Spring is the traditional start of the home sales season. The market is hot this year, especially for first-time home buyers looking for starter homes. Everyone I’ve talked to who has sold a home recently tells the same story: Multiple bids and a quick sale.
There is a lot to be said for homeownership. But when markets get competitive you want the discipline of time-honored fundamentals. Can you make a 15 to 20 percent down payment? Will you live in the home for at least five years? How much will your total debt payments be once you own? A good rule of thumb is total debt payments — from mortgage to credit cards — shouldn’t exceed 30 percent of your take home pay.
My bottom line is this: You don’t want to be house poor. If you doubt that, talk to anyone who couldn’t afford to maintain — let alone upgrade — their new home. A home makes for a wonderful lifestyle when financed with a margin of safety, but it’s stressful and potentially disastrous for anyone that stretches their finances too much to own.
A combination of factors has come together to strengthen the housing market. Job growth, for one. Prospects of higher interest rates with growing confidence that the Federal Reserve will increase its benchmark interest rate several times this year. The leading edge of millennials have launched their careers and have started settling down. The most important short-term factor is limited home inventory, especially in the starter home market.
The most important question to answer before buying is how secure is your household income. The job market is doing well, but far too many people still find themselves living with financial insecurity. The more uncertain your household income the more attractive becomes renting.
By the way, don’t pay attention to the real estate mantra that renters “throw their money away.” The basic idea is homeowners build up equity by paying down the mortgage. That’s correct. But renters can build up equity by setting up a monthly automatic savings plan. (Put the money in a low-fee well-diversified portfolio and over time you will probably end up with higher returns than from owning a home.)
For those with good jobs, homeownership offers several advantages. For example, a home is the most tax-advantaged investment available to the average person. A home is also an enjoyable place to live. You decorate it to reflect your tastes. You are in control, not the landlord. Just make sure your budget supports homeownership first.
Chris Farrell is senior economics contributor, “Marketplace,” commentator, Minnesota Public Radio.