Thinking about new home - but scared to take the plunge

[imoldernu]

Not advice on the decision, but a new article that discusses the pitfalls of obtaining a mortgage, and the fact that most buyers lose big time, by not doing their homework, and comparing banks.

Mortgage Borrowers Pay Thousands In Excess Fees Due To Complex Bank Pricing | Problem Bank List

excerpt:

Shopping for a mortgage, however, is an entirely different story. The complex mortgage application process and opaque pricing policies are extremely confusing to most consumers. The mortgage industry seems to pride itself on offering a bewildering variety of pricing options and fees that make it both time consuming and almost impossible to determine which lender is actually offering the best deal. Most consumers have neither the time, inclination or ability to match wits with the mortgage pros and, accordingly, wind up paying higher rates and fees.
According to a recently completed Fannie Mae survey, many mortgage borrowers do not properly investigate or fail to understand the mortgage choices available to them. This results in paying thousands of dollars more than necessary and expands the probability of problems arising during the life of the loan.

...and this final point in the article:

When even the smartest consumers can’t figure out if they are getting a good deal on a mortgage, you know for sure that the system is either very corrupt or very broken.

 

[Htown Harry]

This doesn't fit the OP's situation directly, but my experience might provide another data set to consider.

Shortly after college, DW and I bought the smallest house in a good, close-in neighborhood . Good schools, although we didn't plan on kids anytime soon. It was a 1940's two-bedroom cottage with a bit of curb appeal but a bad floor plan, one closet, a washer in the detached garage and few inches of insulation thrown into the attic only for show. We kept it up, and even thought occasionally about a big remodel as a few others in the neighborhood had done.

Slowly but surely, however, the neighborhood began to gentrify, with little houses like ours being bought by spec builders and replaced with new houses at 3 times the square footage. And indoor laundry rooms.

By the time DD#1 came along 10 years later, we were sure that a remodel or modest expansion of our little place wasn't the way to go. By the time DD started school, we were well established and well-pleased with the neighborhood, but facing the prospect that any big investment in the house would be a long time loser.

The appraisal board had bumped us up regularly, but dropped the value of the house to a token amount compared to the lot. Although little had changed on the house, the marketplace said we were now living in a tear-down.

A few years later DD#2 came along, along with an unrelated windfall that increased our after-tax nest egg. We decided were out of room and looked at our options.

Eventually, we found a "build-on-your-lot" company with a good reputation and fair prices, moved to a rent house for a year, tore down the cottage and built a new house on the lot. Also found a S&L who had a program with construction loans and a guaranteed conversion to a conventional mortgage at move-in. We saved money by building my own fences, installing landscaping ourselves, and directly hiring the demolition contractor and driveway contractor. We moved into a brand-new house at the same address we had had for 15 years. (The new place didn't match the neighbors in square footage or amenities, but it did have a nice laundry room. )

BoilerEngr, if building a bigger house on your lot isn't practical, perhaps there is a neighborhood nearby with decent schools and a little orphan cottage that could be an OK house to live in for now (or manage as a rent house since you have the resources to consider that option). Make a move, then consider your options over time for expansion or a rebuild. To use a w*rk analogy, it might be a lateral move to a spot with better prospects for promotions over time?

 

[Buckeye]

While if you have a paid for home it is easier to hold and wait, there are still costs to owning a paid off home. Between insurance, property taxes, electricity, heating/cooling, pool maintenance, snow plowing, etc. the house that I sold probably would have cost me $800 - $1,000 a month just to stay vacant. Not to mention the opportunity cost.

Also, you must notify your insurance company the house is vacant if you do not rent it out. They may cancel the policy or convert it because you no longer have an owner-occupied dwelling and the risk profile is much different. If you haven't notified them the house is vacant and it burns down or a water pipe breaks or it's vandalized, they probably won't pay out.

A friend of mine just bought a condo that was vacant for months because the owners had moved to an assisted living facility. There was some water damage ($13,000 worth) when the condo was vacant and a claim was filed. The insurance company paid but later found out the condo had been empty when the damage happened and slapped a $13,000 lien on the property that got paid when it sold.

 

[Calgary_Girl]

We moved into our new house in late July and we decided to move out of our old house first before putting it on the market.

We put approximately $30K of upgrades into the old house to make it sell faster and I didn't want to live through the reno nightmare with two small kids (6 and 3) plus a dog. In addition, I didn't want to have to leave the house with 5 minutes notice from the realtor that they had a potential buyer who wanted to see the house.

Luckily, we could afford to pay for two property taxes, two heating bills, etc. and also pay for the carrying costs until it sold. Also, we luckily live in a very strong (but competitive) housing market (Calgary) and our old house was on the market for only 45 days before it sold.

 

[EveryLady]

To second a couple of others -

DD and I lived in a 2-story condo with 750 sq. feet on each level (one bedroom upstairs, one down). While having the lower floor helped out with storage (and the w/d), for all intents and purposes the two of us (single here) spent her first years on the level containing the full bath and kitchen.

Our situation seemed more convenient and kid friendly compared to friends in larger spaces. Everything - including the kid - was always in the "right" (i.e., same) place. Also helped restrain the tendency to acquire too much kid-stuff.

So small did work for us. Don't think we started living on both levels until she was about 4 or 5.

 

[EllisWyatt]

+1 on contingency contracts.

When we bought our current (last??) house, we had been planning on moving to the family place we inherited, so the old house was already on the market. It had been on the market for two years when DW found the current house and we decided that it was THE place - and changed plans.

The previous realtor had listed our old house for two years, and we had not had an offer. When the contract with our realtor expired, we put a contingent offer on THE house, and began listing the old house with the agent listing THE house. Mircaulously, within three weeks of re-listing with a new agent, we got an offer on the old house. Suspect it really helped to motivate the agent when he had two potential commissions riding on one sale.

