"Goals are dreams with deadlines" -- Diana Scharf

Monday, April 8, 2013

Why We're Waiting to Buy a House

In last week’s post on mortgage rates, I explored how interest rates and down payments impact the cost of purchasing a home.   For the purposes of my analysis, I restricted the variables to these two factors.  I recognize that my analysis only looked at two sides of a very complex story.  As with all major financial decisions, the choice to purchase a home should be based on more than two factors alone. 

When Mr. W. and I discuss purchasing a home, we rarely talk about interest rates and down payments alone.  Here are some of the other factors that we’re constantly considering:

  • Taxes:  I didn’t discuss property taxes in my analysis since they aren’t impacted by interest rates or down payment.   But these are big-ticket expenses that can’t be overlooked.  Annual taxes in our area are about $7,000-$8,500 for a $350,000 home.  On a monthly basis, that works out to be approximately half of what our principal + interest payment would be.  Yikes! In addition, the tax records for these homes show that it’s not uncommon for taxes to spike by $500-$1000 in a single year, with no change in the property assessment.  The taxes support a very good school system, so we understand why people are still clamoring to buy in this area.  However, there isn’t an immediate need for us to live in a top-notch school district since we don’t have kids just yet.  This high tax rate is enough to deter us from buying a home for several years.  

  • Insurance: One of our targeted neighborhoods experienced flooding during Hurricane Irene.  Although this town is inland it has a large river that is prone to flooding.  Obviously, we would buy a home that is far, far away from the river.  However, it is possible that homeowner’s and flood insurance for the entire municipality will increase after recent events.   

  • Maintenance/Repairs: The cost of home maintenance and repairs can add up quickly.  We enjoy working with our hands, so we plan to take care of all indoor and outdoor home maintenance ourselves.  We’ll also take care of any non-structural improvements.  Nonetheless, the tools and materials will cost a pretty penny...money that we probably would not need to spend as renters.  For instance, Mr. W. made me this kitchen island as a wedding gift (love that man!).  Even though it was a DIY project, the materials still cost around $200 since he used high-quality lumber.  Yes, it was a savings in comparison to the $500 inspiration piece from Crate and Barrel.   But it certainly wasn’t cheap!
He gave me an island (no, not THAT kind of island!)

  • Job/income stability: This probably goes without saying, but I would remiss if I were to exclude job/income stability from the equation.  Mr. W. and I both work in salaried positions, so we know precisely how much we’ll bring home in any given month.  This makes financial planning easier than if we worked on commission or as contract employees.  Mr. W.’s job is very stable, with good pay.  My job is less stable, but the pay is a little better.  If my employment situation changes, we don’t want to have made commitments that leave us scraping the bottom of the barrel.      

  • Debt-to-income ratio:  Right now, Mr. W. and I have monthly debt payments of $366 for his car loan (36 months at 4.6% interest).  Based on our combined income, we could comfortably afford a $350,000 starter home.  But once we buy a house, we would like to be able to cover our mortgage and car payments with the lower of our two salaries (see above).  And, we should also have enough left over to pay for car insurance, utilities, and groceries.  This is a very conservative approach, but we think it’s best for our peace of mind.  We don’t want to sign a mortgage and then spend 30-years worrying that we may not be able to afford it.  Based on a back-of the envelope calculation this means…we need to earn more before we buy a home.        

  • Appreciation: Given our proximity to New York, we expect home prices to increase considerably once the economy has made a full recovery.  The fear of being “priced out” of our preferred neighborhoods causes us concern.   This is an argument for buying sooner rather than later.  However, we also don’t want to rush into the decision to purchase a home. 

  • Local economy:  the local economy is relatively robust and diverse, thanks again to the Big Apple.  However, if the local economy were structured in such a way that it revolved primarily around one specific industry (automotive, tourism, oil, etc), the housing market would be more dependent on other economic conditions, whether favorable or unfavorable.  I would be hesitant to buy in this situation.    
  • Geographic stability:  Mr. W. and I may decide that we want to try living in a different city/state before settling down and doing the “two kids + golden retriever + white picket fence” thing.  As long as we remain open to relocating in the near future, renting is probably the better option for us.  It’s much easier and less expensive to break a lease than it is to sell a home.  If we buy and sell the same home within five years, there is a strong likelihood that our mortgage would be underwater, even if we put 20-30% down and even if the home value has appreciated by 3-4% annually.      

  • Other personal or financial goals:  Mr. W. and I have toyed with the idea of pursuing additional educational/professional development opportunities.  These endeavors would be costly and would not be subsidized by our employers.  We haven’t yet determined whether the investment of time and money would be worthwhile.  However, it makes sense for us to maintain some liquidity in our assets so that we can pursue these options if we so choose.
What factors impacted/will impact your decision to buy a home?  Are they the same factors as we're considering?


  1. we have also toyed with the idea of purchasing a home. It is definitely where we are heading, but we are saving our pennies right now for the opportunity. Maybe end of 2014? we definitely don't want to be priced out, which we will if prices keep going up (in our area, they went up by 12% in the past year!)

    1. Yikes -- 12% in one year isn't a good trend for prospective homebuyers.

      You guys are in Orange County, right? I grew up there, and I can remember house hunting with my parents. It was February of 1997 when they started looking at houses, but our other home hadn't sold yet. By the time our home sold in April and my parents were ready to make an offer on a new home, prices had gone up by 10% -- in two months! People were buying houses, sight unseen, because they were worried about low inventory and rising prices. It was a crazy time. After the most recent mortgage crisis, I hope this will never happen again.

  2. Oh yes, the property taxes!! Sometimes we think about how a mortgage payment would probably be very similar to our rent payment...and then we think about property taxes + insurance and pretty soon it's almost twice as much.

    Another factor we think about is commuting/transportation costs. We'd need two metro north passes, plus occasional subway rides, and at least one car (since we currently have none). We're *hoping* to be able to pay cash for that car on top of the down payment, so that's more saving we'll have to do before we feel really ready to move.

    1. I completely understand re: the property taxes. I know so many people in this area (mostly in our parents' generation) who paid off their mortgages, but decided to move because the property taxes were too high. A lot of these folks bought a home 30+ years ago for say, $300,000. Their homes are now worth double or triple what they paid...and the property taxes are $20,000-$30,000/year.

      And the commuting costs can become crazy! We between our one car payment, gas, insurance,repairs, and train tickets, we spent just a little less on commuting than we do on our living expenses. Granted, we found a great deal on our apartment and pay less than market value. But still...

  3. Property taxes sound crazy in your area and that would definitely impact my decision too. I don't mind you for waiting until the time is right. There's no reason to rush!!! =)

    1. Yep, I have to keep reminding myself -- no reason to rush!

  4. Those properly taxes match what I saw back in the Chicago suburbs. Thankfully in Utah it's cheap. My taxes are only $2400 for a $300K house on a .25 acre plot. In chicago suburbs the equivalent house would be more like $8-$10K. Im not sure exactly why it's so much cheaper here but I know the school system isn't the greatest and we have one of the lowest per student spending in the US. I'm sure that counts for a lot.

    1. I'm glad you were able to buy into an area with more manageable property taxes.

      I think that one of the reasons why New Jersey taxes are so high relates to the structure of local government. NJ has so many small, small towns that could be combined into a larger municipality to reduce infrastructure expenses. But that seldom happens. It's an incredibly densely populated area, but even so, so you have these little towns of 5,000 people...and each town has its own school system, police force, fire department, city hall, library, etc.