For anyone who has considered purchasing a home recently, the behavior of market participants (some of them, at least) has brought back painful memories of the overheated housing market collapse that preceded a collapse during the Great Recession in 2008-2009.
With home prices experiencing stock market-like increases during the last year there is certainly cause for concern, but a lot has changed since 2009, which means that any potential housing market challenges will be different if and when they occur.
Although prices have shot through the roof mortgage underwriting standards have tightened considerably, which means that unlike last time around, when someone gets a mortgage, they are far more likely to be able to afford it. Preceding the last financial crisis, mortgage lending standards were so loose that some mortgages were colloquially referred to as NINJA loans (“No Income, No Job, No Assets”).
So if you’re considering buying a home, or selling one, we have a few tips to help keep you on solid financial ground.
Set a budget, and stick to it
This goes without saying, but the most important thing aside from buying something you genuinely like is setting a budget and sticking to it. Remember, changes in the housing market determine what you can get for a certain price, but only changes in your financial situation change what you can afford.
More often than not, homebuying coincides with life changes, and that means that several aspects of your financial situation (not just one) are likely to change. If you’re leaving the city for the suburbs, you may now need a car, and if you’re having kids childcare and other new expenses should be considered as well.
Don’t depend upon refinancing opportunities
Even though interest rates have started to rise again, they remain at historically low levels. It’s important to keep that in mind as people have benefited handsomely from declining interest rates in the past.
Falling interest rates not only give people the opportunity to reduce their existing monthly payment, but it increases the purchasing power of all buyers, which boosts home prices. It’s always good to consider refinancing when rates decline, but with interest rates as low as they are refinancing opportunities are likely to be limited going forward.
Get expert financial advice
Because buying a home is the largest purchase you can make, and many moving pieces are involved, it can be highly valuable to engage a financial advisor to help you understand the full implications of this decision.
This includes consideration for your new mortgage and home expenses, anticipated life changes, and a strategy to balance your down payment with any other cash needs. Even among towns that share a common school district property tax rates can vary widely, so what you can afford to spend will differ in each town.
Ultimately, finding your dream home is one of life’s great pleasures, but if its cost changes your retirement age or stands in the way of having as many children as you’d like, it’s probably worth reconsidering.
If you’re planning a home purchase, or just have questions, Contact Paceline for a free phone consultation.
This blog was written by Jeremy Bohne, Principal & Founder of Paceline Wealth Management. Paceline is a fee-only investment advisor serving clients in the Boston area, and on a remote basis throughout the country. Paceline specializes in helping tech and biotech executives, physicians, and those seeking financial planning services.