Were talking housing today!
Housing is a hot topic these days. Renting, buying, sub-prime mortgages, foreclosures. The news tackles the subject, bloggers tackle the subject, and Nan Mooney tackles the subject in chapter 8 of (Not) Keeping Up With Our Parents.
Mooney’s problem this week is that the middle class can’t afford to buy a nice home on a middle class salary. I agree. That’s a problem.
Throughout the chapter, Mooney gives us examples of families who bought houses, either to lose them because they couldn’t afford the payments, or who are now slaves to their homes, because they can’t afford much beyond the mortgage.
Not once in her examples, though, did she interview a couple who saved a good down payment AND took out a reasonable mortgage for their income. Couple after couple stretched their budget to afford a home, only to regret it later.
Mooney went on to blame the increase in housing prices on the rich.
The wealthy upper strata are driving up the prices for everything from housing to daycare, making it impossible for the educated professional middle class, not to mention the working class, to compete.
I have a big problem with this generalization, and I think that’s my biggest problem with this book in general. The author seems to have a problem with wealthy people. According to Mooney, all the economic problems in this country are due to the wealthy, and the fix must be government intervention.
I couldn’t disagree more. The wealthy didn’t drive up housing prices. The availability of credit and the willingness of people to spend beyond their means did. It used to be that you couldn’t buy a house unless you had a 20% down payment, took out a 30 year fixed mortgage, and used less than 30% of your monthly income toward your mortgage payment.
Would prices have gone up as far as they had if people still followed those guidelines? I don’t think so. There would be very few buyers for the expensive houses today if buyers were still restricted to those regulations.
I am a huge believer in supply and demand. If people aren’t willing to buy, prices fall. We’re seeing that now. And the last few years when prices have skyrocketed, it’s been because of increased demand. More people were able to get mortgages (though not great mortgages), so more people were willing to buy houses. Now that subprime mortgages are not as widely available, and now that the number of homes on the market has increased, prices are stagnating and even falling. It has nothing to do with the “wealthy upper strata.”
For those who are thinking about buying a house in the future, I have a little advice that might keep you from making the mistakes the couples in the book made.
Figure Out What You Can Afford
This is not the amount of mortgage for which you can qualify. More than likely you can qualify for more than you can afford. You need to sit down with your spouse and make a reasonable budget. Live on that budget for a while. How does it feel? Will you be happy putting 30% of your income into a mortgage payment every month? If it’s comfortable, consider buying. If not, lower your expectations.
Your Mortgage Isn’t Your Only Expense
Don’t fall into the “if I can afford the monthly payments, I can afford the house” trap. Remember, you will have to pay insurance, property taxes, and maintenance on your home. Your utility bills will likely increase. If you’ve moved further away from your job, your commute costs will increase. Make sure you’re ready to take on the expense.
You Are Your Own Best Advocate
While it’s nice to get the opinion of your real estate agent and mortgage broker when it comes to buying a house, remember that these people make money on the deal. Their job is to get you to buy a house. If you need advice, seek it from a trusted friend, parent, mentor…someone whose financial management you admire. Don’t seek advice from those who will make money off of you. They’ll just try to sell you more.
Save a Down Payment
I would love to advise you all to put 100% down on a house. That’s not realistic. 20% down is great. Even 10%. But don’t finance 100% of your house. If you get in over your head, or if you situation changes, and you can’t afford your payment, you could be in deep trouble. You never, ever want to be upside-down on your mortgage. The best insurance against that is a nice down payment.
Don’t Bank on the Future
Do not buy a house on the assumption that you will have a higher paying job in 5 years. Don’t assume you will never get laid off. Or that you will never want to be a stay at home mom. Or that you won’t have to take time off to care for elderly parents.
Life happens, and it happens to all of us. If you stretch your budget, assuming that your finances will be better down the road, or if you stretch your budget so much that you don’t have any extra money to save for emergencies, I guarantee that you will be in trouble down the road. You may not lose your house, but life will be pretty uncomfortable. Don’t make assumptions about the future. And prepare for emergencies.
You are Responsible
When you sign your name on the dotted line, make sure you understand what you are signing. If something happens, you are responsible for what you signed, whether you understood it at the time or not. So make sure you are clear about the terms of your mortgage.
If after reading this you realize you are not in a financial position to buy, remember that there’s no shame in renting. My husband and I rent. I would love to own a home someday, but I want to own my home. I don’t want my home to own me. Until we can afford to buy a house without breaking our budget, we will be content as renters.
What are your thoughts? Are the wealthy to blame for the high price of housing? If you could tell a potential homebuyer anything, what would you want them to know before they took the plunge?
