You're around 30 years old and you want to own a home. You're sick of hassling with landlords or mooching off your parents, and you envy friends who bought a few years ago and made a killing when prices went up. On the other hand, the downsides worry you. You're still kind of broke. You're not sure where your life is headed. And you fear that you'll get screwed by buying at the top of the market.
What to do? We'll get to that in a bit, with some sensible advice from financial planners, Realtors, a consumer advocate, and an author. Meanwhile, here's the bottom line: If you find a nice place you can afford and you don't think you'll need to sell it anytime soon, go ahead and buy your little piece of the American Dream.
The ups and downs of the market won't matter to you as long as you sit tight. On the other hand, think twice or thrice before purchasing a house with the idea of flipping it in the next year or so. Prices in big swaths of the country could be flat or lower in the next few years.
Taking into account the heavy transaction costs of a purchase, including broker commissions and lawyer fees, you could come out in the red. And if you put no money down at the purchase, you might even have to dig into your own pocket at the time of the sale to pay off your mortgage -- in other words, the American Nightmare.
If it's any reassurance, there's nothing unusual about buying a house when you're young and low on dough. On Feb. 23, the Federal Reserve released a survey showing that fully 41.6% of American households headed by someone under age 35 in 2004 owned their primary residence. And according to a survey released Jan. 17 by the National Association of Realtors, the median age of first-time home buyers last year was just 32. [That means 32 was the midpoint: half were younger and half were older.] Also, 43% of all first-time buyers last year put no money down, according to the survey.
Now, here's some advice for young would-be home buyers:
Don't jump too soon: Many young people are overwhelmed by dealing with moving to a new city, getting married, and having children. They simply don't have the time or mental energy to consider a home purchase carefully, says Shashin G. Shah, a certified financial planner and owner of SGS Wealth Management in Dallas.
He recalls a young couple, with a baby on the way, who overspent on a house and ended up having to borrow money from the husband's family to make ends meet. Far wiser, he says, was the young couple of physicians who signed a nine-month lease on an apartment when they landed in Dallas. Within a few months they realized Texas wasn't for them and decided to relocate -- an easy decision to make since they weren't burdened with a house to sell.
Know all of the costs: Young, first-time buyers tend to be shocked by monthly expenses they hadn't budgeted for, especially property taxes. Shawn Jacobson, 35, a certified financial planner for Legacy Financial Advisors in Bloomington, Minn., recalls being surprised by how much it costs to have a house when he bought one five years ago. Advises Jacobson: "If you already have kind of a shaky financial picture and then you buy a house and some things come up, you could get into a world of hurt."
Don't borrow the maximum you qualify for: Some young people think that just because a lender will give them $500,000, it must be safe for them to borrow that much. Not necessarily, says Shah. Lenders know that most borrowers will do almost anything to avoid a default, so they feel safe doling out lots of money.
But think about it from your own perspective: Do you really want to be eating surplus cheese and sitting on milk crates so you can keep making extreme monthly mortgage payments?
Watch out for unconventional mortgages: One potentially dangerous loan is the so-called option ARM, warns the National Association of Realtors. The loan allows you to pay less than the monthly interest you owe, with the shortfall getting added to your principal. That means you owe more and more as time goes on instead of less and less. That is, until you hit a ceiling, at which point your minimum payments suddenly zoom. It can be a killer.
Remember, a house is most of all a home: People's views of the housing market are shaped by their experiences, and for young people today, the experience is year after year of double-digit appreciation. In their experience, housing has done far better than the stock market as an investment.
But before the last five or six years, house prices rose at barely above the rate of inflation. Older people tend to be more aware of that history -- and plan accordingly. Says Allen Fishbein, the Consumer Federation of America's director of housing and credit policy: "A generation gap started emerging as a result of this housing boom."
Brace for the risk of a market drop: You may get lucky and prices will keep going up. But many experts say the market is top-heavy. One bubble theorist is John Talbott, author of a new book, Sell Now! The End of the Housing Bubble. Here's Talbott: "The group that's most vulnerable is the young. I think the mortgage bankers have played to them. That whole generation is concerned with status. They've made homes into status goods. And it's all going to unravel."
Talbott's advice for the tough times he sees ahead? "Young people should be considering a two-bedroom fixer-upper instead of a four-bedroom."