The 3Q 2006 quick guide to buying a house

This is just some brief advice to buying a house in our current environment.

I would suggest first asking yourself why you want a house. Is it economic? Is it because you need more storage space? Do you not like the rules/noise/etc of apartments? Do you just want to because you want to be able to raise a family? Is there social pressure? You should make a list of these things, and think about them.

Secondly, regardless of if your move is economic, I would suggest looking at the economics. At the very least you should do a comparative economic estimate. With an apartment this consists of:
a. rent (cost)
b. utilities (cost)

With a house it consists of:
a. interest paid on the loan (cost)
b. utilities (cost)
c. property tax (cost)
d. interest you could have made on the principle you have in the house (cost)
e. tax reduction on mortgage interest (benefit)
f. Appreciation of house when you sell (benefit)

The most difficult to estimate amongst these is house price appreciation. I would suggest setting out 2 scenarios and thinking about what it would mean if either happened. The first scenario I would assume 3% growth per year until you sell, and the second scenario I would assume 5% declines in value for 5 years, then 1% growth until you sell. Using these 2 estimates, and knowing how much of a downpayment you want to make, compare an apartment to your 2 housing appreciation estimates if you moved in 2 years/5 years/10 years/30 years/etc. If this math seems tough send me an email or post a comment with some of your figures and I'd be glad to help.

After making this list and running through the economics you should start looking at houses. And look for houses that are EXACTLY what you want. There is a glut of inventory for sale right now and there is no reason to make exceptions. In every place in the country it is now a strong "buyers market".

Search web sites (such as HouseJockey.com of course =p ), for houses you would like to see. It is probably a good idea to get a buyers real estate agent, though that is up to you. The key here is, don't settle for anything other then a dream home. If you were shopping in 2004 or 2005 you may have had to settle, but in 2006 Q3 you can likely find exactly what you are after for sale somewhere.

After finding a house there are many ways to put in an offer, but if possible I would suggest doing these 2 things:

1. Use sites such as zillow.com, or the city assessor office, or your buyers realtor to help value a prospective house. Put an offer in slightly below this value... this is a buyers market after all.
2. Make the offer contingent on an inspection (these cost around $400). After the inspection comes through, ask that the seller fix or pay for all major things the inspector has in his or her report.

You will likely get a counter offer, and the only advice I can give on this is to remember that there is always another house for sale. Don't ever feel pressured or feel like you owe anything to anyone.

The simple fact is this: Housing prices have likely peaked but it is unclear how much they may decline over the next 2 to 5 years. All that is certain is that right now there are a lot of houses on the market, which means there are a lot of options. If you have a fixed rate mortgage you can afford, plan on living in the house for many years, and love the house that you find, then now is a fine time to be a buyer. Just make sure you understand the economics, and understand the potential downside risk as we are now at a "peak".