Tuesday, January 13, 2009

House Hunting

It's always funny to hear people ask "Is now a good time to buy?" because the answer always seems to be "Yes!" To a certain extent, provided that two specific conditions are met, it really is always a good time to buy. Those two conditions are important, however. The first is that you are going to live in/own the property for an extended period of time. Normally this is at least 5 years, right now it could well be longer.

The second condition is that the buyer must be able to afford the payments. Since this option pretty much eliminates ballooning rate type mortgages, it would have applied even during 2006-7...it's just that many of the people that bought then would have been precluded from buying because the exotic loans were necessary to produce an initially affordable rate.

I'm looking for a house. I've always wanted one, and now that I have a job that pays enough in a market that is getting back to sensible prices, I can afford one. I have known better than to get some bizarre financing option (and now, apparently, banks do too) but I am in a minority of Americans who are good at and enjoy mathematics. I also expected and am glad to have been correct, that prices were inflated beyond what real incomes could support.

At a median home income of $50k/yr (a bit high) after taxes is ~$36k/yr or around $3000/mo. Good banking practices use gross income to figure max payments and for the imaginary middle person here it would lead to <$2000/mo in total debt payment. That would include mortgage, car loan(s), student loan(s), credit card debt, and anything else. A minimum down (3.5%) FHA loan at a very good 5% interest, for a $300k house is $1550/mo without taxes and insurance, which could add between $100 and $700 /mo depending on location/risk/whatever. People were getting loans for more expensive houses on less income that were greater risks.

I like the idea of banks restricting the mortgaged amount to 3x annual income or less. If they were to impose that restriction, no matter what, then housing prices would be forced into a much better place. People would have to save (possibly by building equity in their current home) to front a larger down payment to buy a home that cost over that.

Of course banks aren't restricting like that, and between location and other factors I may have to go over. I'm still going to do my best to stay under 3x, but I've put a limit of 4x. In practice, the real limit comes in monthly payment amounts, which are tax and insurance dependent as well, and I've set a hard limit of 33% with a desire to have total payments be at or under 25% of gross.

We'll see.

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