your budget.
Most homeowners should plan to stay in their home for five to seven years, so consider what may change in those years. If you plan to have children and may want to have one parent work less, your income could drop. If you enjoy golf, travel or skiing, you must factor that into your budget or decide if you are willing to reduce your spending in that area. If you work on commission or as a freelancer, or if you depend on overtime earnings, make sure you base your budget on a low-earning year rather than a high-earning year in case your income drops.
- On our blog, Listed: HUD videos offer basics of homebuying
On the other hand, you can consider increasing your housing spending if your retirement is fully funded, you are debt-free and you expect a guaranteed increase in income.
The bottom line
Although no one can predict with accuracy whether or by how much home values will increase, purchasing a home you can afford and building equity by paying down the principal are the surest ways to get started climbing the property ladder.
Buy what makes you happy....but don't come crying for handouts when the foreclosure gods come for your house because you HAD to have the biggest and best! Keeping up with the Joneses will only get you as far as bankruptcy.
We're currently living in the box somebody's stove came in. Now we're hoping to upgrade.
I've got my eyes peeled for a refrigerator box. SWEET!
Every time I see conventional wisdom pointing a certain way, I start looking for contrarian possibliities. Usually by the time conventional wisdom hits mainstream, it is way behind the trend so if you want to get ahead of the came, use you brains and you could do very well.
I don't need a pretentious home to impress everyone and I don't want to be stuck with massive utility bills, but I think anyone who can afford to do so should be buying as much home as they can reasonably expect to be able to pay for right now. Prices and interest rates can't get much lower, people need a place to live, the economy will eventually pick up and those currently foreclosing and going into bankruptcy will eventually be back in the housing market.
I think it will be another four to five years before things really start to turn around, but at that point a major correction back up will occur. By then, I think a person will look back at money spent now and be very happy. My logic? It will take the government that long to get their act together with fiscal policy, but most important, a huge segment of the population- those most likely to buy and drive prices up- is now out of the buying market because of their credit w/foreclosures and bankruptcy. In about 4 years, these folks will have repaired their credit enough to start getting back into the market, and at that point, demand will go up very quickly.
Finally the article that separates "Want" from "Need" and "I am worth it even though I can not afford it"!
Live WAY below your means, it is the key to comfort and happiness.
Life is unpredictable.
A starter home may turn out to be the home that you stay in for a lifetime. What's wrong with that?
I think a good strategy is to purchase an easily affordable (initial price, carrying costs, maintenance) home. It should be affordable on one income since kids happen (at least they should).
It should be capable housing a family throughout the years and staying in after the children leave (if they do).
Also, live simply and happily. Our possessions should serve us and not the other way around.
Don't forget, debt stinks and no law says that you gotta borrow.
We bought a "starter home" 14 1/2 months after we were married when someone tried to break into our apartment. It was in our budget. When husband had to go on disability income 11 years later, we could still make the house payment with one-half the income we had previously. I would have liked a larger home, but I don't want to have to worry about how to pay for it. Our area has been hit hard by businesses closing-GM, DHL, and predatory lending, etc. This has had a cascade effect here. Banks were telling young adults we know that they could afford homes they couldn't. Fortunately, they were smart enough to listen to their parents, in-laws, etc.
The Zeitgeist Addendum movie as well.
as is usually the case- if everybody is doing it, its probably wrong. and certainly if your corrupt, *run by businessmen government* is telling you to do it.
homes are to provide a place to live, not "an investment". that profiteering concept is what made (and continues to make) all these real estate manipulators so much money (off of you for your entire life), has made it such a big part of the economy (including how our fiat money and never ending debt are created), and is why so many "hands" get a piece of the action when you buy a house. it is totally manipulated and is no where worth the money you will pay out. not to mention that historically, owning a home is always a loss except in rare cases or periods of deliberate gross manipulation
don't forget that the people who are supposed to represent YOU- your governments, are totally conflicted in that they make money off of you buying a home, and paying as much as possible, so that they receive more (i.e. taxes). This is a failed system(for the people anyhow!). of course we know things are the way they are on purpose- and are maintained that way.
also don't forget that you can never OWN a home (or even a car really, if you want to drive it) anywhere in this country as long as you have to pay a "recurring fee" like property tax (or vehicle registration, fees, etc that permit you to use it). it doesn't matter if you paid $500k towards owning a home; if you didn't pay $100 in taxes, they can take it from you? how does that work?
for one, just don't pay these ridiculous prices for a home, and they will adjust.
if you get a loan for a home, that debt is created out of thin air, and now you magically owe money that never existed.
Remember that over time the house you live in seems to get smaller. Once the parents are too old to have gatherings at their house, you can do it if you have the space, for siblings, nephews, nieces, etc.
Bottom line, buy the newest, biggest, nicest house, best neighborhood, that you can AFFORD. You wont be disappointed everyday, when you come home from work, knowing that you got what you wanted, and dont mind paying the mortgage every month, because you got what you really wanted in the first place.
Oh, puh-LEEEZE! Some people actually live their whole lives in a "starter" home...you know, the 1400 sf 3/1 that housed whole families of six forty or fifty years ago! I laugh when I see couples with a small child and one on the way insist they HAVE to move...no way can a family of four with two kids MANAGE in that 1900 sf 3/2 (with a den and finished media room in the basement, plus a little yard!)
They HAVE to get the four bedroom with a master bath the size of a bedroom and a kitchen with double ovens and granite. It is both sad and silly to think that every home should have a bedroom for each child PLUS a guest room AND a playroom AND formal and informal livng and dining rooms. It is also a fast track to financial ruin. Unless you really are wealthy--learn to live together as a family in a regular sized home.
Ok, you buy a house for 100k and look forward to "move up" in ten years from your starter home. In ten years your first house is worth 150k, but now the 200K house you really wanted, now sells for 300k.
This is just a 3 1/2 % normal annual increase in value.
Same story here as others, we waited to buy, when friends got their first real jobs and bought starter homes, we waited and bought a real house, in a real neighborhood, that we wont grow out of, this is the best way to do it.
By the time you factor in the transaction costs, cost of moving, costs of repairs, and starting over on a new loan...its better to wait and get the house you want the first time.
I know because we tried to sell ours in 2009-2010. It didn't sell and now we have no choice but to stay put.
This article is possibly the worst recommendation on the face of the planet. Buy what you can afford, get the best dream house you can that fits your budget. NEVER NEVER Settle for what you can take your time with and find something better. The key phrase is to buy within your Means.
If your a fixer type of person, you might have a advantage, as you might be able to turn your "Fixer upper" into your dream home. But remember that your free time - non work time - is precious.
Think of your home as a permanent place to live, not a temporary until I can get my dream home place. Put down roots, get to know your neighbors, and the neighborhood.