The basic rules of buying a house

David Brancaccio and Janet Nguyen Jun 1, 2018
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Tim Boyle/Getty Images

The basic rules of buying a house

David Brancaccio and Janet Nguyen Jun 1, 2018
Tim Boyle/Getty Images
HTML EMBED:
COPY

It can be nice not dealing with a landlord who will suddenly send you a letter saying you have to be gone in a month.

But with housing prices skyrocketing dramatically, it might make more sense to rent

We checked in with Chris Farrell, a Marketplace senior economics contributor, about the possibility of a housing bubble and to get some advice on buying a house. Below are his edited responses. 

The housing market seems to be inflating, but is it a housing bubble?  

Well, this is one of the conversations that’s going on in Wall Street with the high and rising housing prices. So you have very low inventory. And the leading edge of the millennial generation — they’re getting older, they’re starting to look at home ownership. You have low unemployment. We’ve had low unemployment now for a period of time, so maybe people are getting a little more confident. And there’s a rise in interest rates. You know, people going, “Hey, maybe rates are going to go higher, maybe I should buy now.” So the economic fundamentals explain high prices, but because of the experience of a decade ago, you just can’t shake that in the back of your mind: Is a bubble forming? Are we starting to see a little bit of irrational exuberance? Who knows. What we do know: Prices are high.

The perennial debate cycles around whether you should buy a house or just keep renting. But the key question might be: Are you getting in over your head if you buy? 

The question that matters to the homeowner, particularly the first-time homeowner is: How are my personal finances? Are they healthy enough? Are they strong enough to own? And this is when you want to look at the fundamentals. You want to pretend that you’re Warren Buffett — you’re cold, you’re calculating, you’re looking for value. And the one thing you don’t want to be: You do not want to be house poor. It means you are at risk of losing your home.

And it’s not just your mortgage payments. Some of us carry debt, like student loans and car loans. 

You don’t want more than 30 percent of your income to be going toward those debt payments, and obviously you’d like that to be less. You also want to live in a home for at least five years, because there are a lot of costs associated with buying a home, like the closing costs and the real estate fees. And then the other thing you have to ask yourself is: How secure is my job? How stable is my income? Yes, the job market’s stronger and people are doing better, but a lot of people are financially fragile and they don’t have much in savings. And if that is you, renting is better than buying.

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