Buying A Home? Be Conservative!
When the word “conservative” is used, people don’t usually think of old Johnnie Lockwood. Politically I’m somewhere to the left of the Democratic Party and somewhere to the right of the Communists.
Picture a 1960s folk singer without the pot and with a haircut, and you’ve nailed it.
Nevertheless, even if you’re more of a radical hippie freak than I am, you should be as conservative as heck when it comes time to buy a home!
For most of us who own homes, our mortgages are the biggest payment we make every month, so keeping one’s emotions in check and buying conservatively can make a huge difference in whether we’re overextended or not.
Selling Whale Harpoons to Eskimos
There’s a cliche in selling about the salesperson who’s so good that he can sell “ice cubes to Eskimos”. Fortunately, those of us who sell homes don’t need to be anywhere near that accomplished. People really want to own their own homes, so really our job is less about selling the idea of ownership than it is getting in front of someone who already wants a home and then providing them with access, expertise, and information to help them make an informed decision.
Indeed, as we’ve seen in recent years, the combination of the lure of home ownership with the high cost of area homes has created huge market swings from unsustainably high prices to rapid crashes in value. So part of our job as ethical Realtors® is sometimes to talk our Eskimo clients out of the automated ruby-studded platinum whale harpoon they’re looking at and try to interest them in the solid oak whale harpoon that better fits their budget.
The recent housing crisis is an economic phenomenon of huge proportions, of course, but on the micro level what happened were that thousands of individual buyers overextended themselves.
Here then are some tips for buying more conservatively.
Six Tips for a More Conservative Purchase
- How Long Do You Need to Be Here?
Your first task is to consider how long you’ll be in the home. Is your situation fairly stable and established? Can you see yourself in the same job, with the same spouse, in the same area, for several years? Home prices fluctuate according to a long market cycle, so for most of us, wanderlust is the enemy. Of course, no one’s situation is ever guaranteed, but in general, if you know in advance that there’s a good chance that you’re moving next year, in general you should be renting. Is this more true now that the market is going down? No, it’s AS true. It was true when the market was going up, too, but unfortunately many people lost sight of that truth when the market was going up. - Prequalify First, then Shop
If you feel you’ll be in one place long enough to make buying worthwhile, an important next step is to get prequalified for a loan. It’s hard to overstress how important it is to do this before you go shopping. Working with the lender first lets you crunch the numbers first, independently of looking at homes you might want. Can you get a conservative loan at a payment you can afford? If so, what does the lender say you’re qualified for? That’s a starting point (but it’s not the end of the story — see below). - Shop for a Conservative Loan Before you Conservatively Shop for a House
Almost always — certainly always when Interest is still as low as it is now — you should insist on getting a fixed rate loan. Can you get a lower initial rate if you don’t? Of course you can. But adjustable rates adjust, and remember our goal is to shop conservatively. If you need the adjustable rate to get your $350,000 home, maybe you should be looking at $310,000 homes instead. When you see “Adjustable Rate”, you should think “Increasable Rate”. - No, You CAN’T Always Refinance
I sometimes think that if there was a single phrase that could be blamed for most of our current market troubles, it’s the phrase “You can always refinance.” Refinancing was not free in the best of times, and when prices are declining as they are now, it’s not always even possible. Generally, if you need to refinance later to afford that home now, you can’t afford it now. If a lender tells you “you can always refinance later”, you may want to emphasize that you’re trying to buy a home, not signing on to support your lender full time. Be careful to use the appropriate level of force when you emphasize this. The use of firearms or sharp-edged weapons, though providing temporary emotional satisfaction, may involve you in legal difficulties. - How Much Can You COMFORTABLY Afford?
Once upon a time, buyers were advised that they could comfortably afford to spend 25% of their income on housing. In California, especially, most folks wouldn’t qualify for a home at that number, so it got revised upward constantly. Another way to look at this issue is to look at the total amount of money you have to service all your debts, including your car payments, student loans, credit card bills, and your mortgage. Called your “back end ratio”, a conservative number is 36%, but in the market “heyday”, lenders were often using back end ratios of 50% or higher.Even more important than the ratios the lenders use, however, is your own common sense. Does the number feel high to you? If so, it is. If the number the lender will lend people was the same in all cases as what people could comfortably afford, 75% of July’s sales in Sacramento wouldn’t have been short sales and foreclosures. - Shop Only For What You Can Comfortably Afford, If At All
Once you’ve seriously dwelled on the questions in 1-5, NOW you’re ready to make a decision about whether you can and should go shopping for homes. Now for the hardest step of all: you should plan on shopping for homes that are actually in this price range. Oh, but John, it’s a buyer’s market! Surely I can get that $1.15 million dollar beauty for 75 cents and a pocket full of cheese, right? Well, no. In the first place, the difference between list price and selling price is not that great in real estate on average even in this market, and the better the home is already priced, the less difference there is. Learn more.Even more importantly, however, the absolute cardinal rule of buying conservatively is to adjust your expectations to reality, not to adjust reality to your expectations. Can you comfortably afford something up to $280,000? If so, then you have no business looking at homes in the $400,000 price range. The home that’s worth $400,000 but is listed for $280,000 is going to go for $320,000. Besides, for $280,000, you might easily find the home that should be listed for $310,000 without much competition. Moreover, as a conservative buyer, you know that if you’re comfortable up to $280,000 and look at homes up to that price, you may find something you like at $240,000. Now you’re $40,000 more comfortable!
Common Sense + Up Front Number Crunching = Success!
With these six tips in mind, you should be well on your way either to making a purchase that won’t leave you overextended, or walking away before you even shop. Learn all you can before you shop, keep your eyes open, and you’ll be fine!
