With the turbocharged real estate market, buying a house is not as easy as it once was.
We’ve all heard stories of houses getting multiple offers, before they are listed or homes selling well over the asking price. Stories like these have many people thinking about moving.
On this episode of Financial Symmetry, we explore whether or not it is worth the effort to buy a home in a seller’s housing market. You’ll learn the reasons why the housing market is so hot, questions to ask yourself, and alternatives to buying a home.
Why is the housing market so hot?
If you have talked to your neighbors or seen the news lately, you know how hot the housing market is.
Everyone has heard stories about bidding wars and people receiving multiple offers on homes. It is definitely a seller’s market, but why?
There are several reasons that home sales are through the roof. As with any economic force, when demand outstrips supply, then the market becomes one-sided. Since people have been spending more time at home and even working from home, they have had an opportunity to evaluate the pros and cons of their place of residence. Couple this with an influx of cash from higher incomes and injections of cash into the economy, and many people are ready for a change of scenery.
Steps you should take before you consider a move
But just because the Jones’s are packing up and moving, does that mean that you should too?
Before you think of selling your home you should stop and consider a few questions. Since this is a big financial decision, taking advantage of financial planning will help you analyze this choice.
After you figure out why you want to move, you need to consider what steps you need to take to prepare. Buying a home is not as easy as it once was, so you’ll need to make sure that you have a preapproval letter in hand before looking at any houses. It’s also important to realize that in a hot housing market, contingency offers are off the table. You won’t be able to compete with cash offers if you are trying to buy a home based on the sale of your own home. So if you must sell your current house to come up with a down payment, then you may need to rent for a while after the sale of your home.
Know how much you can afford
Typical rules of thumb, call for your housing costs to be between 28%-36% of your monthly income. But rules of thumb are general guidelines and understanding your customized situation in the context of a financial plan gives you the best idea.
It is important to watch out for the lifestyle creep that often comes with moving. You don’t want to end up being house rich and cash poor.
One way to ensure that you don’t get roped into spending too much is by coming up with a maximum number that you can afford and telling the realtor a number that is 20%-30% less. Don’t rely on the bank to decide how much you can afford since they will be happy to lend you more.
Where will your down payment come from?
The next consideration is where will you get your down payment? There are 4 primary ways to come up with a down payment. Many people rely on the sale of their home for a down payment. Others have cash set aside in savings.
Another consideration is to use a 60 day IRA rollover. This will allow you to avoid the taxes that come from withdrawing from your IRA if you repay the money in 60 days. Oftentimes, this allows you to close on the home you are selling and replace the money in the account. However, this could backfire if the sale of your home falls through or gets delayed.
The last way to fund a down payment is to take out a HELOC on your existing home. It is important to do this before you put your home on the market. Listen in to hear some alternatives to buying a new home that you should consider before taking the leap and moving.