**Note** Next week is the final chapter in (Not) Keeping Up With Our Parents. I’ll be giving away the book after next week’s post. Also, I need help deciding on the next book to review, so please vote in my poll!
Previous posts in this series:
- (Not) Keeping Up With Our Parents
- The Rise and Fall of the Middle Class
- The Cost of a College Education
- Career Struggles
- Marriage
- The Decision to Have Children
- Health Care
- Credit Card Debt
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I agree that prices have increased due to many ill-prepared buyers taking mortgages that could not afford. It is tempting to want to own a home, but seeing the consequences of some very rash decisions, we’re going to wait a bit.
I don’t think I could agree with you more! Excellent post and insight!
I agree, 100%. It isn’t the fault of the wealthy, it is the market at work. Too many people are taking advantage of loans they can’t afford, and getting themselves into trouble because of it!
When we bought our house we put down 20% and we feel much better because of it. Remember, when you’re buying a house, its not just a house payment you’ll have to make. You’ll also have to make insurance payments, property taxes, closing costs, other miscellaneous fees, homeowner’s assocations (sometimes on newer homes), etc etc. Owning your own home is extremely expensive.
Great stuff.
It is important to remember that equity does not always equal real money.
So very, very true! All of the advice you give is what I plan on following when my husband and I are finally ready to buy a house. For us, though, we’ve got plenty of time to save. We won’t be settling down in a permanent place for a few years yet, or even more depending on if my husband stays in the military or not.
Blaming all the problems on the wealthy is a convenient scapegoat. The problem lies largely within the middle class itself, where everyone feels the need to live an “upper class lifestyle” without the necessary funds; it’s only exacerbated by everything else that’s happening.
I hope nobody blames their problems on me when I’m comfortable. I definitely plan on being wealthy someday. :)
What are house prices like in your area and do you ever think you’ll be able to afford to buy one?
Also it’s very difficult to sit on the sidelines during a hot housing market. We just had that in Canada (where my family is) where the Conservative goverment allowed 100% mortgages and 40 year terms (can anyone say rent!) I don’t think Canada will experience a subprime mess like the US but the housing market has softened and prices will go sideways for a long time.
Spain is also going through a major housing meltdown.
The housing prices in our area are pretty high. Not California high, but a 1000 sq. ft. 3 bedroom 1 bathroom home in my town is about $225,000. We could move to a neighboring town with a worse school system and a slightly unsafe neighborhood, and we might be able to get a house for $175,000. Right now it’s not an option, though.
I’m an optimist, so I do believe we could possibly own a home someday. Because we’re not in our 20s anymore, though, we’d need to have a bigger, rather than smaller, down payment. But even if we never own a home, I’m OK with it.
I think the problem was easy credit and people getting in over their head just because the bank said they could. Now they are in trouble.
My rule is to always buy LESS than you can afford. If you are a 2 income family make sure you can make ALL your payments, and still eat, on only one income. (Plan for the unexpected)
Buy in pieces. My last house I built a manufactured home. 4 years later when I had the cash, I built the garage. Therefore, I was not paying extra mortgage/interest etc on the money for the garage.
When I bought this house (my final hopefully and planning for retirement in it as well as living in it now with overnight grandkids a lot) it was only 460 sq ft… a tiny 2/1 with a mudroom. I have paid cash for the addition and the remodeling as I went/could afford it. One room at a time for the painting and fixing up. It’s now 1036 sq ft – a 2 bedroom, 1.5 bath. And while I was remodeling, looking forward, I am making it handicapped accessible. When I get the cash saved (again) I am adding a wood shed, a deck, and a carport or garage (depending on cash saved.) Do it piece by piece! I’ve been living in a construction zone for 2 years, but the end is in sight :)
Buy less, and improve. It’s easy to learn to do sheetrock, paint, plumbing, and swing a hammer, and run an electric drill/screwdriver. (Even for me, in my 50’s) I’d much rather spend my energy than my money :)
Good luck! and good planning!
A few points:
1. People may be driving up the price of homes by overspending, but who is providing the loans? Clearly some blame belongs in the lap of the brokers and the banks (in much the same way that way that drug dealers share some responsibility for the drug problem in America), most of which are run by whom? The wealthy.
2. Many people, like Foxie above, will defend the wealthy tooth and nail because they believe that they will some day be wealthy. The sad reality is that very few people will actually be wealthy. Of course wealth is defined differently for everyone, but when we talk about “wealthy issues” like the “death tax” we are talking about a very small percentage of people who are defended by a very large number of people who have no chance ever of having this issue apply to them.
