I’m selling my house.
I really like the property. It’s in a historic neighborhood with a 1950s neighborly vibe. The streets are lined with beautiful old trees, many of which have tire swings hanging from them. And my kids love playing here.
But it’s also just 1,900 square feet, and I’m tired of tripping over my children. It’s too small for a family of five. So, we’re selling and looking for something a little bigger.
Let’s just say it’s a seller’s market. I haven’t even listed the house yet, and I’ve already gotten multiple offers. There is no inventory, and people are getting desperate.
My situation is a little different in that I don’t need to immediately buy the replacement house. My family and I will be out of the country a lot until around Christmas. So, I have the flexibility to sell my house, put my things in storage for a few months and wait to see if the market loosens up a little. I’m in no hurry.
But I know many would-be buyers are out there losing their minds trying to find that perfect house. Maybe you’re one of them. Let’s set a few ground rules to keep in mind while house hunting.
How Much Is That House?!?
You’re not the only one getting sticker shock from house listings today. Prices have exploded in most markets. After a year of being stuck at home, people want more space. Add to that a lack of new construction during the pandemic and skyrocketing materials costs, and you had the perfect storm for a price explosion.
But here’s the thing: With mortgage rates at historically low levels, you can generally afford a more expensive house than you could have a few years ago. And let’s face it. The Fed dumped nearly $4 trillion in new money into the financial system over the past year. Until new houses get built — which will take time — there’s a lot more money chasing a finite supply of housing stock.
Prices might seem absurd. But frankly, the entire financial system is absurd right now. A high purchase price doesn’t have to be a deal-breaker so long as the payments are reasonable for your income level.
How Much Is Too Much?
The rules of thumb here are evolving. Fannie Mae’s guidelines are that your total debt service shouldn’t be more than 36% of your gross income. Under certain conditions, the ratio could be as high as 45%. But for planning purposes, assume 36%.
Now, clearly, the lower this number, the better. If you want a happy, stress-free life, live below your means. You don’t want to be constantly stressed because you don’t know where the funds will come from to meet your payments.
So, do the math. You know how much you make per month. Add up your debt payments — student loans, autos, etc. — and figure out what you have left for a mortgage payment. That’s what you have to work with.
And then your search becomes a two-step process:
- Back into the size of the mortgage that would go with that payment.
- And then back into the price of the home based on the size of the down payment you can afford.
Choosing a home is rarely this dispassionate, of course. What happens more often than not is that you fall in love with a house, and you envision yourself living there. Then you do whatever you have to do to justify the purchase price after the fact.
So, be smart. Figure out what you can afford first, and then limit your house hunting to that price range.
Buy a House Now, or Wait and See?
Homeownership is a smart financial move. While it’s expensive and often a headache, you build equity over time and have some built-in inflation protection.
But you don’t have to own. You can always rent, and there’s nothing wrong with that. It’s better to rent for a while and wait for a more balanced market than to panic-buy a house you don’t necessarily like or can’t quite afford because you’re afraid of being left behind.
You also don’t want the house to consume the entirety of your capital. Make sure you still have room in your savings budget for investing. Because no matter how much you love that house, it’s not likely to pay your bills in retirement.
To safe profits,
Editor, Green Zone Fortunes
Charles Sizemore is the editor of Green Zone Fortunes and specializes in income and retirement topics. Charles is a regular on The Bull & The Bear podcast. He is also a frequent guest on CNBC, Bloomberg and Fox Business.