Timing The Market: The Wait & See

Posted by urbandigs

Wed Apr 23rd, 2008 10:07 AM

A: Real estate is a personal decision. Timing the market is a fairyland. In a perfect world, one could buy Manhattan real estate at the bottom, sell at the top, rent for a few years, and upgrade after the market corrected a bit and some deals popped up. Now wake up! Timing the market is impossible to do, so don't even try it. It will make an already complex investment decision even more complex; yes, I view your house as an investment that you live in, and that should be a part of your portfolio. If you don't like the investment, rent. If you prefer to own, build wealth, and take advantage of tax benefits, then buy. But don't try to perfectly time it as that will cloud the overall decision. Instead, focus on what works for you and finding the best product in the price point that is out there and getting it for the best price possible! Originally Published January 28th, 2008.

This is for those that are looking for a new home to use as their primary residence. While I discuss what interests me here on UrbanDigs, including what is going on outside our walls, I don't want that to cloud your investment decision. Just because I made it my point to focus on the credit crisis since last July, and hopefully now you understand why, doesn't mean I expect Manhattan housing to crash 50%, I DON'T! Lord knows there are enough people out there that are making this assumption for me.

Deciding whether to pull the trigger should be a clear decision. A decision that is made after assessing four very important personal criteria:

a) Liquid Assets After Closing Costs
b) Salary / Debt-to-Income Ratio
c) Job Security
d) Timeline To Hold/Own

Assuming you made the decision to seriously consider buying, you must now figure out if you can afford it with your total salary, if you have enough liquid assets leftover after the transaction, if your job is secure, and if you intend to own/hold the asset for at least 4 years. Let me just briefly go into each one:

Liquid Assets After Closing Costs: Do you know what the buy side closing costs are going to be? Many brokers don't discuss this with their clients until they get very close to bidding, and for some buyers that # comes as a shock. So, better off knowing before hand how much OUT OF POCKET you will be to actually buy the condo or co-op. A rough estimate is about 4.25% of purchase price for a Condo, 5.75% of purchase price for a new-dev Condo (assuming pass down of sponsor costs), and about 1.75% of purchase price for a Co-op. This does not include points and is dependent on how much you are putting down as well so use as a very general guide.

Now, the down payment. After you add up the down payment + estimated closing costs, how much money do you have leftover in your liquid accounts; 401K/Retirement accounts not included. You can convert some retirement money into liquid money, but there likely will be a penalty for doing so.

QUICK TIP FOR USING ROTH IRA FUNDS PENALTY FREE: For those with a ROTH IRA account over 5 years old & plan to purchase their first home, you may use up to $10,000 penalty free for the down payment. Click the link for more details on qualifying for this distribution incentive.

Generally, you want at least 8-12 months of MORTGAGE + MAINT/TAXES leftover in liquid assets to buy a condo, and probably more to pass a co-op board. You can do it with less liquid for a condo, say 6 months total payments in liquid, but you really do want to leave yourself some security just in case when the deal is done.

Salary / Debt-To-Income Ratio: Now, take your total expected monthly payments and add in any minimum debt payments you currently have. Divide this total monthly expense by the total gross income you are bringing in each month (I usually add in bonus if its set in your employment contract, but acceptance of this trend is likely to change).

Here is a hypothetical to give you an idea:

TOTAL MONTHLY PAYMENTS ---> $4,000
TOTAL MIN DEBT PAYMENTS ---> $650
TOTAL GROSS INCOME ---------> $15,000
=================================

$4,650 / $15,000 ---> 0.31 or 31%

This person's debt/income ratio is 31%. Generally, you want to keep your debt/income ratio UNDER 28%! Anything over that may become a problem either for the lending gods or the board gods! If you do go over 28%, you may be able to still do the deal if you can offset this with bulky liquid assets leftover after closing. But, anything over 33% is probably going to be a problem for any co-op board. Condo's of course are less stringent leaving the buyer to gauge their own comfort level as opposed to the board's/lender's comfort level!

Job Security: Please make sure your comfortable with your job; both in keeping it and staying in this location. One of the biggest destroyers of wealth, besides divorce, is being forced to sell your largest asset because of job loss or relocation! If you have to sell quickly, you will have to be flexible on pricing!

Make sure your job is secure before making such a big investment decision!

Timeline To Hold/Own: General rule of thumb is 5 years. Its a good rule, although I can live with one less. If you are going to hold the property for at least 4 years, and you meet all the above criteria AND YOU WANT TO BUY AND OWN YOUR OWN HOME, then you have very compelling reasons to pull the trigger!

Since buying & selling real estate incurs transaction costs, you want to have time on your side to both build wealth and take advantage of tax benefits! Ideally, you want to be able to sell the asset when YOU choose to, not when you have to. A longer timeline to own gives you the freedom to pick & choose your exit points.

The wait & see attitude generally comes from those concerned about the economy, asset deflation, buying more then they can afford, or just putting most of their eggs into one asset class. For these people, buying may not be the best decision if it will result in large amounts of stress and a negative effect on the quality of your living standards. The last thing you want is to argue about the new apartment you bought that caused you to not enjoy life as much as you did before. If you don't qualify for the above 4 criteria to buy, then you shouldn't be buying in the first place! If you think you'll need a bigger place in 1-2 years and can't afford that larger property now, then you shouldn't be buying!

Happiness is still more important than money, so be sure you can find a place that not only you can afford, but one that makes you happy and hopefully is scalable so that you can grow into it should your family grow in the future!

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