Question: After waiting out the overheated Northern Virginia market for several years despite lots of peer advice to buy, my wife and I are now seriously considering taking advantage of lower prices and interest rates. However, we're not sure we'll stay here past five years (but there's a good chance we could) given that we expect to have children by then and will feel the pull of our family in the South. We realize that buying a home for a short time frame is a risk (especially given that the housing market remains unpredictable), but we also assume that it could be a risk to not do it--given that home prices and interest rates probably will rise again-- should we decide to settle here for a longer period of time.
We are considering buying a house between $475,000 to $550,000 (though we aim to stay on the lower end of this range). We both make a little over $80,000 a year (gross income) and have about $35,000 in savings (to which we add about $1,500 a month - and could probably add more a month if we continue renting), so we would be using an FHA loan to buy a home. We were contributing about $15,000 annually to our 401Ks but have reduced this to 5% (our employers match this) to pad our savings.
We've tried to calculate the benefits of renting versus buying and possibly owning for only five years but haven't really found sites that are very helpful, as we already know we'll be able to save more by renting. Do you all have any advice on how to better think about this situation? Thanks in advance for your advice! Chris, Alexandria, VA
Answer: I don't think there is any rush to own. Of course, in the forecasting business, everyone eventually ruefully comes back to Samuel Goldwyn famous remark, "Never make predictions, especially about the future." The future direction of the housing market is uncertain. Still, my own sense is that the market remains weak and, even if bottom is reached relatively soon, it will take years for prices to genuinely rebound. The ebb and flow of home values will largely be dependent on local job and income growth. In the words of a Business Week story on the housing market, it will be "back to blissful boredom."
Fact is, most people would be envious of your financial situation. You have savings and are able to set aside a fair amount of money every month. Every month your money profile improves and your prospects for owning without stretching your finances. And I am concerned that you'll end up financially fragile if you buy.
A good rule of thumb before the real estate bust was that you shouldn't buy unless you knew you were going to stay in the home for at least 3 years. Even then that was an aggressive bet. I believe that benchmark is now 5 years. That's the minimum time for ownership.
Yes, a home offers plenty of tax benefits, including the deductibility of mortgage interest payments and no capital taxes due on home sale gains under half-a-million dollars (for joint filers). But those gains are offset after factoring in the costs of ownership, including mortgage interest payments and property taxes. The cost of maintenance is steep. So are the improvements you make.
My advice would be to focus on improving your finances even more so that you don't end up house poor. In the meantime your longer term plans may become clearer.