April Financial Fitness Challenge--Know When to Buy a HouseSusan Tiffany, CCUFC
Before the economic crisis, the mantra was that buying a house was a better financial choice than renting—everyone, it seemed, bought in to that conventional wisdom. Then, as home values tumbled and people saw equity they'd built in their homes evaporate, the smart advice was that renting was the only rational decision.
Lessons learned the hard way
For decades, before the Great Recession, most financial counselors believed that owning a house was the way for average consumers to build wealth. That was true, and still is, if the house rises in value over time—called appreciation in the jargon of economics.
The combination of growing market value and declining loan balance, as you paid off the mortgage loan, assured that you were wealthier owning a house than renting. When you rent, your payments only enrich the landlord—you do not participate in the property's equity growth.
We've learned, though, that housing markets do not always rise. They can stagnate, and they can fall. And that doesn't make buying a house a bad idea—it just means we have to be more realistic about expectations and take more into account before making a decision.
Housing turns the corner
Trulia, the online real estate company, recently reported that it's now more affordable to buy than to rent in 98 of 100 markets. Two standout exceptions are Honolulu and San Francisco (ironically, home to Trulia).
Three facts support the affordability argument:
- Home prices are down.
- Mortgage interest rates are low.
- Rents are rising.
Ken H. Johnson, a professor of real estate at Florida International University, Miami, told CNNMoney.com that he believes home prices nationally have hit bottom.
"The ship has turned," he says. "Markets should slowly start to recover. Housing will return to its traditional role of a safety investment."
Buying presents challengesThose rising rents are a sticking point for consumers hoping to buy—you can't save a down payment if rent is taking an ever larger chunk of your budget. Consider these factors, too, when you face the rent-or-buy question:
- Credit score. If your score is 760 or better, lenders will be happy to see you. If your score has lost some luster, you might get a home loan but you'll pay more for it; focus on improving your score with consistent, timely payments before approaching a lender. Bring your credit balances down and don't apply for more credit unless you truly need it. Go to AnnualCreditReport.com and request your free credit report from the three major credit bureaus; make sure no errors are dragging your score lower than it really is.
- Debt ratios.The amount you owe, as a percentage of your income, can affect how much you'll be able to borrow, or even if you'll be able to borrow. This debt-to-income calculator can help you evaluate how you measure against this scale.
- Job stability.Another durable lesson from the recession is that no job is guaranteed. Still, you usually know about how likely you are to continue working. Is your company laying off workers? Or, is your company likely to ask you to move to another location to keep your job? Answering Yes to either question suggests this might not be the best time to buy a house.
- Upkeep demands.Face it—you might prefer wielding a golf club to a thatching rake on weekends and evenings. Not everyone is cut out for the do-it-yourself aspect of keeping up a property. If you can afford it, you can pay others to take care of routine maintenance, but most homeowners end up performing at least the basics. This takes time and requires an investment in tools and supplies. Prepare for ongoing fix-up costs by saving some money each payday to build your maintenance account.
The simple question—will it cost more to rent than to buy—does not have a simple answer.
The simple question—will it cost more to rent than to buy—does not have a simple answer. You can get a clearer picture by using the New York Times rent vs. buy calculator.
Financial Fitness Challenge
Your credit union money mentors bring you this website and other tools to help you make the most of your financial resources. The Financial Fitness Challenge continues to look at ways you can make better financial habits no matter what condition the economy is in.
Each month we randomly select five winners to receive $50 Visa gift cards; we choose each month's winners only from that month's entries, so enter every month. Remember to register for the Financial Fitness Challenge.
Susan Tiffany, CCUFC