Reader Question: Thinking of Finally Buying

I received the following question this week from a reader whose situation is probably similar to many other readers of these pages:

I was a big follower of this site during 2006-2009 and felt pretty informed/unsurprised when the original bubble burst. I’ve been busy since then, got married, went through grad school, got a good job, and am now thinking about buying a home. I’m curious what you all think about that.

We’re looking at prime, walkable neighborhoods in central Seattle, (Wallingford, Capitol Hill, Phinney, Tangletown) and are looking for 3-4 beds / 2 baths, since we’ll be starting a family soon. The interest rates seem really appealing right now, and while I’m confused a bit by the lack of inventory and the recent price bump, it doesn’t seem like it’s a bad time to get in, given what we’re looking for, and our current situation. (Cramped in a nice, but small 1-bedroom apartment).

Obviously I’m a bit concerned about the recent run up, the Fed and the discontinuation of them pouring money in the mortgage market, but I’m unsure how much that’s propping the market up right now. Even if they stop and mortgage rates go up into the 5-6% range, that would likely be paired with a small dip in home prices, and my affordability would probably be similar, no?

If we’re looking to live somewhere for the next ten-plus years, what are your thoughts? What if it were only five years?

It’s good to be cautious after the intensity of the competition and home price increases in the market this spring. While now might not be as good a time to buy as a year ago, I think that someone who chooses to buy today can still make a good purchase.

I think my best advice for avoiding over-paying in any market is probably the “How To: Analyze a ‘Below-Market’ Deal” series that I wrote back in 2010. If you can find a home that you like, can afford, and is a good deal based on comparable sales, nearby rents, and historic pricing, then I say go for it.

The biggest challenge in this specific reader’s case is going to be the location he’s targeting. The “prime” neighborhoods are prime for a reason: Lots of people want to live there. That’s likely going to mean lots of competition on the nice homes, so be prepared for a number of disappointments before you finally land the right home.

What’s your advice for this reader? Is now a good enough time to buy? Why or why not?

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About The Tim

Tim Ellis is the founder of Seattle Bubble. His background in engineering and computer / internet technology, a fondness of data-based analysis of problems, and an addiction to spreadsheets all influence his perspective on the Seattle-area real estate market. Tim also hosts the weekly improv comedy sci-fi podcast Dispatches from the Multiverse.

41 comments:

  1. 1
    Erik says:

    Waiting for Ardell to comment…

  2. 2
    Blake says:

    It is a sellers market right now with low inventory (selection), plus the bond market just slipped up and interest rates popped 1% or more. It is a good time to do lots of looking and research…. It took me 3-4 years before I bought (2011) and when I found the place it jumped out at me because it was exactly what I wanted. So…. be patient and make lists and think abotu what you really want. Walk the neighborhoods at night, in the morning… talk to people. And visit Seattlebubble every day!
    Good luck, Blake

    ps- My personal opnion is that the US and world economy is still pretty sick and has fundamental problems. So I expect to see another leg down in this pitiful “recovery” and expect to see home prices and interest rates drop in the next year or so. IMHO…
    But… “Seattle is different!” ;-)

  3. 3
    mmmarvel says:

    My opinion (and semi-educated guess) is that it’s a BAD time to buy. Sellers market, interest rates climbing, prices staying high. If it were me – I’d wait, but that’s just my opinion and gut feeling.

  4. 4
    wreckingbull says:

    I would give three criteria.

    1. P/E It has always been about the P/E and always will be. What could you rent your potential home for? When the P/E pencils out, you have the green light to buy.

    2. Quality of inventory. Is there mostly garbage on the market today, or are you actually finding quality homes? I’ll let you answer that one.

    3. Can you live in your home and still save money for retirement, emergency funds, education, travel, and whatever else you enjoy doing? I think that cable television have turned us into housing-porn addicts. There is much more to life than your home.

    That is all. If you can evaluate these questions and are happy with the answer to all, pull the trigger.

  5. 5
    almostClosed says:

    I’ve been renting for 7 yrs on the eastside and seriously looking for a house for almost 2 years. This summer I’ve bid on 3 homes with escalation clauses (something I thought I would never do) and got beat by all cash buyers with no contingencies. It has been very hard not to get swept away into thinking I had to pay even more if I really wanted to buy.