You need to sit down with your spouse and make a reasonable budget. Live on that budget for a while. How does it feel?
Best advice ever!
@MITBeta – I do agree that banks provided some very bad loans, but when you sign on the dotted line, you are responsible, just like if you get caught with drugs, you’re busted. Does that absolve the banks of their responsibility? No, and many of the banks are paying the price by going bankrupt.
The problem that I have is the author seems to look at wealthy people as evil, just because they have money. Wealthy people are not evil, nor do they owe the rest of us, just because they happen to have a lot of money.
And though most people will not become multi-billionaires, we do live in a country where it is possible to move up the income ladder with a lot of determination. If Chris Gardner (The Pursuit of Happyness) can do it, it’s certainly possible for the rest of us. I know he’s had to endure more hardship than I ever have!
I think increased expectations of a home also contribute to the problem. For a lot of us, our parents’ first houses would be considered below our standards. What? Only one bathroom? I couldn’t possibly…
How does rent compare to a mortgage and property taxes assuming an average down-payment 5% or a mortgage of 210,000
It’s very difficult to be a renter in a land of owners, also having a paid for house is the corner stone of most peoples retirement plans. although many seniors are asset rich and cash flow poor.
Property taxes generally run between $2000-$2500 for a 3 bedroom home in our town. A mortgage (before property taxes) is $1225 a month. Add property taxes of $2000, and it comes to $1391. That’s before PMI or money to set aside for repairs.
You can find a 3 bedroom house for rent for around $1000. Or you can rent a duplex, like we do, and pay less than $700, and that includes water, which is expensive in our town.
It is difficult the be a renter in a land of owners, and I can’t say that I never have the desire to just buy. But a mortgage right now would be well over what we can afford.
It was a shock to find that the ratio between rents and mortgages are so different there. Here they tend to be more equal – as rents have risen a lot in the last few years.
My last mortgage (including tax and ins) was $515 on the 3/2 manufactured home. At the time I bought that house I was paying $500 for rent, so it made sense to buy.
Now our minimum rents are about $700 up to $1400. And the housing prices (this year- they were high and out of reason last year but have dropped drastically now) have dropped back down to the same range. That’s the good news – unfortunately the wages here tend to be very low also.
My reason for buying had more to do with retirement – I don’t want to be paying mortgage nor rent when I retire, altho I’ll be paying about $150/mo for taxes and insurance.
Good luck :)
During a housing boom rents always lag house prices!
Great post. And great advice. I especially liked Marci’s comment about being sure you can handle it if you lose one of your incomes. When we purchased our current home, we didn’t plan on becoming a one income couple. Because of health problems, I’ve had to quit my job. Because both my husband and I are pretty conservative financially, we’re doing just fine on one income. Even with a mortgage payment.
When we purchased our previous home, the mortgage broker kept insisting that we could aford almost 3 times as much for a home. Even after we explained that we were unwilling to stop tithing or lower our retirment savings. We finally just told her that this was the house we wanted and if she didn’t want to give us that small a mortgage, we’d go somewhere else.
During the big boom, there was a lot of pressure on the mortgage folks to push higher loans to get higher returns for the company. Combine that with the realtor’s desire for a larger commission and the general marketing that we’ve got to have more and newer and better and you end up with … well, today.
Great post! I agree with you about why homes have become so expensive. I asked a mortgage broker how so many people could afford the huge number of $700,000+ homes being built in our area. His answer was longer term mortgages (40+ years), lower down payment requirements, and ARM loans. As long as people were stretching their budgets to pay these prices, they kept going up. Now, people have stretched until their budgets have finally snapped, and the prices are crashing down.
In reality, many people were already overextending themselves when buying their homes before the ARMS’s and 40+ year mortgages. Being in the construction industry, my husband has been working in large homes for 20+ years and has always talked about how so many of these houses were still almost “empty” even after the owners had lived there for several years. Their mortgages were so expensive, they couldn’t afford furniture, curtains, etc.
Real estate agents and lenders definitely share part of the blame. When we bought our home 16 years ago, the agent and lender tried to get us to buy a house at our max approved loan amount, but we had determined our own upper limit and wouldn’t consider anything more expensive. We’ve never regretted that and never had to worry about losing our home even when money was tight and when we lived on one income while our child was young. Our home will be paid off many years early, and we have saved tens of thousands of dollars in interest. The peace of mind has been worth way more than a bigger house!
Thanks for your great blog! I am a regular reader and enjoy your practical advice. I hope everyone buying a home follows your advice!