Why you should buy a house in a bubble.

 

When I almost bought a rental property this weekend, a few readers chimed in saying “Ninja you are supposed to buy low and sell high. Right now you would be buying when the market is booming.” Comments like these are expected, especially when I’m always talking about Seattle Real Estate being in a bubble.

So why do I still check the local MLS listings every day, hoping there will be a place worth looking at? It’s simple really.

I’m not stupid shortsighted. 

If you’ve read any news about real estate over the last six months, it’s clear the market has picked up. Some cities like Phoenix and Las Vegas jumping up 20%+ in the last 12 months. What was a $300,000 house one year ago, now goes for $360,000 after getting multiple cash offers. Same story up here in the Pacific Northwest. Inventory is low, prices are high.

There is no denying 20% year-over-year real estate appreciation is unsustainable. Eventually things will cool off. Maybe to a more normal 3 to 6% YOY growth. Maybe things will go flat for a while. Or, who knows, prices could actually drop. Thinking about the recent boom on an emotional level causes some to shy away (myself included at times). They are waiting for a correction that may never come.

Yes, Seattle prices are up 16% in the last year, but they are still 20% below their 2006/2007 peaks.

What’s more, even if real estate is in a bubble right now, it’s a completely different bubble than the last one. In 2006 banks were handing out money like candy. People with no income and no assets were qualifying for $500,000 properties. The market took a dump on it itself when these unqualified homeowners could no longer keep up with their 5-year jumbo ARM payments.

Sure the market is in a frenzy right now, but banks learned their lesson (at least temporarily) and are exponentially more picky in who they lend to. If you don’t have great credit, a significant down payment, and a solid income history, you aren’t getting a loan. Unlike 2006, most of the people buying houses now can actually afford their monthly payments. (random fact: 1 in 4 houses in Seattle receives a full cash offer)

All this is great, but there is really only one reason why Girl Ninja and I are still open to the idea of buying a house in a boom.

We don’t give a crap about price. 

If we find a place we love, I don’t really care if it costs $350,000 or $400,000. All I care about is being able to comfortably afford the monthly payments. Sure, I could buy a house for $400k today, and three years from now it might be worth $375,000. But I’ve ALWAYS said, one shouldn’t buy real estate if they aren’t comfortable with the idea of owning the property for at least 10 years. I look at property values over the long haul, not the short-term. A $10,000 price difference today matters little when the house could be worth double 15 years from now. As long as rates are at all time lows, and prices are below their all-time highs, I say it’s still a good time to buy a house.

What say you?

12 thoughts on “Why you should buy a house in a bubble.

  1. I’m with you. It’s only a loss if you sell, otherwise it’s just a number on a sheet of paper. That goes on the flip side as well. If the same house in your example goes up to $600,000, in theory you’re sitting in a great big pile of….well, again a number on a sheet of paper. Until you sell.

  2. A house is where you live, and is not just your most expensive purchase but a fundamental part of your personal identity. It is not a stock, which only has monetary value. There will always be good houses coming and going, and you should take your time finding the best one for you. But if you’re certain you’ve found what you want and you can afford it, that is the time to buy.

  3. I agree with you here Ninja, I also do not care about the price of the house. If I can afford it, no matter what the cost is, and I love it then I will buy it. I look at buying a house the same way as if I were to look at buying a new electronic or car. Sure, those examples tend to depreciate in value when historically houses appreciate, but you’re not buying the electronic or car to make a profit are you? You’re buying it to USE.

  4. I would still give a crap about price… but I get what you are saying. Sometimes timing doesn’t work out in life, and if you are ready to buy a house now and it is in a bubble, well that sucks, but you are willing to live in this house and enjoy it for 10+ years, then you probably still made the right call.

  5. Well I wish it was really that simple for me. I guess I’m at a point where my caviar tastes in homes is getting me too close to a home that’s probably not the most affordable, however I’m sure banks are salivating on selling me their commissioned loans. As you have experienced, the banks will qualify you to borrow more than you can imagine, STILL! I don’t think lenders are so quick to disqualify people as you have said. It is up to the buyer to not take that drug called credit.