    Last month I found something in the right area that I can afford. If I hadn’t been ready with a large downpayment and preapproval, I would not have gotten the house. I was not the high bidder, but the seller felt I had the best chance to actually close.

    The house I bought isn’t a dream home and it feels like I am spending too much money, but I’m pretty sure it’s the best I can do in terms of total cost and location. I plan on staying there 5-10yrs, but you never know…

    For me, the location and commute to work were most important, so I had relatively few homes to look at over this summer. Take your time. Pay attention to what is selling in the areas you want and what it takes to buy. Be ready to buy, but don’t be rushed into any deal. No one knows if prices will be 20% higher or lower next year. Find a house that is a reasonable deal now, and that’s all you can do… you pay your money and take your chances.

  6. 6
    ChrisM says:

    “If we’re looking to live somewhere for the next ten-plus years, what are your thoughts? What if it were only five years?”

    Five years, don’t buy. Transaction costs are too high.

    “Even if they stop and mortgage rates go up into the 5-6% range, that would likely be paired with a small dip in home prices, and my affordability would probably be similar, no?”

    Run the numbers, on interest rate scenarios and find out for yourself what affordability would be. An affordable monthly payment at 3.75% likely is completely unaffordable at 5%.

    Lastly, “starting a family soon” infers radical changes to your household budget…. Schools become more important (assuming not home-schooling). Left unmentioned is your overall financial picture – retirement fund, baby fund, etc. Lots of things to think about!

  7. 7

    I like wreckingbull’s criteria. I’d add:
    1. What are the chances that you’re only going to be in the house a few years? If the chances are pretty good, then buying now is unwise, as closing costs and commissions at both the buying and selling ends are likely to eat up any profits you might make. If there’s a likelihood you’ll be there 7 to 10 years or more, that reduces the risk some.
    2. Mortgage payments are going to be larger than rent for the same house in those neighborhoods. Are these larger payments going to put a crimp in your style? Do you have enough income to easily cover this, or is the family going to go on the ramen and canned bean diet?
    3. What kind of compromises are you prepared to make?.Inventory is low in the neighborhoods you mentioned, and there’s a lot of competition. So you might have to “give” on something. Are you willing to buy something smaller and junkier in those neighborhoods? Are you willing to participate in a multiple offer situation and spend more than you’d originally considered? Are you willing to consider a less prime neighborhood?
    4. Prices have gone up pretty rapidly lately. But at some point in the next few years, we will see price declines. I don’t think this bubble is going to last at it’s frenzied pace for as long as the last bubble did, so the decline probably won’t be as bad. But it looks like we may be in for a period of volatility. If you can buy a house and then have the willpower to not constantly check the “value” on zillow, you’ll be able to have better control of your blood pressure.

  8. 8
    Eastsider. says:

    Home prices in Seattle area today fall in the historically range. So if you find a good home and your personal financial situation is solid, you should go ahead and buy it. Don’t think about it as an investment or try to time the market. You are buying a (good) home to live in!

  9. 9
    mike says:

    RE: ChrisM @ 5 – On a tangletown house the difference in payments is under $350/month between 3.75% and 5%.

  10. 10
    Erik says:

    RE: wreckingbull @ 4
    That was a quality comment. I knew you had it in you.

  11. 11
    ray pepper says:

    advice from people here???????your better off looking to the heavens for advice on real estate matters: http://www.youtube.com/watch?v=nuyOU5qvNyg

  12. 12
    Kyle says:

    RE: ChrisM @ 6

    I echo these sentiments. 5 years seems too short. I’d feel pretty good about a ten year horizon. Had you bought in those areas at the peak (06-07) of the worst housing crash in 100 years, you’d be able to sell relatively unscathed 7-10 years later. This isn’t to say its the best way to deploy capital for an investment, more assuming that your objective is to have a home and stability for your family.

