Is now a good time to buy a home? Part I

A friend of mine asked me the other day:

Friend: Ray, is it a good time to buy a home?
Ray: Depends on what you mean by good time. What are your future plans? How long do you plan on keeping it?
Friend: Well, I’m planning on going to B-school so for about two or three years. Do you think homes will be the best investment choice for the next three years?
Ray: Do you really expect me to give you a yes or no answer?
Friend: Yes.

Decision to buy a home is never an easy one and although the general public believes purchasing a home is a good idea, you have to look at your individual future plans and contingency plans. Stock brokers can’t pick stocks that beat the S&P500 but gets paid over $500K, do you really expect me to predict the future? I can’t predict what might happen, but I will give you my opinion. Regardless, buying a house all depends on your particular situation. (read this if your thinking about selling a house in three years or “flipping” it) Of course you ask a realtor about your plan the typical answer is (per Frank): Hell yeah! A house is a great investment! (Internal monologue: No risk to me, I make 3% transactions out of it: 1) Help her buy, 2) help her sell and 3) help her buy a bigger place). Do it!

Sooooooo, you’re going to have to do your own analysis based on your financial situation. Even if the house doesn’t appreciate, can you make money? Here’s a quick spread sheet of some finances you might want to consider:

Home purchase price: $180K ($180K is this the house in SE, DC? Don’t worry, this is just an exercise so ignore that part.)
Down payment: 5%
Interest rate: 6%
Mortgage: Interest only – fixed
Personal tax rate – 28%
Tax, insurance, and settlement costs are just examples.

So, it doesn’t seem like a great deal to buy a home. But GLASS IS HALF FULL DAMMIT! If the price goes up even 1% then the return is $1,800 Additionally, if the house doesn’t appreciate then you have to pay 7% for sales tax, Realtor fees, and closing costs. Of course you can try to sell it yourself but I don’t recommend that under any circumstance. It’s like you trying to defend yourself in a criminal trial. You don’t know the laws, the tricks or even the opposing side. I’m sure you can learn by reading books like “How to be a criminal defense attorney for Dummies” but you’re probably not going to have the same results. But this is a whole new topic in itself and we’ll cover it later.

The above isn’t to discourage you from buying a home but to educate you. In the next blog, I’ll identify the benefits of owning a home as well as market projections. It’s ok though.