    The market here in Las Vegas is hotter than you have heard about and I still attribute it to low interest rates INFLATING the prices. It reminds me of the car selling practice selling cars according to how much you can afford per month compared to the actual value of the car. Not a good way to buy a home methinks :/

    Nonetheless, I have researched the heck out of our future new home purchase and still intend on making the offer to buy next month because I believe that the location is almost perfect. Perfect would be on a beach, by the way 🙂

  6. Seems to me that a small starter home is the thing for you. When your family grows and you need a larger place, you can rent the first one. Isn’t that the best of both worlds for you?

  7. First of all, it’s important to realize something about the recent financial collapse: all the really big money players made out just fine. Whether it was cause they were a bank that was ‘too big to fail’ or because they were a banker with a golden parachute that was playing with other people’s money…those types of institutions and individuals came out just fine. It’s the little people that got hurt.
    The reason that’s relevant is that it really calls into question your perspective that the banks have learned their lesson (even temporarily).
    The lending market *is* different now. But keep in mind, from a bank’s perspective, one way to reduce risk is to require larger down payments. Another, equally valid way, is to increase the interest payments (that’s why credit card rates are astronomical for people with poor credit). Because the fed is keeping interest rates low, mortgage rates are also extremely low. So we went from a system in which bankers took on foolish deals with too little money down, to bankers making deals with very little interest. Are these new deals as foolish as the old ones? Probably not. But they are not risk-free.

    So… does that mean it’s a bad idea to buy a house that you love to live in and that you want to stay in for *at least* 10 years? Nope. But it means that you can still be in a bubble. The amounts they will loan to you can still represent something you can’t really afford, and you may very well look at your house at the end of those 10 years and say ‘well, it kept pace with inflation, but if we’d lived in a smaller place for the first 4 years and put the difference in the stock market I’d have a million in the bank about now’.

    Also, for two equally livable and structurally sound properties, there IS a real difference between 350k and 400k, irrespective of whether you can make the payments. 50k is 50k, and when you finance it, 50k more in house value (assuming you can’t put down more of a downpayment) looks more like 94k (assuming a 30 year mortgage, 3% interest, and some other standard defaults). Maybe you wouldn’t bother stooping down to pick up a penny on the street, but I’d pick up 94k.

    • I did acknowledge that real estate is bubbling. What I don’t think will necessarily happen is an epic burst like 2007. I expect more of a bubble that lets the air out and the growth slows abruptly.

      As for your comparison about “two equally livable and structurally sound properties” being priced differently, Obviously I agree. If two houses are identical in form and function and meet a buyers needs, they should go with the cheaper one. But what I wont do is sit on my hands and refuse to buy a house I can afford because it was $20,000 cheaper this time last year. I’d rather take advantage of a sure thing like low-interest, then keep my fingers crossed that the market might retract. Run the numbers over a long time horizon, you’ll see that interest rates are far more important than a few thousand dollars.

      For example:

      If I take out a $350,000 mortgage today at 3.5% over 30 years, I end up with a $1,500/month payment.

      Where if I wait for prices to correct let’s say down to $300,000, but interest rates have returned to 6.5%, then I have a monthly payment of $1,900.

      Rates > Price

  8. I agree here. They are still below the highs of 2006, which is when I bought (ouch!). If you find something that knocks you off your feet, then go for it. These are long term investments and you shouldn’t think about losses upfront, but when/if you plan on selling.

  9. We are buying now (literally) to get in with the low interest rates. Every way we worked it, it did not make sense to wait because we would be saving to feed the banks. The rate on our first home’s mortgage will be 3.5%. We’re also going with an FHA loan to get that rate. The conventional loan’s rates were 4.25% which again even with fees and PMI still made the FHA a better deal for us. It was all about the interest rate.

    We are buying in an area where things are picking up but have not bubbled. It’s a modest fixer-upper that we got at an appropriately reduced price at 1.4x our annual gross income.

    So the interest rate coupled with the very quickly upcoming new FHA rules really motivated us to move forward but what is pushing us over the edge is emotional. For us right now the thought of how much money we’ll be (slowly) spending at a home improvement store in the future is acceptable because as soon as we arrived at the place our kid ran out in the middle of the property and laid in the grass. His shoes were quickly kicked off and he was clinging to a tree, then grabbing handfuls of dirt. Next month he’ll get his first bike for his birthday and that will be the quiet street that he’ll learn to ride it on. But at the end of the day we’ll be able to enjoy those moments because we can afford the home.

    Good luck with your decision! At the end of the day it’s one of the head and heart!

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