Deciding to Buy a Home? Read this first.

A home at sunset

There’s no way around it, deciding to buy a home is difficult. If it’s an easy choice for you, chances are you may not have considered probably are forgetting to consider all of the salient issues.

In a prior post, we went through a brief overview of the home-buying process, here I focus on the first step, which can often be the most challenging hardest part.

Having just bought a home myself, I reflected on what factors I considered in deciding weighed in my mind as I came to the decision to buy a home, and I think they generally fall into three categories:

  1. Your Life situation
  2. Your Financial situation
  3. The Current Housing market

Your Life Situation

Perhaps first and foremost, there may be circumstances in your current life that are driving you to purchase a home — some will be legitimate, others not so much. For example, consider the following reasons:

  • You are planning to start a family and you want to buy a home in a neighborhood to take advantage of the public school system
  • Your current rental doesn’t provide important features that you value, such as a large spaces, a backyard garden, a home workshop, etc.
  • You’re tired of dealing with an awful landlord or neighbors that are too close or who you don’t get along with
  • You’ve finally found your dream job and want to settle in and join the local community

I would argue these are all important factors to consider, and there are many more important driving forces that may motivate influence you to buy a home. At the same time, there are also a host of other reasons you may be consciously or unconsciously considering that I would caution against. For example, consider these reasons:

  • Everyone you know has a home, and you feel pressured to purchase a home as well
  • You feel you are wasting money paying rent, and you’d rather put your payments towards a mortgage to build equity
  • You just finished school/training, you found a new job in a new town, and now you have enough income to afford a new home

If you are reading this and thinking none of these three reasons are your reasons for buying a house, then I applaud you!

I know I’ve had all of these thoughts run through my own head. But as you’ll see below, they are not really good reasons to buy a home — in fact, they are terrible reasons.

Your Financial Situation

Exterior of a modern home

Within my own network of colleagues and friends, I heard time and time again that buying your first house is an opportunity to put money into an reliable investment with assured returns. There is plenty of anecdotal evidence of people purchasing homes decades ago, and selling at a high profit.In fact, the advice I often heard was to overextend yourself with your first home, since you know you will grow into it, and it will be a great investment. This couldn’t be further from the truth for many reasons.

For instance, although the home may appreciate over time, much of this can be attributed to inflation. And, when it comes time to sell your home, you will likely not be seeing a true return on your investment, since you will most likely use the funds to purchase another home, pay for closing costs and realtor commission. Finally, homes typically require about 1% of their value in maintenance every year. So a $500,000 home will need at least $5000 in maintenance on average every year. Add this to other recurring expenses that come with the home like homeowners insurance, property tax, utilities, mortgage interest and potentially mortgage insurance, and it becomes clearer that a house should not serve as a true investment.

If all factors in your Life situation point toward buying a house, the next big question is Where do I start? I think it behooves you to figure out if you can actually afford one, but more importantly you should decide your own budget first. Although these two concepts are often conflated, there is important distinction between deciding how much you want to spend on a house versus how much you can afford to spend on a house.

Figuring out how your home purchase fits into your budget is difficult because there can be a lot moving targets to consider. For me, this process was iterative, and after reflecting on my experience, I think it’s easiest to think about it as a cyclical process.

The Home Buying Cycle by LifeWiseMD

In this diagram, I started at the top with Deciding on a Budget, but it’s possible that you might start at any one of the other steps as well. For example, you may start with House Hunting by looking at a few houses on Zillow to get a feel for what type of house you may want before going back to think about your budget. You might also first speak to a Mortgage Lender to get a sense of what type of loans are available before deciding on what makes sense for your budget. Regardless, I think the vast majority of home buyers will start at one of these three steps and work clockwise or counterclockwise for several cycles, before reaching a point at which they exit the cycle and ultimately decide to put in an offer.

Getting back to the question Where do I start? I would suggest starting with your budget. If you are renting right now, consider using online tools to compare whether it makes more sense for you to rent or buy right now, this one by the New York Times is excellent and often cited. If you’ve already entered the cycle at one of the other entry points, I think you will benefit from taking yourself at least once through this iterative cycle to better define what budget is best for you.

The Current Housing Market

The housing market can be helpful to consider, but with certain limitations. For instance, it can be useful to keep an eye on housing prices in the neighborhood which you intend to purchase your home. This can give you a general perspective on any changes in price. A quick search on Zillow or Trulia can easily provide you with houses that you can follow over time. I did this for several months prior to buying my own home. I selected a few comparable homes (even ones that I knew I was not interested in) and checked their sale prices periodically. Over time, this helped me develop a sense of what I could get for my money, and it also gave me a sense of where the market was headed.

You could also follow known indices for the housing market, such as the Case-Schiller Indices which provides data on the housing market at a national level.

In my case, at the time I was looking for a house, the market seemed stagnant (Zillow will tell you how long houses have been on the market) and every 1-2 months I saw listing prices drop. This gave me the confidence when I submitted my first offer that I could reasonably underbid the asking price. On the contrary, if you find houses in your target neighborhood that are disappearing almost as soon as they are listed, you know you will have to be more aggressive with your offer. However, as we’ve learned from the 2008 housing crash, the market can be unpredictable and unstable. New legislation can also affect market forces.

As I was considering purchasing a house, President Trump signed into law a new tax bill which capped the state and local property tax deduction to $10,000. The new bill also reduced the deduction of interest on your mortgage from $1mm to $750k. Although the long term effects of these changes remain to be seen, the new tax bill certainly made homeownership less appealing, which in turn adds pressure to sellers to reduce their prices.

Depending on the neighborhood where you wish to buy, these may be important factors for you to consider, and could change the timeline of your purchase. While the ebb and flow of political winds may make you think twice, acknowledging your own timeline may offer you a better perspective. For example, the average homeowner lives in their home for 8-9 years before starting this whole joyous cycle all over again.

Summary Points

  1. Buying a home is a personal decision that should ideally be made for thoughtful reasons that match your life situation, and not purely as an investment opportunity.
  2. Deciding on a budget is the most important step in the cyclical process of buying a home.
  3. Studying the market both on a broad and on a micro level may give you an edge when you make your offer.
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