Wednesday, November 23, 2005

Why am I buying now?

I think the media is conspiring against me. There's been another spate of housing bust coverage in the past week or so, just as I am signing off on my own purchase. As if buying a home isn't nerve-wracking enough!
So do I want to cut and run? No. I am a little concerned about the state of the market and I do think prices will decline a bit in the short term, but here's why I feel relatively okay about what I'm doing.

Interest rates: I could wait a few months for prices to go down but interest rates could go up in the meantime. Take a hypothetical $300k condo at a 6% interest rate. If the interest rate went up to 6.825%, the monthly costs would balance out if the price dropped to $275k. $25k price drops aren't unheard of. But is it worth the gamble? 1% spikes in mortgage rates aren't unheard of either. The $300k place at 6% would cost me $133,516 in interest over the first 10 years, the $275k place at 6.825% would cost me $140,550. The price gap starts to narrow when you look at it that way.

Long-term price appreciation: Even if prices decline over the next few years, they'll eventually go back up. I'm buying a place that I should be able to live in for a long time. If I don't want to live in it, I'll be able to rent it out with positive cash flow. I am not buying as a speculator or a flipper, I am buying a place to live in, but it will work as an investment too.

Location: I'll be in an area that is close to subways and services. The neighborhood is not yet full of upscale restaurants and bars, but a few have arrived and I think more are on their way. And it's walking distance to existing restaurants. If the economy goes south for a while, the area's development might slow, but I think I am buying in an neighborhood where property values have potential to grow for reasons other than the overall state of the market. Now might be the moment when I can best afford it!

Budget: I'll be at the high end of my budgeted housing expenses, but my taxes and common charges will be low so my "out the window" costs will be very close to what I pay now, while I enjoy a much nicer space. I'll still be able to save money, while having a decent lifestyle. Also, I am not going out on a limb in terms of financing. I'm putting 20% down and getting a 30-year fixed rate mortgage without any pre-payment penalty, so it's a lower risk loan and I'll be building equity.

NYC: while prices have gotten insane here, it's not like that is anything new. It's just a bit worse than usual lately! There is always a housing crunch here, and somewhat limited space on which to build. This hasn't prevented price declines in the past, but it might make a bubble-burst a bit less drastic than other areas of the country.

Space: I'm not moving into another studio, and though it's not a mansion either, I'm buying a place that will give me some space to grow into. And I just really like it! Most apartments in my price range have a lot of drawbacks that this one doesn't have, so when you find one you like, it's worth grabbing. Does it have every single feature I've ever dreamed of having? No. If any place ever did, I wouldn't be able to afford it anyway. But I feel like I found a place that is a good fit for me.

What's the worst case scenario? The market totally crashes, the apartment turns out to be lousy to live in, the neighborhood devolves into a war zone, I lose my job, can't pay my bills, can't unload the condo, declare bankruptcy... or more realistically, say I have to sell in a few years for some reason and can't quite break even. Say I lose $20,000. Well, if I had paid $277 more a month in rent for the past 6 years, which would still be less than market rate for most studios, that would have cost me $20,000. That doesn't mean I don't care about losing $20,000, but in the grand scheme of things, I could live with it.

P.S. I got a mortgage commitment letter this week! Even though it seems like they'll give a mortgage to a dancing monkey these days, that made me happy.

Happy Thanksgiving everyone!


Anonymous said...

Hi X....check out this site. It's put out by the US Treasury and it lets you link you bank accounts, etc. directly to their treasury bill auctions. It's really easy to set up. I like the 28 day bills they auction every week. This weeks' rate you could get was about 3.98%....pretty good, huh? Beats those goniffs at E*Trade.

P.S.: I like your site. And buying the apartment was a good move. It's a long term thing so don't sweat the near term stuff.

Caitlin said...

your thinking sounds right on the money. It really seems like the perfect timing for YOU :) Have a great thanksgiving!

thc said...

Stop overanalyzing. Find a place that you love and buy it!

I know it's nerve-racking and I remember how much we fretted over our first house. But no one can say with any certainty where interest rates or housing prices will be in a year or 5 years or ten years. Just take the plunge!

Unknown said...

With Emigrant Direct, you can get a 4% savings account, so the treasury inflation linked T-bill isn't such a great idea. It'll lock your money up in ways you don't want to. Keeping it in relatively flexible places is a good idea in an inflation environment.

I also think buying the condo now was good, if you got a good price. My guess is that interest rates are going to go up (we got our place in July with a 5% interest rate on a 30-year) from now on, so ARMs are a definite no-no. If past history is a judge, what will happen is that there will be local housing busts in the overheated markets (San Francisco, Boston, etc.) but for the rest of the country what will happen is that housing prices will not increase -- and thus will lose value against inflation -- until they become realistic again. Realistic to me is to levels that a 2-income some kids household can buy a 3-bedroom house and pay less than 30% of their take-home pay towards it.

Nina Smith said...

You made the right choice. Now quit reading all those housing bubble blogs! Real estate is cyclical... needing a roof over your head is not. Relax, everything is going to be fine.

Anonymous said...

I definitely think its a good decision. Even if housing prices decrease, rent prices will likely rise in the NYC, you've locked in a price you afford for the next 30 years!

Tiredbuthappy said...

I think you're doing the right thing buying now. I won't lie: I'd be anxious, too, if I were buying right this minute. But you're ready, your finances are ready, you've found a place you love, and you're smart enough to fix your rate.

Sounds like the timing is right for you, and about the market--who knows what will happen? Everybody's got a guess, but nobody really knows.

Anonymous said...

Your logic is sound. It is the same logic I have generally used in my r.e. purchases and it has served me extremely well.

I know you're anxious. The process is always nerve-splitting and the future always seems very uncertain.

But, take comfort in the fact that you are making the right decision for the right reasons.

All you can ever hope for is to go in with eyes wide open.

savvy said...

You are fine. Don't let the media get you down. If you were buying a property to flip or rent out, I think you would be justified in worrying, but you plan to live there come hell or highwater (or real estate bubble bursts).