Right Time to Buy a House or Just Bad Money Management?

by David Ning · 17 comments

new homes

(Photo from Shea Homes)

In a surprising move, my boss made a offer on a single family home in Aliso Viejo, CA today. In fact, he is interested in two homes in the same “new development tracts” and he told the sales lady that he is willing to buy any of the two depending on the deal that he gets. Although I feel like this is bad money management because we are far from the bottom of the current housing downturn, I can’t stop myself from thinking twice because I highly respect his judgement.

The offers my boss put in the houses listed at $1.6 million and $1.2 million were $1.35 million and $1 million respectively. He went in with his bank statements and told the sales lady that he can pay cash, and that he is ready and able to purchase by this month. The sales lady told him that she needs approval from management but my boss is quite confident that he will get the deal because those houses are already built and the builder is just sitting on them and losing money everyday that it sits unsold.

As I discussed numerous times before, I believe the housing market will be in a correction for at least another 6-12 months. I will eventually get a house, but I do not believe it is the right time yet. I feel that I will be able to get a better deal in 2009, which is why I haven’t pulled the trigger. In fact, we haven’t even looked at houses for a few months now.

However, after speaking to my boss and knowing what he’s done, it really puts doubts of my thesis. If the houses he put his offer in were listed at $1.8 million a year ago and he ends up getting it at $1 million, it is already a 44% decline from peak which is something I’d be happy with.

I know I shouldn’t see my house as an investment but it is going to be my single biggest purchase by far. I’m not trying to time the absolute bottom of the market but I’d hate to see myself paying for possibly $100,000 more than I need to pay as it will take me years to make up the difference.

What do you think? Fire away at the comments section, I really appreciate it.

Money Saving Tip: An incredibly effective way to save more is to reduce your monthly Internet and TV costs. Click here for the current Verizon FiOS promotion codes and promos to see if you can save more money every month from now on.

{ read the comments below or add one }

  • Kaylabe says:

    I think now is the time to buy. When all you hear about is the housing market and everyone is panicked is the time time to move. This of it like y2k. Everyone panicked and it was all anyone talked about. Many got rich off the panic-stricken massive who sold homes and bought disaster kits. By the time new years 2000 happened, everyone had taken precautions to reverse the computer glitches. The market will recover quicker than expected because of panic. We are all cutting back and being super cautious till out new president comes in and reassures us its all ok. I would buy before tax time 2009. I think we will see a massive recovery beginning by summer.

  • lasik surgery says:

    Down here in FL there has never been a better time to buy — it’s just very hard to get a decent mortgage with the economy as it is.

  • Certificate of Deposit Rates says:

    Aaron and Cease, great points. As I was thinking about the property tax issue, purchasing the right size home is also important.

    I would love to have our original property taxes which were about $2000 per year. We out grew our house and now they are over $6000. And talking about property taxes, make sure you check into any assesments or bonds that are added on. On ours there are 3 additional ones that add quite a bit above the base 1%.

    Also, consider what growth may occur in your area. Will the city be looking to have a vote for a new school or two. The city passed a bond to build a new high school. We pay about $100 per $100,000 per year. The county passed a bond for the local community college.

    We did make the move before things became super-overheated so we had a nice down payment, but unless we at some point move to a lower priced home, we are locked into those property taxes.

    Lots to contemplate.

  • Aaron Stroud says:

    @ Cease, you’re right, the interest rate is a very important factor. Waiting for houses to drop 50-100k could be an expensive mistake if rates rise.

    However, the rate’s importance is also determined by time frame. The longer they plan to stay in the same house, the more important their interest rate will be.

    As Bret pointed out, their purchase price will determine their property taxes. So they will have a strong incentive to stay in the same house instead of trading up at some point.

  • cease says:

    How come no one on here even considers the interest rate. Its very low at this point, and according to all the analysts… they really can’t drop rates anymore. So by the end of the year its very likely rates will start to rise. So whats worse, waiting for houses to drop another 50k to 100k but taking a 8% rate over 30 years or buying now and getting 30 year fixed at a little under 6%. Plus the longer you wait the more rates are likely to increase.

  • Aaron Stroud says:

    Bret, great point. As our property taxes continue to skyrocket, I try not to think about the property tax protection our neighbors to the south enjoy.

  • Bret Frohlich says:

    My Mom lives in Aliso Viejo, so I am familliar with the area. Even though it’s a nice place to live, I wouldn’t be paying a million dollars for an upscale tract home there. I agree with Carl that those numbers may not add up.

