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Author: JBeauty Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127262  
Subject: Re: Is it crazy to try to buy in the Bay Area no Date: 5/23/2005 6:32 PM
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I have gone through my own debate about whether a housing bubble exists, and if so what would be it's potential impact.

A lot of my worry about buying a house goes away if I am buying something that on my salary I could afford, even if I went through a 6 month layoff, and doesn't exceed 30% of my takehome pay for ALL housing expenses (not just PITI, but also utilities and maintenance).

I can't predict the future, but it seems that any of the following could happen
A. housing in my area could go up 10% next year
B. housing could remain flat and not appreciate for many years
C. a bubble could burst here, and houses could lose 10% of value

If a bubble exists, and I do end up having to sell my house for unforeseen circumstances (like losing my job in another downturn of the economy or health issues) some time less than 5 years, then I need to be prepared to deal with worst case scenario, option C.

Say a hypothetical house costs $100,000. You put 20% down plus pay $2000 in closing costs. Then later you sell the house for $90,000 and pay $5400 in closing costs. You've paid 27,400 plus whatever mortgage payments and maintenance costs along the way, and you get back roughly $10,000. OK, so you lost $17,400 on the deal which hurts, but if you are OK with losing that much as a worse case scenario, then you shouldn't be as worried. It is not like stocks that can drop 60%. Plus there are protections for homeowners, like the homestead act, and many times whatever bad thing happened that might make you consider selling is over in a year or two, so holding out and tightening the belt can let you stay in your home and wait for the price to rise again.

Now, use the same math on a $600,000 home. Me, I can deal with losing $17K, but get weak in the knees at the worse case scenario with bigger numbers. But I could never qualify for a $600,000 home so that may be why the figures are daunting to me.

Numbers alone don't answer all of the questions about Rent vs. Own. It is cheaper for me to rent, but I did just buy. I bought at less than 30% of my takehome, and I got a place twice the size of my apartment. I am so overwhelmingly happy about that.

If you can't afford the home you want, wait and you might get it 10% off when prices drop, and continuing to save will make those mortgage payments less and less.

It is OK to rent. It is even SMART to rent, in strange economic times when rents haven't risen as fast as house prices. Ultimately, think about what will make your family the happiest. It isn't just a money decision. Buying a house isn't a guaranteed move to improve your net worth. Weigh the options and decide what is best for you.

JBeauty
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