Do we need to buy a house if the economy starts to recover?

[bokonon]

Hi All,

I'm one of the many professionals on the boards with too much SL debt but decent jobs.  My wife and I have knocked our SL debt down to 100k from 134k in December 2012 thanks to the inspiration and help of MMM and these boards.  Our combined income is around 130k pre tax (90k ish post).   Interest rates on the SLs vary, average 6%.  I am 32 years old, my wife 27.

Our current life plan is to pay all SLs off, then start maxing our 401ks to reduce our tax rate (we currently contribute to get employer match), then save 20% down payment to avoid PMI, and buy a home we like.  Then we will make extra mortgage payments using all the extra cash flow we have from paying off our SL as well as maxing our ROTHs and putting some amount into a taxable retirement account to head towards FIRE.

I love this plan.  I believe that no matter whan, getting these loans off our backs opens up so many possibilities in life in terms of part time work when we have kids, housing choices, savings possibilities, etc. 

My mother is starting to scare me though.  She is a smart lady with finances, always a saver and very frugal.  She recently asked me to please research buying a home sooner, as housing prices are beginning to increase while interest rates are increasing as well.  I argue that with all my extra cash flow letting me make a larger down payment and extra mortgage payments, my way makes sense even in light of rising interest rates / housing prices.

I imagine we would qualify to buy a house on our incomes right now with no down payment, and almost certainly in 6 months with 30k down.  Is my mom right?  Is there some point with rising interest rates and housing costs where I should turn the income stream away from student loans and toward getting a home sooner?  (side note my wife is willing to participate in our mustachian ways, but she has stated several times she would like a home sooner if that is the better financial move).

One last thing - on my plan we we aren't talking about waiting forever to buy a home.  I aim to pay off SLs in 2 years, 1 year of saving for down payment, so 3 years until house purchase if I stick to my plan.

I know it's all speculative, but we have some great minds here and I would love to hear your thoughts either way.

[matchewed]

You'll really have to run numbers on it. The problem is the numbers depend on the future and although now we have rock bottom interest rates relative to history and in the future I can guarantee they will be higher, neither your mother nor I can tell you when that will happen.

If the question is in three years will interest rates be higher? Probably.

The question is do you guys need to buy a home? And is a home the right financial decision for you guys (obligatory link to NY Times rent v. buy calc http://www.nytimes.com/interactive/business/buy-rent-calculator.html?_r=0)?

A home is not an investment (generally). You will always need a place to live whether you rent or buy. So run some of the numbers, what does your financial life look like in 1-3-5 years if you purchase a house now? What does it look like if you choose the alternative plan?

*Edit* Shoehorning a home purchase just because rates and prices are low is a bit like timing the market. Because a owning home is generally such a terrible "investment" it is almost always a money sink regardless of timing of purchase. Have to throw in the caveat that this is purely home ownership and not turning it into a business like becoming a landlord or flipping houses. The run up to the recession was an anomaly in the history of housing in the US, the perceptions of that time still reverberate in the drive to buy houses now that they're "rock bottom" prices.

[Another Reader]

In general, increasing debt increases risk.  Student loans are a big risk, as there is no way to get out of them.  If you bought a house, and one of you lost your job, would you be able to handle all of the payments comfortably?

Second, while interest rates are low, prices have already recovered to a large extent in some areas.  If you live in an area with a big run up in prices, I would be cautious.  Anywhere you are considering in the coastal areas of California there is simply too money chasing too little product.  The combination of low interest rates and investor demand driving the market makes the price sustainability questionable.  In Phoenix and Las Vegas, investor demand has driven the price increases.  There is a limit to what investors will pay.  If you live somewhere where supply and demand are more in balance, then interest rates might be a significant factor.

Third, interest rates have already risen.  Over the last couple of months, they have gone from the mid three's to the mid 4's.  Current rates are low by historical standards, but they are having an effect on demand.

Fourth, how long are you planning on staying in the area?  If you have stable jobs and you are likely to stay with the same employers long term, buying may make more sense.  If you will be transferred in two years to another state, not so much.  Buying with little or no money down puts you underwater from day 1, because of the transaction costs.  Selling WILL cost you a lot of money if you have to sell shortly after buying.     

Because I have always lived in coastal California, I do think of a home as a good investment.  Since WWII, demand here has almost always outstripped supply and prices rose faster than inflation.  You will have to look at the numbers in your area to see how a housing "investment" performs over time.

If you decide buying is the choice for you, I would buy less than I could afford.  Not being maxed out on payment gives me some breathing room if something goes wrong.

[fiveoclockshadow]

I'm going to say no, your mom is not right and you should ignore her and stick to your very well thought out and reasonable plan. You should also take this experience as practice in the future for ignoring fear mongering relatives, coworkers, friends and talking heads on TV.

