It seems everyone is buying a house these days. At first it was just the distant acquaintance on social media. Then it was people in my inner circle, and despite my reservations, I confess I recently started feeling a growing case of FOMO. How can you battle the pressure when you start feeling your own symptoms, and what did I ultimately decide to do about my own condition?
Understanding the Root
What comes to mind when you think of a successful life? In America at least, you might think of a spouse, 2.5 kids, a dog, and of course, a house with the white picket fence. Having owned a home before, I understand the pride associated with owning your own piece of the land, something to call your own and generally do with as you see fit.
If you drill a little deeper, you begin to recognize the social implications linked with owning your own place. Someone who owns their home is likely to be seen as accomplished, stable, and perhaps most importantly, responsible. This was cemented for me in an article I read a few weeks ago in which a father dispenses advice to his daughter speaking to the security a man with a home conveys, not that we really needed this article to teach us as much.
In looking at the two points above, the first is perfectly acceptable. Anything that elevates your own sense of fulfillment, provided it is legal and does not hurt others, is a positive goal. As long as you properly save up for the expense, you should not feel guilty about your investment. We cultivate money so that we may engage in those things that bring us wholesome satisfaction.
The second point, however, is not okay. It is never okay to let someone else define your success. You do not need to be a homeowner to be accomplished, stable, and responsible. Sure, owning a home tells a perspective partner, at minimum, that you are solid and not likely to leave the local area on a whim. Nevertheless, your viability as a complimentary partner should not be measured according to a mortgage.
We’re talking about buying property. But, let’s pause for a moment and draw a parallel to any outward symbol of status. Upgrade to the latest phone model, because your old phone can no longer keep up with your demands. Buy the brand name clothing, because you’ve done your research and believe it will last you more than one season. Check out the new trendy restaurant, because you appreciate the cuisine and want to treat yourself after a hard week at work. In other words, do it to satisfy yourself and not someone else’s image of who you ought to be. The only exception to this rule, in my humble opinion, is the splurge you are encouraged to indulge because you properly budgeted for it.
And, read my post on the iPhone 12 before you take the leap.
The most appealing factor in the current market is a record low interest rate. People understandably want to lock in these rates, and while the interest rate is an important factor in the home buying process, it is not the only factor.
We are currently experiencing a seller’s market. Sellers know they can drive up prices, because the demand is greater than the supply.
Because buyers are moving out of city propers and into the suburbs. People are attempting to escape the spread of COVID.
Because people are working more from home and want to expand and enhance the space that has suddenly doubled up as their living and working environment.
And, frankly, because people see other people buying and want to seize the moment, whether it is because they do not want to be outdone or because they feel as though they might be missing out on a great investment.
On some level I think buyers understand the prices are high. They continue pressing the demand though, in part, because a lower interest rate means they can afford a more expensive home while keeping monthly payments at a reasonable rate.
When a bank preapproves you for a loan, they will give you a figure larger than your budget. Why not? The more you owe them, the more interest they collect over the course of the loan, but speaking from experience, when you start going out and looking at properties, you slowly start to imagine how much more home you could get if you stretched your budget to accommodate an extra bathroom, another bedroom, a finished basement, a bigger yard, etc.
Consider this: Your credit card may allow you to spend up to, let’s say, $10,000. That does not mean you should go charge $10,000. That’s a lesson in debt management, but it’s a lesson that holds true for managing your paycheck. Just because you bring home $1,000, for example, does not mean you should go spending every last dime. Conventional advice says your monthly mortgage should not exceed 35% of your gross pay.
Another thing you have to be careful with are ambitious real estate agents. If you are not clear with them about your parameters, they will skate at the upper limit of your budget. The higher the price, the larger their commission. I am not setting out to paint realtors as con artists. They are sales people who get paid to employ effective sales strategies. It is your responsibility to do your math. After it’s all been said and done, you will be the one paying that monthly bill.
And, speaking of monthly bills, remember the mortgage is only part of the expense. Take into account insurance, taxes, possibly home owner’s association fees, and if you come in below a 20% down payment, private mortgage insurance.
It is important you make an informed decision before you commit to one of the largest investments of your life. Social status and a perception of security are only as good as the financial foundation that can sustain it.
The Right Strategy
If you feel now is a good time to buy, I would want you to consider several factors:
First, make sure buying a home makes sense. I’m not saying ever. I mean, right now. Read Mike Calvo’s story about the nice home he is renting without the financial constraints of homeownership. Take into account maintenance liabilities. Factor in your flexibility to move in case of a change in job status. Kick out of this mentality that renting is throwing money away, because you have very little control over whether or not your property’s future value will result in a financial gain or a financial loss.
Second, consider your employment situation. Take into account the COVID impact and whether or not you feel secure in the longevity of your position. The Washington Post reports one third of nonprofits could close as a result of steep declines in donations. Regarding retail, Deloitte reports the recession could “expose existing weaknesses, accelerate emerging trends, and force organizations to make structural changes faster than they had planned.” The National Restaurant Association projects a loss of $225 billion and a loss of 5 to 7 million jobs. I am not making a case for you to be paranoid. I believe many of these jobs will come back, but in the foreseeable future, can you be assured you will have steady income to cover a new mortgage?
Third, make sure you have an emergency fund set up that is independent of your down payment. When you move into your new home, you’re likely going to want to paint, furnish, and perform a number of cosmetic changes to make the place your own. In the next article we’ll focus on emergency funds, but suffice to say cosmetic updates do not rise to the level of an emergency. In an ideal world, you will set up an emergency fund. Then you will save up for a healthy down payment. I’m not saying you have to save up the full 20%, but on top of the down payment you will also want to save up a slush fund to clear those cosmetic, moving, closing, and miscellaneous expenses that are a natural part of the home buying process.
The American dream is whatever you want to make it. If buying a home is critical to your future vision, by all means go forth. The only permission you need is from the immediate family who will be living with you and your own bank account.
Do not, however, be influenced by what other people are doing. I have often commented that I will start caring about people’s opinions when they start paying for my living expenses. Until you meet that benevolent soul, you have to go with the flow of your own race track.
But, I will not say it is easy to ignore FOMO. Despite my cautionary points about buying a home, I admit I spent a while feeling sorely tempted. What finally grounded me was this observation by Peter Dunn at USA Today. He wrote:
Don’t feel pressure to buy a home right now. Especially if your financial life is really just “OK” and not “great. Because homeownership rarely turns “OK” into “good. It typically turns “OK” into “unstable.”
What do you think?