Surviving A Housing Cooldown
A: Lets go into the minds of a buyer who is aware of the cooling housing market, wants to take advantage of the buyers market we are in right now, wants to buy now and lock in rates before they get too high, and wants to build wealth and enjoy the tax benefits of home ownership instead of renting. How would they survive a housing cooldown without taking a hit financially? Here are some tips to prepare for future bumps in the road!
In this post you MUST understand that I am discussing a buyer in today's market who knows they will be buying (rather then renting), but wants to prepare properly for a housing cooldown in the hopes of surviving one financially.
FIRST & FOREMOST, are you prepared to buy a house today? I find plenty of possible leads contacting me with the hopes of buying their first home, but when I discover their financial situation I am forced to be brutally honest with them and advise them to SAVE their money in order to be better prepared for homeownership! With that said, lets begin:
SURIVIVING A HOUSING COOLDOWN
1. BE FINANCIALLY ABLE - You are going to need significant liquid assets to buy your first home comfortably so that you will NEVER BE FORCED TO SELL, especially in the next few years!
As you figure out what price range you can actually afford, analyze your total liquid assets and see whether you can actually afford the 10% or 20% down payment and the closing costs to do the transaction! Ideally, you want to put as much money down as possible in order to finance as little as possible in this higher interest rate environment. However, I understand that this is not always the case and that most people will choose to put down the absolute minimum in order to become a homeowner.
Nothing wrong with that as long as you have enough liquid assets AFTER CLOSING COSTS (that is, down payment + transaction fees) to live comfortably. In general, you should have at least 6 months or so of monthly expenses (housing + debt's + living costs + tax payments) in liquid assets leftover after the deal is done. The more the better. The first year of homeownership should be considered the REBUILDING YEAR as you replenish your accounts by saving and sacrificing some luxury's that are not necessary to survive. The goal here is to NEVER, EVER be in a position where you are forced to sell because you ran out of money as a result of the home purchase!
2. YOU WON'T HAVE TO MOVE - The second tip to surviving a housing cooldown is making sure you will NOT have to sell because of a job transfer or other unforseen job change (such as being laid off) over the next 2-3 years! If you are self-employed in an industry with fluctuating salary then be sure you have 1 years worth of monthly living expenses in liquid assets after closing!
If there is a possibility of being transffered in the next 1-2 years, than now is NOT the time to buy! A job transfer will force you to sell your home during a buyers market when lending rates are rising. Not the best time to be forced to sell and not the best strategy for making money in real estate!
3. LOOK FOR VALUE - Don't let emotion take control of your intentions to buy! Be disciplined and focus on paying for the permanent features of a property that will utlimately lead to the highest re-sale value down the road. As I mentioned before on UrbanDigs, these include raw space, location, light, and views! Paying top dollar for somebody else's renovations is NOT the best inmvestment strategy in a cooling housing market!
The goal should be to get the most bang for your buck by buying the worst apartment, in the best neighborhood, in the best building with the most sunlight and nicest views! Very tough to achieve so do your best to at least satisfy most of what I just mentioned.
4. TAKE THE PROPER LENDING PRODUCT - If you have to settle for a 3YR Interest Only ARM to buy your first apartment than you are buying too much house than you can afford and rationalizing the purchase by agreeing to take out a risky lending product! Not the right move! Call your mortgage broker today to find out where current interest rates are for 30YR fixed or 5YR or 7YR ARM's (not Interest Only) so that you have an idea of what your monthly costs will be based on your target price range. Educate yourself! If you put yourself in a position where your monthly housing payments can rise sooner than you would like, than you are setting yourself up for financial disaster! Higher monthly mortgage payments is one reason that could cause a homeowner to be forced to sell; something we are trying avoid!
UrbanDigs Says: The homeowners who get hurt the most in a housing cooldown are those who are FORCED TO SELL! If you know you are going to buy because you want to start building wealth and enjoy the tax benefits of home ownership, than be sure to know the housing pitfalls that lead one to SELL when they don't want to! If you can weather a housing downturn then you can sell your property when YOU CHOOSE TO and at a time when housing gets back in favor again!
Good Luck!
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