Today Dr. Housing Bubble shares with us some tips on buying a home in a bear market. Thanks Dr. HB!
There is no question that we are living in a multi-year housing bubble. All you need to do is take a look at some of the Real Homes of Genius in Southern California and youll quickly realize the magnitude of this housing mayhem. Is there any doubt that lax lending standards played a part in supporting this housing market especially in overpriced metro areas? As we are facing depreciating markets, rising inventories, and tightening credit what can a prospective buyer do to prepare for a housing bear market? There are a few tips that you can do to prepare yourself for the coming years; playing house, maintaining your credit score, and buying when fundamentals make sense.
Playing House
Most people jump into an overpriced home only to realize they bit off more than they can chew. In an appreciating market, you are given a get out of jail card because all you need to do is list the home and it will sell. But in a declining market this luxury, as most homeowners are realizing, isnt available. Many homeowners are finding themselves underwater and one paycheck away from being foreclosed. So how can you plan for your home purchase? You should play house. That is, if you expect to buy a home for $400,000, you should set aside each month the difference between your current rent and the hypothetical PITI and save it for your down payment. This way, you are doing a dry run of owning a home. Of course you wont have the other unforeseen factors such as maintenance costs but youll have a better sense of the cost of owning a home.
Keep up The Credit Score
The difference between a 9.5% loan and a 7% loan is enormous. In markets with a tight credit supply, having solid credit is absolutely important. So what can you do to improve your credit score? For one, you want to avoid reaching the maximum limit on your credit cards. If you can, pay off your card every month. So what if the credit companies see you as a dead beat. Another important factor is call up your credit card companies and lower your rate. It really is that simple. Let them know that you are being offered a lower rate somewhere else and you are ready to take your business elsewhere if they dont work with you. It isnt like there is a lack of companies if they call your bluff. In addition, credit card companies do not want to lose credit worthy customers in tighter markets. This will help you in getting a mortgage thatll save you tens of thousands over the life of your loan.
Buy When the Numbers Work
How can you figure out if it is the right time to buy? I wrote an article on real estate valuation techniques. You want to factor in local rental/lease rates, neighborhood statistics, and the projection of future prices. In most stable markets price is set by the sales comparison valuation model but in inflated markets, you should also use an income approach just in case you had to sell. Plus, if all homes in the area are inflated like multi-color party balloons, what is the use of comparing a bubblicious home with another? Many in the industry will say this is a bad approach since your own home will never be a rental. Look at this as insurance. If the market is down, and unforeseen circumstances hit you or your family, how much can you rent your house for? This is a worst case scenario. One of the main things that got us into this bubble and the rampant rise in foreclosures is now that people need to sell, they are stuck and need to short-sell or face foreclosure. The numbers are so out of line. But if you followed the previous steps of playing house, having a good credit score and going into a conventional mortgage, and buy a place that is reasonably priced you will have the most vital thing of all, peace of mind and a sound investment.
Read More...
[Source: Blown Mortgage]
No comments:
Post a Comment