    One item to think about in those areas might be zoning. There are blocks in Ballard where developers are knocking down old homes and putting up 4-unit town homes. I would be PISSED if I bought a place only to find 3-story cubes casting large shadows on my house 2 years later.

  13. 13
    nwbackpacker says:

    In my opinion…

    PROS:
    – all your neighborhoods are good, will hold value well
    – low interest rates
    – prices still lower than boom highs, which bought us some time
    – local economic outlook strong
    – highly desirable region which many predict will continue to grow; some say becoming like SF
    – hopefully at worst you have a giant piggybank

    CONS:
    – economy unknown, possible crash(es) eminent
    – we may be in another bubble
    – stress

    My latest plan is to buy semi aggressively on 1 income (tho we have 2), stay relatively close in for short commute, do some DIY to add/maintain value and buy lower price house in a nicer neighborhood. I’m over the idea of HGTV kitchens, high square footage, a garage, etc; I just want to plant some roots and not stress about income & commute times.

    It’s taken a long time for us to not just save money, but manage expectations (mine and wife’s).

  14. 14
    drshort says:

    I don’t get the premium people pay for houses in those areas mentioned except for Capitol Hill. I’d much prefer to have a nicer/cheaper house in North Admiral.

  15. 15
    Jonness says:

    Others have provided you excellent advise, so I’ll keep this short.

    Thinking of only staying for 5 years and then paying 8% to resell the house? Not a good idea. Keep renting but start legitimately looking for a house. I looked for a good 5 years, and by the time I bought, I had already outgrown the type of house I initially set out to buy.

    After my girlfriend and I graduated from college, we kept living like college students and banked all the extra money. So after 5 years of house hunting, we knew we had found the right house, and we had plenty of money to afford it. After 9 months of living here, I still can’t hardly believe it when I look out the window across the Sound and into the mountains. It has been well worth the wait!

    My advice is to start thinking about the house you really want to live in, and then start planning how you are going to be able to afford to buy it.

  16. 16
    Peter Witting says:

    RE: drshort @ 14 – Shhh….don’t let the secret out!

  17. 17
    Christy says:

    We just bought our first home last year in Sunset Hill (and love both our home and our neighborhood). We looked for 2+ years below 80th, north of downtown and west of I-5 due to work locations and lifestyle. I never thought we’d end up in Sunset Hill and never thought we’d pay as much as we did for a house, even though it was still well within our means.

    What we found over time looking at a lot of houses is that what we thought we wanted wasn’t what we really, truly wanted (which turned out to be a view). Looking at so many houses and for so long certainly helped us clarify our wants, willingness to pay for our wants, and when the right house came along, we made our first offer (full price) and got it. So, my point is that you may not end up where you start in your house search and that looking at a lot of homes and giving yourself time may ensure you end up with exactly what you want.

    Good luck!

  18. 18
    Erik says:

    RE: drshort @ 14
    Changing the house from not nice to nice is something that can be changed. The location is something you cannot change. I would rather buy somthing where I can control the undesireable variable.

  19. 19
    wreckingbull says:

    RE: Erik @ 18 – Ask anyone who bought in Ballard in 1995 and they would likely disagree with you. Take a look and see what Sunset Hill and Crown Hill homes went for in 1995 and you will shed a few tears. The trick is to find an area like this where the premium is not yet baked into the price. That is Dr. Short’s point.

  20. 20
    Attorney says:

    I bought in phinney-wood in the last quarter of 2012. First time buyer after a few years of looking and following this blog. Three offers came in at the same amount, just above asking, one all cash. I escalated 5k over the all cash offer and made the personal sales pitch. I did not waive the inspection or preinspect. The home my wife and I ended up loving was nothing like what we thought we wanted. Went out looking for an updated craftsman (cliche I know) ended up in a contemporary. A nearly identical place (i.e., perfect comp) just sold for 115k more than I paid. Not bragging. Just a plug for location location location.

  21. 21
    drshort says:

    By Erik @ 18:

    RE: drshort @ 14
    Changing the house from not nice to nice is something that can be changed. The location is something you cannot change. I would rather buy somthing where I can control the undesireable variable.

