How to Buy Your First Home

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The tale of Smith and Jones

Here’s a true story:  Round about 2002, a family with teenaged children (I’ll call them the Smiths) lived in a modest home.  Mr. and Mrs. Smith had an entrepreneurial spirit and realized that in a few years they’d be empty nesters.  Mr. Smith was a pretty handy guy, too.  So they put lots of sweat equity and several tens of thousands of dollars into expanding and upgrading their home.  The Smiths loved their classy “new” home and the teens loved their private bathrooms throughout their high school years.  By 2007, they were both off to college and Mom’s and Dad’s date with empty nesting arrived at the height of the real estate bubble.  Meanwhile, another family, the Joneses, arrived with their deep pockets from a higher-priced State.  Even at the height of the market, the Smith house looked like a bargain to them.  So they bought it.  The Smiths were thrilled with their windfall, and the Joneses loved living in their “new” home.  They loved it even when the assessed value dropped by 30% in 2008 — after all, they were in for the long haul, and don’t forget those deep pockets.  Time passed, and lo and behold, in 2017 Mr. and Mrs. Jones were empty nesters too, and it was their turn to sell.  The value of the house had recovered a lot, but not back to the price they paid in 2007.  Meanwhile their pockets were no longer deep — the house is still on the market.

I’d like to thank the Smiths and the Joneses for permission to tell this story.  Now, here come the lessons.

Learning from the Smiths

The Smiths made some smart decisions.  They wanted to give their daughters a wonderful home for their final years in the family nest — where they could entertain their friends and also enjoy more privacy in their teens.  At the same time, they accurately assessed the upgrade potential of the home they already had.  They also guessed that there would be a good market for an upgraded home when it came time to sell.  So, they worked hard and risked some cash in order to address both needs.  They were also lucky — the housing market soared from 2002 to 2007, and they sold just before the crash that even most mortgage lenders didn’t see coming.

Learning from the Joneses

The Joneses were not so smart.  Buying in a new State before you are familiar with the local market is a big risk — there’s a lot to be said for becoming thoroughly familiar with the lay of the land before leaping into the deep end (sorry for the mixed metaphor!).  But they loved the house, and there’s an argument to be made for going for what you love, even when it’s not economically optimal.  Kudos to them for following their hearts!  They say they didn’t see their financial crunch coming, nor the anxiety that came with it.  Chances are their house will sell, and they will pull through okay.  But one lesson to keep in mind is that following your heart is not always the wisest financial decision, and, if Lady Luck springs a surprise, it might be bad for your heart in the long run.

So what?

So what does this story have to do with buying your first home?  Most of us tend to be either head people or heart people.  A head person will conduct a careful assessment of value, both present and future, before making a major decision, or hire someone competent to do it for them.  A heart person will go with their gut, fall in love or even follow the classic formula:  “Ready, Fire, Aim.”  The heart person’s life can be exhilarating and joyful, but also heart-rending.  The Smiths struck a pretty good balance, they made sound analytic decisions, but also enjoyed a fine home for the time they needed it.  The Joneses relied too strongly on their hearts.  But the stories of both families demonstrate the importance of forces beyond their control.  If the Smiths’ children had been five years younger, they might have made their decision to upgrade their home in 2007 instead of 2002, and they’d be in a very different situation today.  If the Joneses had fallen in love with a home that wasn’t above the prevailing local values in the inflated 2007 market, and if the market had not subsequently crashed, they also might be situated very differently today.  So, whether you are a head or heart person, you are still subject to the universal truth that  the future is unpredictable.

Time to buy?

As I write this in late 2017, the stock market is at an all time high and house prices are just about where they were in 2007.  But the structural problems in the mortgage market that drove the housing boom and caused its crash are not present today.  In other words, I feel quite confident we aren’t in a bubble, but have simply returned to the steady rise in prices that characterized most of the last 100 years.  So I believe this is a safe time to buy a home — but it has to be the right home.

My bottom line is that your home purchase needs to be both a heart and head decision.  Buying a home is a big decision, and you deserve the joy and exhilaration it can bring you today, not just the security of some distant payoff.  So, buy a home you love, and make sure it’s a place that makes you feel good to live in.  Create wonderful memories every day.  But, since you cannot know what the future will bring, you also need to involve head as well as heart in the decision.  There are well-established and sound approaches to the current valuation of reall estate — good real estate agents do it all the time.  The future is uncertain and future value is much harder to predict, but a sound investment today is likely to survive the storms better a whim based on heart alone.  So, even if your strength is not in analytics, your best bet is to partner with someone who can both understand you and give you sound analytic guidance.

You need both head and heart

I happen to be both a head and heart person.  Prior to my work in real estate, I spent thirty years applying analytic techniques in product assessment, risk management, and marketing.  I’ve also spent fifteen years as a life coach and understand a bit about our need for gratification.  If you need a real estate agent who can be an understanding partner as you wade into the market for the first time, maybe I’m the right agent for you.  Call or text me at 804-658-7718, or email me at martin@martinahrens.com to continue the conversation.