Help a Reader: Buying a House

Here's an email I recently received from a reader:

My wife and I are considering buying a house in California, either in Fresno or Los Angeles, depending on where our job search nets out.  I realize these are very different regions, so let's do the Fresno scenario.

Should we buy?

Basic financial info:

• modest, nice house = $70-100K
• savings we can apply to down payment with no penalties = 30-35K
• pretty good credit, so interest rate around 4.5%
• Obama tax credit = $8K
• rent foregone = $600-800/month,
• incremental maintenance, insurance costs = unsure? any estimates welcome

Our situation:

• our expected time horizon for staying in the house would be 3-4 years. 
• our combined income will be between 80-90K

At any other time, this would suggest to me that we should buy a house.  But real estate prices in Fresno (and much of California) have dropped precipitously, and do not show signs of stabilizing yet.

Depending on the maintenance and insurance costs of owning a home, my back of the envelope says that if we bought for 70K, the house would have to drop to below 45K in three years for us to lose money, which seems unlikely.

Are there other factors I should be thinking about? Also, I have 30-35K in savings including my emergency fund.  How much should I apply to my down payment, and how much should I hold onto (my employment is in education, and thus relatively secure)

What advice do you have for him?

Comments

[Ken M]

Have you accounted for:

Closing costs? Figure 3-5% total costs of house
Selling the property? Figure 6-8% of selling price
Property taxes? 1-2% a year?
Insurance? 600 a year?
Is your score actually good enough for 4.5%? i have 800 score and am approved for 4.65.
Are you really going to find a job and earn that much? Are both of you?

[Trent D.]

First...$70,000 to $100,000 for a modest to nice house...in Fresno or L.A., in California?! I'm looking on Zillow, which confirms the availability of such prices, but that sounds crazy low to me.

Second...a 4.5% APR sounds way too low for a fixed rate loan. It sounds an awful lot like an ARM.

ARMs, and the abuse thereof, are largely responsible for the financial mess we find ourselves in today. I know you plan to be gone in 3-4 years, but plans change, so make sure you can afford the adjusted rate after the teaser expires. Don't say "It won't happen to me". It just happened to about 2 million people.

[rdub98]

With a time horizon of only 3-4 years, I would NOT sink 30-35k into the house. I would put just enough down (20% or 14k for a 70k house) so that I didn't have to pay PMI (private mortgage insurance). I would bank the rest of the money for the down payment on a more permanent residence (or retirement). If you are looking at only 3-4 years, don't go blowing your savings on something that could still lose significant value over that period of time.

[MB]

Why is your expected time horizon for staying in the house such a short time? And why not just rent if you don't plan to stay in the house for longer? I have often wondered how much we could have saved these past 4 to 5 years had we not had a house to update, decorate, repair, paint, yard to maintain, etc. I started to add it up once but it was too depressing. There are lots of costs associated with owning a house that you just don't realize until you are in the house and your heating unit breaks or your mowing your own lawn, etc.

Plus, our house is no longer 'perfect' for how we live our lives. It would be much easier if we rented and could just move to something that suited us more. Not to say that I don't love owning...I do. But, just throwing it out there since your timeline is short.

[Mark]

Money magazine thinks LA won't hit bottom until 2010 Q3 (summer 2010) and Fresno 2009 Q4 (fall 2009) ... I'd wait until things start to improve

http://money.cnn.com/magazines/moneymag/moneymag_realestate/2009/maps/states.html

[Josh]

You'd be hard-pressed to find a decent house for < $300K here in LA... where are these mythical 70-100K houses?

My wife and I are also looking at buying a house, so hopefully right now doesn't turn out to be an actual *bad* time (we'd plan on being there for at least 4-5 years)

[bebe]

For $100K you can at most get a condo at a bad neighborhood, not a house in SoCal.

