Here’s a question I recently received from a reader that I will call “Jack”:
I’m 26. From L.A., recently moved here. Saved for a year, and moved with about 30k, (made 110k in ‘06) I was on disability for a year before after I almost died in an accident, so my previous savings were depleted. We are renting and working in Bellevue. Our rent for a 2 bed / 2 bath is $1,175. It’s a pretty nice place outside of downtown BellevueI just closed on a 2/2 in Issaquah off of W. Lake Samm. Blvd. and I-90, for $219,950. Got good rates (I deal with loans of a different kind, so I did my homework). Anyway, my payment all in is $1,600, including approx. $140 in tax and $218 in HOA dues. Looking at the comps over the last 6 mos. I didn’t steal the place, may have overpaid a couple of grand. I plan on living there for 4-5 years.
I’ve been well versed in med. emergencies, and work on commision, and am very worst case scenario oriented. My all in, PITI, and everything else is around 30% on the worst month i’ve had in a year, and around 12-15% on a good month, with plenty in reserves…
What is your HONEST opinion on this one?
Here’s what I said to Jack:
My opinions on buying real estate right now are pretty simple. In general, I don’t think that now is the best time to buy. However, those that do choose to buy will come out all right as long as their payment is affordable and they would be able to and wouldn’t mind staying put if the price dropped to less than what they paid. Be aware that if price drops do come, it could take 5 to 10 years before prices come back up to their previous highs. By “affordable,” I mean no more than 30% of gross income is going to mortgage, insurance, taxes, and HOA. Certainly there are exceptions to every rule, but it’s always best not to start off with something that you can barely afford (approaching 50% of gross or more), because if a job loss or medical emergency crops up you could be in a tight spot very quickly.
So generally, I would say that if you’re happy with your home, you’re not stretching to make the payments, and you have a reasonable plan in case of financial problems, then more power to you. Enjoy your place.
What advice do you have for Jack, now that he has bought the condo in Issaquah?
I do see quite a bit of posts on the blog here, asking us, the bubble-weary, about purchases, or friends who’ve purchased…
I see the blog as more of a consumer advocacy PSA than anything else, and it seems most people who ask for advice seem to have a level head about them (or they probably wouldn’t be asking, would they?)
I think much of our consumer ire derives from people who haven’t even heard of a ‘bubble’ at all, those that recklessly weild option-only ARM to sit on flipper properties at the expense of the educated folks wanting to pony up to a home purchase for traditional purposes (to live in), They’re what I call bubble-amplifiers.
Its these insaniacs and their REIC enablers that truly need a wrench thrown in their proverbial machinery. My scorn and ridicule is directed at them, not the mindful and cautious.
So, I think Tim’s advice is measured. If you can afford your payments using a traditional product with some down payment, plan to live in the place as your primary purpose for purchasing, have a diversified investment portfolio…. then who cares?
You may kick yourself for paying too much, but if it doesn’t cause financial ruin and permenantely reak havok on your credit rating, then c’est le vie.
I can understand coming here for advice…but…basically…IMO…this is kind of like…
a person who wants a tat. They don’t know where to go so they get inked by a rookie. The tattoo looks very “so-so”at best…below…and now…he’s asking his friends…”what do you think of my new tat?…Did I go to the right guy?”
What do should this persons friends say in this situation.
“Dude…you should have come and asked our advice FIRST”
By coming later…you weren’t so much looking for advice…but were hoping that the people in this *particular* forum would pat you on the back and tell you good job.
I can’t in good conscience give the “if you can afford it and want it and it won’t ruin you, then go ahead” response…because that runs afoul of the “more $ than sense”
Best of luck.
I would tell Jack the same thing I told my brother who bought a house last month in Seattle, and who I occasionally talk about the coming end of the bubble to.
“Congratulations! When is the house warming party?”
Some people learn by reading, some people learn by seeing and some people have to piss on the electric fence themselves. Whataya goind do?
My response to Jack is this:
Nice work. It seems you are living within your means.
You are in a situation where you can weather a downturn. Almost everyone else I know who bought in the last few years is stretched to the limit. They will crack when the going gets tough. (which it eventually always does.)
Based on the open thread from yesterday, Jack needs but one piece of advice – we hope you brought a woman with you from L.A.
Love it when someone makes a decision and then needs reassurance that it was the right thing to do.
Obviously you can pay more monthly than you are doing.
Here is what you do. Put the condo back on the market. Condos are the place to be so ask twice what you paid for it. When a newby from California finds it and buys it you will now be able to buy your dream home for $750,000 with a little creative financing.
You should be able to sell that should you so desire for over a million bucks next year.
Don’t be dragged down by all of the doomsdayers that post here. They missed the boat and are just sour graping.
You are young and need to learn to take risks without looking back over your shoulder. Worst case scenario is that if it does not work out as planned you get to live out of your car for a few years. Not the worst thing unless you like to watch TV a lot. Every meal is a barbecue!