When Not to Buy a Home

Even with housing on the mend, bank repossessions rose 4% from March to April, according to RealtyTrac. While a single month-to-month figure may not mean that much, it does remind us of the importance of making wise home-buying decisions. Volunteering at foreclosure prevention workshops over the past six years, I've seen too many customers who bought into all the headlines crying "Now is the time to buy" without doing a little extra homework.

There are always two sides to the marketing bullet points that encourage home buying.  Considering the 'other side' may help provide the extra perspective needed to make the most educated home buying decision.

When rates are low
It's not necessarily bad to buy when rates are low. But by the time you start seeing the advertisements about historically low rates, you're looking in the rearview mirror: News about low rates usually lags the real-time market by a couple of weeks. It's important to know why rates are so low; after all, bad news for the economy is generally good news for mortgage rates. If rates are dropping like an anvil, pay attention to the job market in your city. Watch for news reports about what's happening to house prices. Local Chamber of Commerce meetings can be a great way to get a feel for both the current and projected economic well-being of your area, without the sales spin of a particular local housing player. If things are slowing down, it may not be the best time and place to buy.

When prices are on the rise
The last six years of home price fluctuations show that home prices can go down just as quickly as they go up. Buying a house because everyone else is doing it is never a good idea, either. It comes back to affordability and a long-term investing strategy. Know what your payment comfort level is and tally up the previous year's expenses to see how much money you can expect to have left over each month. If you make a minimum down payment (like 3.5% on an FHA loan) to buy a home, keep in mind that the cost to sell it in the future is 6%-7%. If you assume your home value will at least keep pace with inflation, you'll need to be in that house a few years just to break even on the resale costs. This should make you think twice before engaging in a bidding war on a home unless it's one you can't live without and plan to live in for a very long time.

The graph below shows the dangers of buying a house based on the notion that "house values never go down" (see full-sized version here).

When everyone else is flipping houses
When the housing market shows signs of improving, there will be a lot of advertising about buying and flipping homes. This can be incredibly profitable -- if it's done right. If you want to get into the flipping game, it's important to accept one simple fact: This is speculative investing. You're timing the market and hoping for a big payoff. I've had customers make hundreds of thousands of dollars because they got in and out at the right time, but just as many have lost all their capital and had to go through foreclosures that devastated their credit. If your entire investment portfolio does not hinge on the success or failure of a flip venture, then go for it. If not, this isn't the time to buy a home.

When a mortgage is easy to get
Easy lending should never be a reason to buy a house. The difference between keeping your home in hard times and losing it will come down to how much documentation you provided to the get the loan in the first place. You want your lender to know whether you make enough income, have enough money in the bank, and have managed your credit well enough to repay your loan. Pay stubs, W-2s, bank statements, and credit explanations are the way to show you have the ability to repay. Meeting with distressed home-owners at foreclosure workshops, I was surprised by how many of them told me they had never provided any of these documents when they got their loan. Unfortunately, when they went to make a case to their lender to modify or refinance their loans, the mortgage guidelines had changed, and many of them ended up losing their homes.

When you're just tired of having a landlord
You want to paint the bathroom in orange and black and own a great Dane, but the apartment you live in won't let you. Home ownership gives you the freedom to enjoy that jack-o'-lantern bathroom, and you don't have to pay a pet deposit to let Marmaduke roam your yard. Just keep in mind that when the faucet breaks, the A/C stops working, or the plumbing clogs, you'll be footing the bill. If you have a sudden change of income or get a job somewhere else, you can't simply give your mortgage company 30 days notice of intent to vacate. You have to sell your house. And if you do sell it, you'll probably need to repaint the bathroom, make sure everything is in working order, and keep that massive canine on a short leash when prospective buyers start dropping by.

Buying a house is an emotional experience. It's easy to get dreamy-eyed when you picture your family laughing at the dinner table, playing Frisbee in the yard, or watching movies snuggled up on a couch. And it's tempting to gloss over the fact that home ownership is a tremendous financial commitment. Going into it armed with some knowledge of when not to buy a home will reduce the odds that your dream of home-ownership becomes a nightmare.

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