Very first rule of investing - if there is a perceived rush to invest in something the best course of action is not to invest in that kind of asset. Housing markets many places are obnoxious right now with institutional cash buyers crowding out mortgage buyers along with a glut of mortgage buyers rushing to get interest rates. If you happen to be in a geographic market where there might be an advantage to buying now rather than later you will find five to ten offers on every house worth purchasing. If you are in a market with less pressure there is a reason and there is probably no advantage in rushing.

Interest rates going up?  Probably, but they likely wil stay near historic lows undrempt of in the past for quite a number of years. We bought three years ago at record lows on a 7/1 ARM to lock in those rates. Turns out we should have done 1/1. We refied last year to a 5/1 at an even lower rate and could have waited another year.

If they go up a lot they will also depress house prices to a degree. The market is based on monthly payment, not total price. So even if interest rates pop say two percent by the time you buy you may find things just as good, or even better off. Still a huge supply of underwater houses that will rapidly increase supply as prices try to rise. Also new appraising guidelines are making difficult for prices to spike.

Finally keep in mind transaction costs of houses are very high. You don't want to just buy a house, you want to buy the right one and only if you know you will be in it for a good long time. Rushing to buy now makes it more likely you'll end up with a house you aren't happy in for the long haul. Given your age and rapidly changing financial situation (good job attacking that debt) you may find you want to move in the next five years. If that does seem likely then you definitely don't want to buy, keep renting.

Finally, understand your mother's generation and their experience with housing. These folks lived through the most insane inflation the nation has seen in over a century during a period in which fixed rate mortgages were the only thing that existed. For them houses accidentally became an amazing investment as they were inflation protected assets leveraged with fixed rate loans.  That's not the reality now nor as a long term average.

Stick to your plan, unless something in YOUR life changes and you need to reevaluate.  Don't change because someone else is fretting. Parental fretting on your behalf is the worst kind of passive aggressive control - even if often well intentioned. Many of those underwater houses are owned by folks whose parents told them to hurry up and buy or they might never be able to afford a house.

[pbkmaine]

+1 for fiveoclockshadow and the idea that whenever everybody gets excited about an investment, it's almost certainly a bad time to buy. Fidelity Investments has a chart room in its headquarters that shows news headlines graphed against the financial markets.  At market peaks you get: "It's Time To Buy" and at market troughs you get: "It's Time To Sell". Ignore Conventional Wisdom. Use Unconventional Wisdom, which is what this website sells. 

[arebelspy]

If it makes sense to buy a home in your area, and your job is stable, I'd do it sooner rather than later (I.e. not wait for all SLs to be paid off.)

If it doesn't make sense to buy, I wouldn't do it ever (now, 3 years, or 10 years).

So first evaluate buying versus renting in your area.

Then personally I'd be doing:
1) Max 401k
2) Save extra towards home down payment
3) Pay off student loans (after home is purchased).

I probably wouldn't go so far as to purchase ASAP (FHA loan with PMI), unless you look into your local market, decide it is worth it to buy over rent, and think there will be larger than inflation appreciation soon.

People rush to be "debt free" so quickly.  I still have student loans, and I have multiple rentals.  I'm good with that.  (My SLs are at a low rate, but even at a higher rate buying the rentals would have been a smart move due to their ROI > student loan interest rate).  A house purchase may well be the same versus rent.

Run the numbers, and don't get fixed to one plan you've had for 6 months, or whatever strangers on the Internet tell you, or family members for that matter.  Calculate out the best plan, given reasonable assumptions.

IMO, that will be the above 3 steps, with possibly getting a house despite PMI, unless you live in an area where renting forever puts more in your pocket.. Then just steps 1 and 3.

[hybrid]

Another +1 for waiting.  Knock down those SLs further.  I would not want 100K of debt and PMI on a place with almost no equity when you walk in the door.  I think you have been on the right course all along.

[bokonon]

Hahaha, I love these boards.

When my wife woke up this morning I told her I had made this post.  I told her I was feeling insecure and needed a little support from you guys, or I needed to know if I was wrong.  Thank you.

Our jobs are very stable, and we are pretty sure we want to keep them for at least 5 years but almost certainly not 15, maybe not 10.  And we think we want to stay in this geographical region.  (We live in a Suburb of Philadelpha, I think the housing market has been level-ish maybe and starting to pick up but that is just a guess from looking at Zillow).  We will be buying less than we can afford, hopefully $200-300k.

Can you guess what I've decided?  Stick with paying off student loans and renting for now.  We'll be able to buy a home, if it is the right decision, once the loans are gone.  I mean, if a couple making 130k without student loans can't purchase a home who can :)?  And if prices / rates are so bad at that point in time that buying is a bad decision, we'll just keep renting and stashing the cash :).

Thank you for the valuable discussion on all fronts!  This is my favorite board, by far, over all the years since I started back in the BBS days.