And now for something different...
The Countess and I find ourselves in the midst of a quest to sell our little castle in the hills in exchange for a home with a few more square feet – something with extra space for our little goblin to run around in. As we do our due diligence to learn more about how the housing market works, I thought I would share a few pointers we’ve picked up along the way. We can start this discussion with the scariest thing of all: the looming housing market crash.
What is a Housing Market Crash?
Let me begin by saying that you’re reading advice from a guy who writes horror for a living. Just tuck that away in your back pocket for now. But, also, let’s acknowledge that that is how unforeseeable a pending housing market crash is in 2019 – even my opinion might have some merit at the moment because nobody can predict anything with any certainty. Nonetheless, the smell of a crash is in the air.
So, what is a housing market crash? It’s a few things. It is when there are more houses on the market than there are interested buyers who have the buying power to purchase those houses. The reason buyers can’t purchase those houses tends to boil down to one or several of the following factors:
- Rising house prices
- Rising interest rates
- A lack of income
- Excessive property taxes
- Debt and bad credit (i.e., student loans)
In combination, when buyers can't afford to buy houses, sellers must lower the asking price of their home. The reason this can be problematic is because if someone bought their house for $400,000, and then they can only sell it for $320,000, that means they have to continue to pay back $80,000 towards their loan, even though their home is not worth that much. If someone MUST sell their home for whatever reason and is forced into a situation in which they have take on a substantial loss, it significantly impacts their quality of life and their ability to find a new home that meets their pragmatic needs (i.e., location, space, etc).
All of this is a way of saying, you really don’t want to overpay for your home by buying before a market crash, or you might be in a position to take on a substantial loss. You also might want to sell your house before a housing market crash to gain top dollar for your property.
Will the Housing Market Crash in 2019?
Again, your guess is as good as mine. Thinking critically about it, a housing market crash tends to occur after years of strong appreciation with low interests rates (we’re on year 8 of that right now). When the market crashed in 2008, we had 10 years of boom before about 5 years of bust.
Side note: Appreciation means the value your home gains while you own it. Very generally, you can imagine that a home gains about 3% in value per year.
Side note: Interest rates affect the amount of money you owe back to the bank on your mortgage (i.e., loan). For example, if you wanted to buy a $400,000 home, and interest rates were set at 4%, that means you would owe the bank $416,000. Therefore, it is best to buy with low interest rates. Sometimes, interest rates are lowered to stimulate the market, but they’ve been at historically low levels and can’t go much lower. They’re bound to go up. As they go up, so does the money you owe the bank for the same house. Today’s interest rate is 4% but some estimates suggest it will go as high as 5.8% by the end of the year. At that rate, your $400,000 house now costs you $423,000.
If history is any indicator, we are likely moving into a housing market crash. And we will likely see the affects of the crash across the United States working from the coasts then inland. San Francisco will be the first bubble to burst, probably along with Miami and other coastal cities. Places in the Midwest will feel the effects, but at a lower volume in intensity and duration.
So, now that you know what to look for, and you can imagine that a crash is suggested to come in 2019 or 2020, we can talk about how to protect yourself from its effects.
Establishing a Price Range:
To know how much you should be looking at in a house, you need to know how much money you can afford to spend in a month. That requires making a budget for how much money you spend on all of your various forms of insurance, groceries, gas, car payments, phone bills, etc. Then, you need to calculate in the cost of cable/internet, electricity, gas, and water. You should also be saving about 10% of each pay check. Once you calculate all of that stuff, now you know how much you have left to spend per month for a home payment (which is actually a few things… you’ll see in a second).
…Keep in mind that the previous calculations don’t include emergency things or other smaller things like pet food, vet trips, going out to eat, buying clothes… any of that stuff.
Your monthly payment is not just for the property of the house. It also includes a payment of about $150 in insurance (depending on where you’re buying and the size and cost of your house) and then a lot of taxes. If you have a townhouse or live in a community, you need to factor in an extra $200-$400 per month for Homeowner's Association fees as well. And that’s why you need to be cautious with a townhouse (sidenote: they usually have lower property taxes).
So, let’s say you realize that after budgeting everything (including electric, water, gas, cable, etc…), you have about $2,000 to spend on a house, now you know what you can afford based on house price combined with taxes. A $350,000 house with $12,000 in taxes is SIGNIFICANTLY more expensive than a $400,000 house with $8,000 in taxes. You’ll have to break out the mortgage calculator online a few times before you start to see what the right nexus is for you based on house price and taxes.
You also need to keep in mind that you will put down 20% of the total home cost up front. So, if you want a $350,000 house, you have to have $70,000 ready to go. Yes, there are options to do a smaller down payment but DO NOT do it. If you do, you have to pay an additional mortgage insurance that's not tax deductible and it jacks up your month-to-month payment. Just do 20% down. Don’t consider anything else. But, also remember that I’m a horror writer and everything I’m telling you here is outside of my knowledge base.
Also, don’t put down more than 20%. For every $10,000 you put into your down payment over 20%, you save yourself about $40 a month in mortgage. Not worth it. Keep that $10,000 invested in something else.