    In my opinion, North Admiral is much nicer than several of the neighborhoods mentioned. The houses tend to be grander with larger lots. It’s quieter. And, contrary to popular opinion, the downtown commute is easier.

  22. 22
    doug says:

    real estate, stocks, bonds, precious metals, should all be collapsing together and soon
    how far they all far is anyones guess but i say they fall very very hard
    the dow falls all the way to 5000 and the sp 500 to 400

    The US Dollar is the very best investment in the world right now (Deflation imminent)
    Oil is a big question and it may be the only asset besides food not to fall in this mega-crash
    anyone want to buy real estate take a road trip to North Dakota (Williston, Dickinson, Watford City, Minot) whats going on there hasnt happened in America for over 100 years
    BOOOOOOOOM

  23. 23
  24. 24
    David Losh says:

    Oh, what the heck!

    I was in a house a couple of weeks ago that was, in my opinion, a good, solid purchase.

    They reviewed offers, but the sales price was only $5K above asking, and in my opinion the asking price was a little low.

    So I would say now is a good time to look, because you never know, but If it were me I’d seriously start looking in a September, October.

    There’s no rush at this point. Take your time, make your lists, figure out what you can comfortably afford, and don’t be afraid to buy below the amount you qualify for. Some people max out, and that’s not going to be good going forward.

  25. 25
    SMW says:

    Wait…the market is turning…prices will be lower in 12 months….rent for a year and reconsider at that time.

  26. 26
    Blurtman says:

    Magic 8-Ball Says: “Reply hazy try again.”

  27. 27
    Jonness says:

    By doug @ 22:

    real estate, stocks, bonds, precious metals, should all be collapsing together and soon
    how far they all far is anyones guess but i say they fall very very hard
    the dow falls all the way to 5000 and the sp 500 to 400

    Yes, no jobs and decreasing wages bode well for a deflationary outcome, but pumping dollars directly onto Main Street works in the other direction.

    The only reason there is currently talk of unwinding the Fed balance sheet is because it instills confidence to consumers that the economy is healing and provides confidence to investors that the Fed has plenty of ammunition on hand and is in control of the situation. Once the Fed starts tightening, and the real economy begins to show up, Ben’s successor will happily set a new money printing record. This otherwise shocking strategy won’t look very bad to people because they will compare it to Beranke’s new normal and simply shrug their shoulders.

    So what will be the outcome of all this money printing? A continued increase in the disparity between the haves and the have nots brought about by a continuation of the current money transfer to the rich. Meanwhile the middle class and poor will work for lower wages and continue on with their “happy just to have a job” renter society.

    We’ll become a nation split between Fat Cats who eat the finest gourmet food available on the planet, all compliments of the Fed.
    http://www.yourislandnews.com/wp-content/uploads/2011/10/Black-tie-dinner-.jpg

    While the rest of the nation wines and dines itself on potatoes.
    http://www.vangoghgallery.com/catalog/image/0082/Potato-Eaters,-The.jpg

  28. 28
    ARDELL says:

    RE: Erik @ 1

    It’s a good time to sell.

  29. 29
    Blurtman says:

    RE: Jonness @ 27 – Try to be in the Fat cat camp, but don’t be too obvious. Save that Che Guevara T-shirt for top down convertible Audi S8 driving when the revolution arrives.

  30. 30
    sam says:

    I am in the same boat as you are. We are going to hold off buying. Homes are way overpriced than they should be. Do not let the realtors and builders tell you that interest rates are very low and you should buy now. You are prone to interest rate risk with the current market prices, unless you are in the house for 7-10 years. I already see houses sitting in the market or coming back to the market because the financing is falling through. What goes up (so fast) must come down. With 1% interest rate increase, we are seeing this. Add another 1% to the mix and see how much affordability changes. Obviously, the locations you mentioned are great ones and they may be less susceptible to extreme downward movements in prices.

  31. 31
    Jonness says:

    By Blurtman @ 29:

    RE: Jonness @ 27 – Try to be in the Fat cat camp, but don’t be too obvious. Save that Che Guevara T-shirt for top down convertible Audi S8 driving when the revolution arrives.

