House Buying Tips

[Kirby]

So I want to buy a house. The interest rates are pretty good right now for buyers, and everybody says it's a "buyer's market".

We've looked at a number of houses in our price range. Nothing sticks out as an "amazing house", but there is one house that we have found that is what we call a "B+ house". Basically, nothing is really wrong with it, but it's a little small, and the yard is a bit smaller than we'd like. Still, it's a pretty good house other than that.

We've been looking for houses for about 6 weeks now, and our "B+ house" is the best we've found so far. Interest rates are starting to rise a little bit...

For those experienced home buyers out there - would you wait things out until we've found an "A+ house" (with the risk of rising interest rates), or would you settle for something that seems "good enough" for the current market?

[pwaldron]

It's tough to give advice without knowing your situation, but I'll pass on a few bits of miscellaneous advice.

First, six weeks isn't all that long. I had friends who looked for six months before finally settling on one. On the other hand if there's external motivation (baby on the way etc) then it's settled and you want a house sooner rather than later.

Second, at least in my part of the world it's a very slow real estate market around Christmas. No one wants to sell a house and the listings tend to be thin under February or March. That being said anyone who is listing is probably a motivated seller.

Third, it strikes me that you're competing with a phantom "perfect house", the one that's never seen but might be out there. I had the same problem when I bought, although for me it was the neighbourhood rather than the size of the house. What I ended up doing was getting my real estate agent to pull the sales records from the past year for my A+ neighbourhood and then walking by to see what the houses looked like. Once I convinced myself that there wasn't a better deal around the corner I was much happier and I put in the offer. Maybe something like that is what would put you in a better position to make an accurate comparison.

[gowan]

To my mind the most important factor is the resalability of the house. It is a "buyer's market" right now but once you buy the house you have to consider being a seller. You never know whether you might have to move for job or other reasons and sell the house. Regarding A+ versus B+, a B+ house that is easy to resell is a far better buy, imo, than an A+ house that would be hard to resell for some reason. Do you have a "buyer's broker"? I mean a realtor who is dedicated to your interests rather than the seller's interests.

[DrStraw]

To me the most important thing is the city in which you are buying? I do not think that housing market has reached a bottom yet. I think it is possible that prices might drop as much as another 20% in some markets. I would not be a buyer right now.

[Joaz Banbeck]

A common fallacy is to believe that the market is either a "buyer's market" or a "seller's market". This leads to the faulty assumption that if people are having trouble selling, then it must be a good time to buy.

There is actually a third state of the market, one which I believe that we are in now, in which the friction and inefficiencies of the market cause the transaction to be disadvantageous for both sides. People are having trouble selling because of the problems of zombie forclosures and unclear titles, and the consequent inability to properly assess the true value of a property. This loss for the seller does not translate into a profit for the buyer.

We will be in this third state until the vast majority of 'underwater' properties are sold - and thus properly priced, and the properties with disputed titles have those titles resolved.

I would not buy now.

[tj86430]

I don't know about your situation or the loan market over there, but in Finland most house loans are for a very long period of time, 10-20 years is typical and even 30-40 years is not unheard of. The interest is usually tied to a market rate, which will go up and down during the loan period. If that is the case for you, it is completely irrelevant what the interest rate is at the moment of buying - therefore I'd wait till I find the "perfect" house, unless there is something that makes it absolutely necessary to buy right now. If you settle for "B+", then in a few years time you will be looking for a bigger or better or otherwise different house.

[CSamurai]

I don't know about your situation or the loan market over there, but in Finland most house loans are for a very long period of time, 10-20 years is typical and even 30-40 years is not unheard of. The interest is usually tied to a market rate, which will go up and down during the loan period. If that is the case for you, it is completely irrelevant what the interest rate is at the moment of buying - therefore I'd wait till I find the "perfect" house, unless there is something that makes it absolutely necessary to buy right now. If you settle for "B+", then in a few years time you will be looking for a bigger or better or otherwise different house.

There are two types of loans here in the states: The FRM (Fixed Rate Mortgage) and the ARM (Adjustable Rate Mortgage).

The FRM is usually 15 or 30 years, and is a slightly higher interest rate than the ARM, but the ARM fluctuates according to market rate, generally making the ARM a worse deal over the course of the loan.

As for the original post.. While it's true interest rates may go up slightly soon, I don't expect prices to recover for 2-3 years, so I'd just hang out, particularly till spring. Many people I know trying to sell their house have taken it off the market for the winter.

