Monday, February 25, 2008

How much should I pay for a house?

As a potential homebuyer I was always confused as to what is a fair price to pay for a house. After many readings and years of research I learned that historically the average homebuyer typically pays 3 times their income for a house.

In some of the bubble areas on the coasts homebuyers have paid 10 times income for a place to call their own. The only way this happened was through poor lending standards. Banks and mortgage brokers started to approve loans without documented income and offered "subprime loans" that offered very low payments for two years at a low interest rate but then escalated to higher interest rates that became unaffordable for the average buyer.

This type of lending is now gone. Banks have had high foreclosure rates which has resulted in tighter lending standards because a lot of their assets are tied up in loans that are going to never be paid back.

My advice to all of you is to wait until the lending standards have had a drastic effect on home prices. Many sellers have not realized the credit crunch and its effect on peoples ability to lend. When you are looking for a house make sure your offers are close to 3X income and don't hesitate to lowball sellers!!! Many are starting to get desperate and you might get lucky and they will accept your offer.

I expect these offers to be taken at a much higher rate as we get into the colder months of 2008. when the spring/summer housing sales are a bust sellers will start to panic.

In a nuthsell, be patient, underbid, and don't be in a rush. According to the most recent housing stats 30% of homes are underwater versus what people payed for them.


Jeff said...

Is anyone concerned abouy overpaying for a house? Thoughts are welcome!!

Anonymous said...

If you stay in the 3 to 4 times yearly income you'll be fine. It's easy to be at 3 times income or less on a townhouse/condo. I'd pay up to 4 times yearly income, for a nice house that you plan on staying in for the next ten years.
With the China/India boom, constructions costs will most likely continue to rise slightly every year, so building a nice house might cost builders 5K to 10K more three years from now. Eventually inventory will dry up, and builders will get smart and only build when a buyer is signed. When this happenes we will all be at the mercy of global building costs.

Jeff said...


I agree that the housing boom could increase costs down the line. Currently because of the housing bust in the US materials are going down in price.

Builders are now able to build cheaper houses in the short term because of this drop.

There is a big debate as to wether we have inflation going forward or deflation similiar to Japan. Right now in Japan it costs about the same to buy a house as it did in 1989 because people were so burned by the housing bust.

If you see major deflation due to a cut in available credit from the banks who are lending at much tighter levels then housing could come down for the next several years.

The inflation/deflation debate is being very hotly contested right now and it will be interesting to see what happens going forward. I tend to favor the deflation theory because people simply don't have the ability to lend like they used to due to tighter lending standards.