    As long as we get deflation to low inflation, the Fed can print, in which case my above scenario will most likely hold. But if Ben prints so much we even get moderate inflation, he will have to start unwinding his balance sheet in order to fight off the inflation. And that’s when all the fat cats will start rushing for the exits in all assets that are currently being artificially propped up by the Fed.

    In short I don’t recommend selling off your stockpile of food, guns, and ammo just yet. And for goodness sake, keep that t-shirt handy. As for the Audi, just take it from someone else when the time comes. No use wasting good money on something that will just end up riddled with bullet holes anyways. :)

  32. 32
    doug says:

    RE: Jonness @ 27

    the run on gold and precious metals is over. Hyper inflation and the end of the world like Germany in 1925 is not going to happen here in America. America will not let it happen.

    As we will rise to defeat the corporations and the government and put a stop to all the stuff they are doing to ruin this great nation.

  33. 33
    Erik says:

    RE: wreckingbull @ 19
    I don’t know how to do that, but I know how to remodel. How do you predict if an area is going to increase in value in the next ten years? I bought where I bought because it was cheapest in the nicest area I could afford at the time. I could visualize the remodel in my head. So far, I don’t know if it could have been a better outcome. I predict $100K profit in 2 years.

    I would love to know how to better predict the areas that will be hot in the future. How is that done? If I sell and have some money, perhaps that is the next step for me? I would buy a fixer in an area that will appreciate because I like instant equity.

  34. 34
    Erik says:

    RE: drshort @ 21
    I didn’t really know where that area was. Yes, it is a nice area. All these areas we are speaking of are really nice to me and out of my price range. I worked at the boeing across the bridge in tukwila for a year or so and that area isn’t nice at all in my opinion. I like the expensive areas in seattle because it seems like you can just walk to wherever you want, which is a nice benefit. I wouldn’t mind buying a condo over top of a natural foods store in those areas. That way I can stop buying premade food off Amazon since I’m too lazy to go to the grocery store.

    Ballard would be my first choice and then Eastlake. North Admiral seems like a lot of residential and not a lot of commercial. If you prefer that, buy there. I have been trying to figure out why people think some areas are good and I think they are dumps. Blurtman said it’s because those areas best support their beliefs. He worded it differently, but that was the message. Move where you think is nice and makes you happy. Don’t worry about what others think.

  35. 35
    Jonness says:

    By doug @ 32:

    RE: Jonness @ 27

    the run on gold and precious metals is over. Hyper inflation and the end of the world like Germany in 1925 is not going to happen here in America. America will not let it happen.

    As we will rise to defeat the corporations and the government and put a stop to all the stuff they are doing to ruin this great nation.

    You are making predictions about what will happen, but you haven’t any models by which it will happen or provided a clear road of where you think we are headed. Thus, I’m stuck not being able to understand your viewpoint.

    I agree we will not see inflation for a while, due to the current balance between deflationary forces and inflationary forces. However, inflation could happen eventually as a result of all the money printing. If it does, the Fed will initially pay banks more than it already does not to lend in an effort to mop up some of the money flowing into Main Street. If this isn’t enough, the Fed will taper and perhaps lightly unwind. It’s important to note, the asset sales will turn the economy downward as the fat cats head for the exits in Fed pumped investment strategies, which will perhaps provide another shot at threading the needle for a while longer, ad nausea.

    So that”s the case for inflation. But the case for deflation is much murkier. It seems to me, if we begin to deflate, the Fed will print more money and shove it into the economy in order to offset the deflation, causing the economy to take another rotation around the Ferris Wheel. So I’m having trouble with your claim that a horrific deflation is on the verge of occurring that will push the S&P to 400. Could you line out some of the particulars so I can better understand your argument?

  36. 36
    Blurtman says:

    RE: Jonness @ 35 – Don’t we already have inflation in assets that are accessible by entities that have received this QE printed money? That would not include J6P.

  37. 37
    David Losh says:

    RE: doug @ 22RE: Jonness @ 35

    As long as we are past the house hunting advice, I’d say we are already in a deflationary spiral, and the Fed printing is putting up a good battle against it.