So, to tie this all together, figure out what your monthly budget is, and then try to find the most house you can get for the least amount of taxes. Understand that whatever the taxes are for a house, they’re based on what the house was last appraised for. So, if you see a house listed at $400,000 and only $7,000 in taxes, you might find that the taxes are based on being last appraised at $350,000. It’s a trap. Those taxes will jump up once you buy a house at $400,000.
Establishing a Location:
You want to be somewhere where you won’t be inhibited in your daily life and routine. Believe me, when there’s an extra 15 minutes tacked onto your travel time, it changes what you want to do and how you want to do it. So, be cautious about where you elect to live. You can calculate this ahead of time using various driving apps on your phone, and I suggest you plot out your typical destinations at different times of day to account for traffic and weather fluctuations as well.
Schools are important. Sure, you might not have kids yet or even while you live in this house, but with good schools, your house will always be in demand. You don’t want to find a house that is great for now, but that you’ll never be able to sell again because nobody would want to raise a family there.
Review crime rates and sex offenders in the area. Don’t live where there’s crime or sex offenders. Bad for you, bad for the community, bad for resale.
Is the House Priced Right?
There are a few ways to figure this out. First, most apps like Zillow and Redfin have house value estimators, but they’re not always reliable. Don’t put too much weight into that. Instead, look at houses sold in that exact area over the previous 6 months. Are they higher or lower, and what is the state of those houses? Variables include the number of bathrooms, the square footage of the house, the amount of land, the taxes on the home, whether or not a house is updated, hardwood floors – things like that. You might find a house priced higher, but upgraded. Therefore, you should expect to pay less for a house you’re interested in that does not have the upgrades that its neighbors had when they sold for more.
If you need to update the house you move into, you can expect to pay about $20,000 to redo a kitchen and about $10,000 to redo a bathroom. It’s about $10,000 to put in hardwood floors. Don’t put so much into a house that you price yourself out of a resale value. This brings me to the next (and probably most important) point:
$/square foot ratio. Remember, homes generally increase in value by an average of 3% for every year they’re owned. That’s not always true, but it’s a general figure to go by. So, assume that a house was bought for $200,000 in 1999 and was maintained well. In 2019, that house should be worth about $320,000. More than that is generally inflation that’s not real; it’s just buying high. Sometimes, somebody can update their home so much that they put more money into it than it’s worth. Imagine a $200,000 house with 24 karat gold kitchen counters. You might think the house is now worth $1,000,000, but it’s not. It’s still worth about $200,000, give or take.
The best calculation for figuring out how much the peak of a home is worth (assuming it’s updated and nice), is to find out the median dollar per square foot that homes are sold for in that city over the previous 6 months. Let’s say in Some City that the median house dollar per square foot is $225. Then multiply that number by the square feet of the house. For example, take a 2000 square foot house in Some City, and it should sell for about $450,000. If they have it priced at $500,000 and it’s gorgeous, well, unless they have a huge yard, they are about $50,000 over what that house is actually worth. You’d be paying $50,000 in inflation that would disappear in a bad market. You don’t want to do that.
You can, however, take a 10% hit on the median value. So, for a $225/square foot median value, 10% of that that is about $22. Add that for a total of $247 per square foot multiplied by the square foot of the house. That’s $494,000 – not bad. So, if you’re going to be 10% over the median price, then it better be a fully updated home.
The Hidden Costs. You have to know what you’re going to be paying for when you take ownership. Sure, you’ll pay to paint and change some things around here or there. But, what about the HVAC? What about the water heater? What about the roof? External wood paneling that needs treatment? The status of those things impact the offer you make, because you can ONLY get about $5,000 in credit once an offer is made and accepted. Ask about that when you see the house.
Narrowing Down the Search:
It probably feels impossible to figure out where you want to live or how to narrow down the amount of available houses. Here’s the first step: figure out the location first by schools, crime, and distances to places you use (e.g., jobs, Target, a grocery store, Walgreens, or your friends if you have any).
To really narrow it down, figure out what your deal breakers are. For example, I would NOT consider a house without a basement. So, that made it very easy to look at a house and to see if it included a basement even before I considered the pictures. No basement, I look no further. You might find you do the same about walk-in closets, an attached garage, or any number of other things. Of course, you might need to be realistic about how many deal-breakers you can afford to have in your price range.
If your house has all of your deal-breakers, next is time to see if you like the look/feel of the house with what is updated and what is not. Will you update that which needs updating or leave it as is? If it’s still in the running, then the most important thing to consider is the layout of the floor plan. Where will you be spending the majority of your time in the house? Don’t have wasted space, because you’re paying for it in square footage and in property taxes. But, keep in mind that you will need room for storage.
Know your price range, know your location, and know what you want in a house. Then, go to a ton of open houses and look around to see what it feels like there. If it feels like a good livable space, if it fits within your price conditions, and if you like the location, then it’s time to go back a second time. The second visit is because you’ll typically leave the initial visit on something like a high. You have to come down from that to think rationally and to give yourself space and time to find whatever flaws are there on your second run through. There will be flaws.
I hope this helps. And, watch out for ghosts! The Countess and I accidentally rented a house once that turned out to be haunted – really, it was legitimately haunted. We would not recommend doing that.
Keep it spooky but not that spooky,