How to decide to buy a house?

How to decide to buy a house?

There are a couple of rules of thumb that will save you a lot of money and a lot of emotional turmoil if you just act within their parameters. Especially in these days of high prices and rising interest rates, you the young buyer should be very careful.

The first rule of thumb is that if it is decidedly cheaper to rent, then rent a home instead of buying into a hot market. Where I live currently, anyone just entering the market is paying much more than renting. There is such blind competition to buy that there are no show homes as they are sold as fast as they can build them. Prices are high and interest rates are rising which means the monthly cash draw is high and getting higher.

On the other hand there is a glut of rental housing available and few high quality renters to take advantage of the situation. A high quality renter is one with a steady job which gives him/her the capacity to pay the rent on time. Persons like this tend to take care of a landlord’s property. Landlords would rather take less rent per month and have someone in that will take care of their property.

If you buy a house you have to pay the mortgage, the taxes and the upkeep of the house. Also you tend to spend money to upgrade the house. If you are renting, you only pay the rent. If there is a 20, 30 or 40 percent difference between the monthly cost of renting and buying, you can rent a house and save the difference.

The important thing here is that hot real estate markets inevitably correct themselves. If rents get this far out of whack with ownership costs, landlords get out of the market which increases supply and drives down prices. By renting you remove this risk for your equity. You will not be stuck with a big mortgage and no equity or minus equity in your house when the hot market corrects. When the market does correct, you do not have to unload a house to buy into the new adjusted market. You will have money saved and have a good credit rating. The banks will love you and vendors will clamour for your business. You will have all the power to get the best price when you want to buy into the corrected market. The banks will also give you the best interest rates as they need low risk borrowers at that time as others are missing payments.

How do you know when the market has corrected? Well, it may be simpler than you think. First you check the census figure and find out what the average family income is for your area. 30 to 33 percent of a family budget is the maximum that should go into paying for a roof over your heads. If the monthly costs of owning an average home are greater than 33% of average income, the market is due for a correction. Particularly if it is up over 40%, you should wait in a rental house for the market to correct. You will watch house prices climb to ridiculous amounts and listen to your friends brag. However, when the market does correct, you will listen to their sad tales as you buy at an affordable price that does not overstress your budget.

When markets correct, they tend to overcorrect. By being smart and being patient enough to THINK YOUR MONEY you will be able to get a bargain price if you buy into the market at this time. You will either be able to get a much nicer home than you ever imagined or you will not even come close to needing to use the full 33% of your budget to meet your housing needs.

The upside of this is that housing prices always recover. If you follow this advice you will have done the first half of the “buy low, sell high” axiom for making money. Money is simple and it always moves to equilibrium of affordability. Don’t let yourself be caught in the panic of an overheated real estate market. These two rules of thumb have always been true. If you accept them and act accordingly you will save/make yourself hundreds of thousands of dollars and save yourself a lot of stress.

What is interesting is that I first published this article over 2 years ago when the housing market on at least 3 continents was flaming hot and I don't need to add more than what is in this article to prove that overheated market correct themselves.