    Oil had been on a downward price path until the unrest in Egypt. I have no idea what Egypt would have to do with oil, but it was an excuse to raise the price per barrel. That raises the price of food because food needs to be transported to market.

    Just because people pay higher prices for Real Estate doesn’t mean the value of the property rises.

    Once you get out of Real Estate, and look around, in my opinion, there are some pretty good deals out there. Cars, clothes, eating in restaurants, going to Home Depot, having work done on your home, having work done on your car, all seem to be more reasonably priced to me.

    In my opinion everyone is trying a little bit harder. There is more money available to make business a little easier to do. I’m talking about cash on hand kind of money, rather than leverage.

    In terms of leverage there is plenty of money being printed to make short term profits, so corporation can bank more cash.

    The way I see it, the Fed can safely slow printing, and the economy can get on with long term investment.

    In terms of the price of Real Estate we are already at a point where we will have declines in some pricing, but in premium properties the value is already there.

    I think things are going pretty well, and look forward to the election seasons.

  38. 38
    joe dirt says:

    Unless Bernanke’s experiment fails, in which case house prices will be the least of our concerns, the best buying opportunity in our lifetimes is pretty much ended (there are still some short sale and auction deals, but they are getting a lot more bidding).

  39. 39
    Jonness says:

    By Blurtman @ 36:

    RE: Jonness @ 35 – Don’t we already have inflation in assets that are accessible by entities that have received this QE printed money? That would not include J6P.

    Yes, you are correct. The QE printed money has bubbled certain investment classes and assets. However, this isn’t showing up as inflation as per the Fed’s definition. And as far as the unwinding at the Fed is concerned, the Fed’s definition of inflation is what’s driving the bus. Thus, for now, the Fed can continue to print. People will complain there is horrible inflation and point to asset and equities bubbles as proof. But really, these bubbles are mostly a measure of the disparity between the increasing wealth of those riding Bernake’s coat tails and the decreasing wealth of those who cannot afford to buy a ticket on the Bernanke Express.

    All the printing is being offset by the underlying rotten economy; so the Fed’s measure of inflation remains in check. But if this measure increases to a level the Fed can no longer hide, Bernanke will have to start selling assets in an attempt to cool things off. Of course, this would cause all the fat cats on the Bernanke train to simultaneously rush for the exits.

    Meanwhile, banks have $2.1 trillion in excess reserves drawing interest at the Fed. If it ends up in the economy, it would be a highly inflationary event. For now, the banks are too afraid to lend, so it’s not hurting anybody. However, if the banks perceive the economy is legitimately healing, or if they feel inflation is eating into their reserves, they will start looking for alternatives of where to keep it.

    Bernanke has tools to fight deflation, but if he overstimulates the economy, his tools for fighting inflation appear to be more limited. He can pay banks higher interest not to lend, he can raise the short term rate, and he can sell his assets into the open market. Given that there are no real job gains out there, none of these solutions looks very appealing.

    So that’s how I perceive things at the moment. The deflationists have a different model that I would be interested in hearing more about. In particular, what separates the U.S. deflationary outlook from the two decades of slow growth experienced by Japan, and why are we going to experience a much greater deflationary event than they did?

  40. 40
    ChrisM says:

    RE: Jonness @ 39 – I’ve recently been enjoying MIT’s lectures. http://ocw.mit.edu/courses/economics/14-01sc-principles-of-microeconomics-fall-2011/unit-1-supply-and-demand/applying-supply-and-demand/ but I wish they would assume an understanding of calculus!

    The model you describe would probably be complicated – I’ve stated before I’m interested in dynamical systems, which I think this qualifies: https://en.wikipedia.org/wiki/Catastrophe_theory

    I’d appreciate any modelling info you care to disclose. Thanks!

  41. 41
    Chris says:

    I said “hey I’m buying a home” in Nov 2011 and I got a whole bunch of ‘thumbs-downs’ on this board and a lot of (almost hostile) comments like “good luck with your boat anchor,” “congratulations, you just lost 10%,” and the like, so my advice would be: don’t listen to this board, make your own decision. There’s such a thing as the pendulum swinging too far the other way and this board was good evidence of such.

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