    Regarding your situation, you probably have at least a year to make a move, so I would line up all your finances. That way, when you do find a deal that makes sense, you will be able to “pull the trigger” from a position of stregnth.

    Every $100K you save on a house is $1200+ per year saved in property taxes for the rest of your life. You also save on points, closing costs, escrow fees and especially interest. So, get the best deal possible and don’t stress your future finances.

  • Rachel @ Master Your Card says:

    I think it depends on what type of house you want in what area. You may have your heart set on a particular type of house and if you find one then it might be best to get it while you can. Most people also say the sooner you can get on the housing ladder the better, but I am not sure how true that is in the current climate.

  • Mike Huang says:

    House prices are in fact dropping as we speak. The economy has grown to an outrageous movement that no one wants to buy anything anymore.

    -Mike

  • Certificate of Deposit Rates says:

    Aaron, excellent comments and insight. I agree, completely.

    We’ve even experienced some of this. We live an in expensive area, and necessary cash outflows have locked us in to certain things for the time being.

  • Aaron Stroud says:

    @ Certificate of Deposit Rates, That is quite an accomplishment. Raising six kids is a lot of work for both of you.

    I’ll admit, I believe parents should parent their kids instead of outsourcing. But that doesn’t change the fact that depending on both incomes will seriously limit your options in the future.

    Sometimes, the birth of a child causes people to rethink their priorities. Sometimes, people get fed up with their job and they want to move on to a more rewarding job that pays less.
    Othertimes, an injury interferes with a spouse’s ability to work.

  • Certificate of Deposit Rates says:

    Aaron makes an assumption, that although I applaud, not everyone desires to be at home with the kids.

    Personally, my wife and I wanted her home and it has made all of the difference in the world. Life with six kids became expenseive and although she is at home, she is doing daycare to add some income.

    If you do desire to have your wife home with the kids take, Aaron’s advice.

    The housing market is tough to predict, however, there should still be some more price reduction. There are still a lot of loans left to reset in later 2008 and 2009. Even if things turn around sooner, it would be better to pay a little more and wait just to make sure your cards are in order.

  • Mike says:

    I agree with you that being more ambitious than your boss is a good idea. If he likes the house, great, but a 17% or so discount doesn’t seem like the absolute best you could get under these market conditions.

  • Carl says:

    I think your boss is a classic knife-catcher. He thinks he is getting a deal by getting the house a couple of hundred K below current list. He may be right, but he may be wrong. It might take a while, but I suspect his house will be worth less than even his reduced offer. Houses like this in AV rent from approx 4K (ok that is rough). To achieve buy/rent breakeven over 10 years, the house price should be approx 160-180 times the monthly rent. This puts a floor on the value, since when it is cheaper to buy than to rent, smart people will buy. So, the intrinsic floor value of this house is between $640 and $720. That is still a long way to go, and I would be surprised if it really went down that far. Keep in mind though, during the last downturn in the early 90s, many neighborhoods were below the 160 multiple.

    When you finally decide to buy a house, I highly recommend you do a similar analysis, as well as a purely cashflow analysis. It will open your eyes. When I learned about this, I realized how overvalued the house I owned was, so I sold it in Fall 2006. I am SOOOO happy I did.

    Carl

  • Aaron Stroud says:

    I’m going to buck the politically correct wisdom of the day a little here.

    First, I’d recommend you take a couple of years to get use to married life. Marriage is a lifelong partnership that requires some adjustment. Buying a house now could make that adjustment more difficult.

    Second, I’d recommend you do not consider both salaries when calculating how much house you can afford. Even if you’re not planning to have kids now, surprises happen. If your house payment requires both salaries, you’ll find yourself in a very unenviable position.

    Third, I’d have to agree with the commentor above—no one can answer this question for you. Ultimately, the two of you will need to make your own decision.

  • Dividend Growth Investor says:

    Nobody can answer this question MN. However, think this situation through with your wife and make sure your can afford the house.
    The monthly payments should not exceed 35-40% of your combines after-tax income.
    As for the house being an “investment”. different people claim different things about house ownership. I do believe though, that if you expect inflation to accelerate in the future, you should buy rather than rent, and stretch your payments as far as possible in the future..

  • devil says:

    Wait. As more people get foreclosed, and builders get more desperate, the housing market will get even worse. Your first instinct was correct…don’t buy yet.

Leave a Comment