So my point, for what it is worth, is that a contingency sale keeps you from having two properties at the same time and sometimes even helps things move along.

 

[bondi688]

Being in a situation where I have to plan to relocate. and to decide whether it is better to rent or buy a place in the area, I have been looking at a fair number of real estate sites to see what are out there. I notice there is a burst of buying activities because people have stayed away from buying for a few years because of the bad job market, the economy and the housing market downturn. Now there is a release of the pent-up demand. The rushing out to buy pushed up the price rather quickly and I wonder if it is somewhat of a mini bubble? Is it better to avoid the stampeding crowd right now and let the market settle into a new point of balance? Or do you think houses prices were down so much that the recent price jump still has a long way to go before they reach fair value?

 

[Walt34]

Is it better to avoid the stampeding crowd right now and let the market settle into a new point of balance? Or do you think houses prices were down so much that the recent price jump still has a long way to go before they reach fair value?

Oh rats, my crystal ball just had a seizure and will have to reboot. I'll get back to you later.

 

[photoguy]

Now there is a release of the pent-up demand. The rushing out to buy pushed up the price rather quickly and I wonder if it is somewhat of a mini bubble? Is it better to avoid the stampeding crowd right now and let the market settle into a new point of balance? Or do you think houses prices were down so much that the recent price jump still has a long way to go before they reach fair value?

Have you taken a look at articles/forecasts by the various companies like zillow, trulia, refin, etc? Eg.

Zillow Home Value Forecast for December 2013 | Zillow Real Estate Research

(Note I haven't reviewed the methodology or results of prior forecasts)

I know that redfin listed my neighborhood as one of the hottest for 2013 but I think this is based on simple YoY trends as of Dec 2012 and not any sort of real model:

Which Neighborhoods Will Be the Hottest in 2013? - Redfin Blog

On their website Zillow & redfin (and probably trulia) have graphs for neighborhood prices, $/sqft, etc. when you look at an individual property. But these are not really forecasts and you are left to extrapolate on your own.

Edit: if anybody knows of good resources for forecasts, please share.

 

[haha]

Some of these markets have once again become highly speculative. In less than 6 months it has gone from properties in desirable areas sitting and sitting, to bidding wars. (Seems to me that Redfin loves to promote these.)

After I bought my condo pretty much at the trough, (at least a temporary trough) I continued to follow my neighborhood and nearby ones, since my GF was also looking for a place. A lot of the listings must be from local people who are changing houses, but not relocating out of area. I think this because a place will go on the market, and 3 weeks later the price get dropped $25,000, even when overall sale prices appear to be rising. Then it may be abruptly delisted.

Robert Shiller, a bona fide expert with a lot of data, says he thinks US residential real estate markets may have developed a permanent speculative character. He cites flurries of rapidly rising prices before, for example in San Francisco in 2010, which were often largely reversed in the next year or so.

And the so called hot areas in the Redfin article look like like cats and dogs coming to life, when people don't have the patience to wait for more stable opportunities. Althopugh it does seem to me that The Mission in SF is overdue for some gentrification. It is just too central, in an attractive expensive city not to have some upward pressure.

Ha

 

[photoguy]

Robert Shiller, a bona fide expert with a lot of data, says he thinks US residential real estate markets may have developed a permanent speculative character. He cites flurries of rapidly rising prices before, for example in San Francisco in 2010, which were often largely reversed in the next year or so.

Very interesting. Following-up on your point I looked up an article schiller just published (http://www.brookings.edu/~/media/Projects/BPEA/Fall 2012/2012 fall case.pdf) which looks at both short and long term expectations for home buyers. He argues that long terms expectations are a big driver of demand but that buyer expectation is very low now:

We cannot test the rationality of long-term expectations as we can with short-term expectations, and yet, since most home buyers own their homes for many years, these are arguably the more important determinants of housing demand. It is from these nebulous and relatively slow-moving expectations that the bubble took much of its impetus, and that future home price movements will as well. Long-term expectations have been consistently more optimistic than short-term expectations across both time and location, but the magnitude of the differences fell from a high of 8.3% in 2008 to just 0.8% in 2012.

The difference schiller is referring to is YearlyAppreciation - mortgage rate.

 

[citrine]

I would keep socking away the mortgage money into the savings account instead of buying another house right now. Do you have a basement or another area of the home that can be converted into an office? Can you just rent a space or do your work from a cafe? Even if your wife did get pregnant, the child will not need that much room for at least five years or so.....a baby does not need a whole room

 

[bondi688]

Average Home Sales Prices in all Regions of the United States
House prices had gone up in the last year, but have retreated a little bit nationally in January. Taking a breather? Or because January had a couple of long and severe cold spells? Will be interesting to see what will happen during the traditional house hunting season.

 

[laurence]

I might have missed it, but did the "take out small mortgage on the first and rent it out option" get beat down in here already? You could use the mortgage money to provide part of the down payment on the larger home and not wipe out your savings. It wouldn't take much rental income to cover that mortgage payment.

 

[Urchina]

+1 on laurence's comment. We talked to a mortgage broker just this morning and were very, very surprised that with interest rates where they are right now, we could pull a significant chunk out of our condo on a refi and have virtually no change in our monthly payment.

If you're at all tolerant of the idea of being a landlord and having a renter pay off the (probably) small mortgage on your first home, while you work on the second, it's something to consider.

 

[bondi688]

Future of the Housing Market Is

My thinking of standing pat somewhat and avoid joining the stampede of the rush back into buying houses is supported by what Robert Shiller is saying.