[Foobarista]

3-4 years is too short; you're better off renting until you have a 5+ year time horizon. Maintenance aside, transaction costs are about 7-10% of the purchase price to sell a house, so even if you get some appreciation, it'll get eaten up. If you have other plans (renting the house after your move, etc), you may want to look at the tax treatment carefully before considering this.

[In the Money]

The housing market has not hit bottom. If you want the best deal, I would wait a little longer. You should also consider other expenses like closing costs and property taxes. I am not an expert in CA real estate as I live in the Northeast, but I it is definitely a great time to buy. Something to consider is the rental market in that area. If the rental market is robust and you choose to leave in 3 years you could always rent out the house. Then you don't have to worry about the property value in 3 years. You just need to think about whether or not the rent will cover the expenses.

[cb]

BUY! That $8k credit is 8-10% of your house cost.

As said above just put down the 20% for PMI. And that number does of $70-100k sounds low on a place.

[Jim]

The $70-100k prices are for Fresno, not LA. Such prices seem realistic for Fresno. But houses that cheap may be in poor shape and/or in worse neighborhoods. I'd check out the homes in person first if you haven't to make sure what you're looking at is worth buying.

If those homes are OK shape and in decent area then I think buying makes sense. If mortgages are lower than rent then buying generally makes sense.

Stick with fixed rate mortgage and avoid ARMs. 20% down is good to avoid PMI.

Property tax, insurance and maintenance will vary so you'll need to get details on the house in question to know those. I'd guess your tax will likely be in the 1-2% range. I'd guesstimate your insurance costs for such a house in the $300-600 range. Maintenance is really hard to know and depends mostly on the condition of the home and its age.

Also keep in mind any extra utility costs and potential HOA fees. Garbage, water and higher electric bills are things you'll have in a house that you might not see when renting.

[Cathy @ Chief Family Officer]

Stick with Fresno, as you'll never find a "nice" modest house here in LA for just $100K.

[Bronco]

For one thing, Fresno sucks. So make sure you live there for a while before you make a house purchase. Plus, (as mentioned above) the housing market has a long way to tumble. You have time on your side; no reason to rush into a purchase decision. Don't listen to the realators, house builders, etc...

[Shannon]

No way can you buy a house in that price range in Fresno or LA. Proably should do the zillow check and VISIT to get a real look at the numbers. There is nothing but shacks in the ghetto for 100K in Sacramento, and the price just gets higher as you go south!

[MB]

Why does everyone quote Zillow? Zillow has my house inflated by at least $50k. Is it supposed to be accurate? I'd be really happy if it were.

[Tarah]

The housing prices have evened out here in the midwest (Nebraska), so I'd say that the coasts will be about 6 months to a year behind us. We wear clothes that are about a year behind the times, but our economy usually stabilizes about a year before the coasts do.

[Trent D.]

I quoted Zillow because they have house "for sale" listings, indicating what the current owners are asking. I'm not quoting their "Zestimate".

[Benjamin Bryan]

My wife and I are hopefully closing on a house on Monday. I agree with Ken M. and Trent D. A 4.5% interest is a little low, we have scores higher than 800 and looked at two lenders. The best we could get in California was 5.0% (and that was when it hit a low on the 18th) even though the newspapers were saying the average was 4.5%, apparently you have to buy points or buy a house in certain areas to get that rate. You can buy it down to 4.5% with points, and there were some banks that told us they could do something like 4.5% and I saw lots of advertisements like that but their closing costs were so high it would have taken 7 or 8 years to make up the difference.

I would budget .5% higher than you think you can get, it's hard to tell where the markets will be at when you have to lock in.

[Jim]

There are 388 homes listed for sale on Realtor.com in Fresno from $50k-$100k. Unemployment is 16% in Fresno and crime rates are about double the national average.

[Paula]

I live outside LA and you really want to make sure you check each neighborhood out. There are some neighborhoods near me that are safe but aren't as popular so the housing is better there. There are deals to be made but you have to be oh so careful. What is the plan after four years? If you are moving again, it doesn't seem worth it to buy.