I’d say this article may currently be a case of good advice coming a bit late in the game, but real estate is cyclical and a new buying frenzy is coming someday. Maybe not anytime too soon, but it is coming.
All five of these falsehoods are worth taking to heart. I’m adding number one to this post because I know a number of people who totally fell into the trap of “I prequalified for this amount and by god I’m buying a house for that amount.” Those people now? Not feeling so good about pushing the top edge of their purchase time financial clout.
From the link:
1. Buy as much home as you can afford. Even after the breathtaking three-year decline in home prices, I still hear this mantra over and over. This line from a well-known TV realtor continues to ring in my head: “You qualified for a $295,000 mortgage and you should spend that.” When the budding buyer protests, the realtor responds with a curt, “You can’t get what you want for less.”
The home shopper is worried about going too deep into debt and the realtor wants her to party like its 2005. And we know all know how long that hangover’s lasted.
Here are the two reasons NOT to buy too much house. You could lose an amount of money that you cannot afford to lose. Yes, home prices can decline. Because homes are bought with large amounts of leverage, a small decline can wipe out your entire investment and then some. In buying too much house, that loss will be too great as a percentage of your income and savings.
Two, the minute your income declines you bought MORE house than you can afford. As soon as someone takes a 20% hit to their pay (easy if you’re in a commission-based job) or suffers a job loss, that house payment becomes beyond your means.
The basic concept of buying a modest home over renting is sound because of the forced savings. But overreaching and buying too much house is not wise. A bigger home is not a better investment.
David Kirkpatrick 