[DrStraw]

Another consideration, which I didn't think about when making my first post, is the situation regarding title validation. Many mortgages have been sliced and diced and churned out as derivatives so quickly that the titles have not been registered at the county courthouse as required by law. No one knows who owns the mortgages. This is a documented fact. There are a lot of houses out there which are not salable because of this. If you are looking to buy make sure that you are not stuck with the cost of the title search.

[gaius]

There are two types of loans here in the states: The FRM (Fixed Rate Mortgage) and the ARM (Adjustable Rate Mortgage).

The FRM is usually 15 or 30 years, and is a slightly higher interest rate than the ARM, but the ARM fluctuates according to market rate, generally making the ARM a worse deal over the course of the loan.

I don't know anything about the US situation in particular, but in general, neither of your two statements are true. An adjustable rate mortgage is typically a far better deal in the long run than a fixed rate mortgage. However, an ARM can be dangerous because your mortgage payment might suddenly increase if interest goes up. You can compare this to buying shares vs. putting money on a savings account; shares pay better in the long run, but there's the risk of short term fluctuations. With extra risk comes extra reward.

Right now, your first statement is true: a fixed-rate mortgage is more expensive than a flexible one. This has not always been the case though. In times of extremely high interest, a fixed-rate mortgage can actually be slightly cheaper than a flexible one. That is because the bank expects interest to go down in the future, so for them it's actually a good deal to sell you a fixed-rate mortgage in which you'll be stuck paying the relatively high interest for the coming years. Of course, the situation I just described is quite exceptional.

[jts]

An adjustable rate mortgage is typically a far better deal in the long run than a fixed rate mortgage. However, an ARM can be dangerous because your mortgage payment might suddenly increase if interest goes up. You can compare this to buying shares vs. putting money on a savings account; shares pay better in the long run, but there's the risk of short term fluctuations. With extra risk comes extra reward.

Right now, your first statement is true: a fixed-rate mortgage is more expensive than a flexible one. This has not always been the case though. In times of extremely high interest, a fixed-rate mortgage can actually be slightly cheaper than a flexible one. That is because the bank expects interest to go down in the future, so for them it's actually a good deal to sell you a fixed-rate mortgage in which you'll be stuck paying the relatively high interest for the coming years. Of course, the situation I just described is quite exceptional.

Is this true? I was under the impression that (American) economists think there's too little data as of yet to say that an ARM is "typically a far better deal." ARMs haven't traditionally been considered a good deal, and while it was trendy to push them in the 00s, they're now in bad odor because 80% of subprime loans were ARMs and it was a ripple in ARM rates that started the current crisis.

To be nerdy about it, rates go up when the Fed (or Frankfurt, if your house is in the Netherlands) suddenly decides to throttle the economy. So the point at which your mortgage payments start to rise is also the point at which you're most likely to lose your job. People systematically underrate how harmful it is to have these sorts of risks correlated.

And contrariwise, while a FRM doesn't get more affordable when rates fall, if rates fall enough you can refinance. I don't know how much rates need to fall to make refinancing efficient, but it's like having a stock option. (That is, the big difference between a FRM and an ARM comes when rates go up a huge amount, or fall a huge amount. If the former and you're in an ARM, you're screwed; if the latter and you're in a FRM, you can lock in at the new rate. So the maximum advantage of an ARM over a FRM is capped, but not vice-versa.)

[daniel_the_smith]

I don't think you really quite know 100% what you want in a house until you've lived in one for a while. So it's very unlikely that you'll find the "perfect" house on your first try. But even given that, I wouldn't let the market pressure you into buying a house you aren't SURE you want.

[hyperpape]

@jts I believe that a lot of the problems with ARMs were the result of option ARMs. The problem wasn't the adjustable rate, it was that buyers were initially putting next to no money down and making small payments that would only be adequate if the value of the house rose. Moreover, they were qualified for the loans despite being incapable of making the larger payment that would be necessary if the value of the house didn't rise.

I do not know whether there's a consensus about whether an ARM is typically a better deal or not.

[Kirby]

Thanks for all of the replies. I guess that the answer for my situation is simply that we haven't found the right house, yet.

[Joaz Banbeck]

No, the answer is that you have not found the right decade.

[hyperpape]

Cant vouch for this beyond 1) case shiller is important, 2) it's within the bounds of respectable opinion: http://www.theatlantic.com/business/arc ... own/68677/