Our first home was purchased with the assistance of my father.  At his insistence.  We were not ready to buy a house after being married only 6 months.  We were still getting to know each other - NOT playing house.  We didn't discuss details of the finances because we didn't know we should.  We had no idea the responsibilities that went with home ownership.  Our primary focus when determing the buying price?  What would our monthly payments be.  Not is the house worth this price.  Not the equity or lack thereof that was going to be realized.  In the end, we were very lucky because the home appreciated quite a bit in the short time we lived there.  We also learned a lot about home ownership and did the purchase of the next house with a better understanding of what we were getting into.

After 16 years of marriage, paying off and closing three credit card accounts, living with only a monthly mortgage expense and monthly living expenses - we love the freedom being debt free has given us.  We rule our stuff - our stuff does not rule us :)  My paid off vehicle drives better, my top notch clothing wears better, my income has increased because I have the freedom to seek better employment. 

 Loreena, you're not alone! :)  Keep advocating responsibility, accountability and living below your income level :)

We waited a year to buy a house after we got married.  Had we wanted to buy a house right away, we would have either had to pay more monthly for a 6 month lease rather than a 12 month lease, or else we would have been house-hunting while we were also planning the wedding and spent our honeymoon moving in!  It's so much easier to rent a place for a year or two, just to have a place to call home, and enjoy your marriage and honeymoon for that time, rather than spending that time house-hunting, mortgage-shopping, and decorating and unpacking.

As far as buying less house and financing over 15 years rather than 30, I agree.  What is wrong with Americans that we feel the need to buy more house than we'll ever fill up, just because we can?  I know people with 2500-3000 sf homes, and one child.  Why does a couple with one child need 4 bedrooms and 3 bathrooms, anyway? 

We're buying a new house and CAN because we've followed what Dave teaches. Yes, we are even doing it on a 15 year note. We wouldn't buy a more expensive house if we did a 30 year mortgage, we'd just end up paying more interest.

Realtors like Loreena are the ones I like to do business with. One that I know won't be pushing me into buying more than I can realistically afford and one that listens when I tell them that XX amount REALLY is the max we are willing to spend.

I couldn't believe a loan broker yesterday telling me not to put much down on our house because if the market fell we would be losing all that money. Uh, hello, the more we put down the less risk we'd have of being upside down on our house if the market fell. It's not like the mortgage company is going to lower our loan amount because the value of the house drops. Can guarantee this, we won't use that loan company.

As for credit rating - who needs if it you don't borrow money any more? I always hear the "You'll pay more for your car insurance if you have a low score" Well, that might be true, but we also aren't paying interest on loans just to keep our score up. And for those that say you can use a CC and pay it off every month to keep your rate up - I know VERY FEW people that are truly debt free (no car payments, etc) and use a CC that way.

EXCELLENT ADVICE.....and thanks for sharing.  I wish everyone had the ethics  you possess.

Regards,

Stan

Loreena,

GREAT advice, things in this country have been running well since the mid-90's and people forget about all the need for a safety net, prudent borrowing, and fiscal responsibility.  Many people don't share your POV (realtors, because it would hurt their business, consumers because they like spending and thinking they are big shots) but I agree 100%

Loreena,

Congratulations for the grate advice!!. It could not be more close to the true.

It happens I have read the comments from Bill, (1st comment). It is clear he wants to mislead people.  It is very sad that "real state cheerleaders" like him push families in financial bankruptcy and sometimes destroy families as well

• Bill "I like the idea of being debt free, but your program would leave people with no or a very low credit score. Most advisors would recommend judicious use of credit, to establish your credit worthiness!"
  Answer: You can create credit with 1 credit card and pay all at the en of the month. (No Debt)

• Bill "I like the idea of being debt free, but your program would leave people with no or a very low credit score. Most advisors would recommend judicious use of credit, to establish your credit worthiness!"
  Answer: You can create credit with 1 credit card and pay all at the en of the month. (No Debt)

• Bill" It's nice to have a down payment, but it's better to buy sooner. In many areas inflation makes waiting downright foolish!
  Answer: The interest you pay for lower down payment is always grater that inflation. Banks never lose.

• Bill:15 year, fixed mortgage? Is a good idea for someone refinancing a 10 to 20 year old loan, but not for a younger new home buyer. At 15 years for the same payment you get 27% less house.
  Answer:  you get 27% less house, but pay 100% more in interest!

• Bill: Not in the first year? Does your spouse know that marriage is only a continuation of playing house? It's no wonder you don't recommend buying mortgages are for 15 to 30 years, you appear to believe marriage is day to day.Did I miss something, your's is strange advice for a real estate professional?
  

Quote of Upton Sinclair:

"It is difficult to get a man to understand something if his salary depends on his not understanding it."

Alex

Loreena,

Congratulations for the grate advice!!. It could not be more close to the true.

It happens I have read the comments from Bill, (1st comment). It is clear he wants to mislead people.  It is very sad that "real state cheerleaders" like him push families in financial bankruptcy and sometimes destroy families as well

•·         Bill "I like the idea of being debt free, but your program would leave people with no or a very low credit score. Most advisors would recommend judicious use of credit, to establish your credit worthiness!"

Answer: You can create credit with 1 credit card and pay all at the en of the month. (No Debt)

•·         Bill "I like the idea of being debt free, but your program would leave people with no or a very low credit score. Most advisors would recommend judicious use of credit, to establish your credit worthiness!"

Answer: You can create credit with 1 credit card and pay all at the en of the month. (No Debt)

--

•·         Bill" It's nice to have a down payment, but it's better to buy sooner. In many areas inflation makes waiting downright foolish!

Answer: The interest you pay for lower down payment is always grater that inflation. Banks never lose.

--

•·         Bill:15 year, fixed mortgage? Is a good idea for someone refinancing a 10 to 20 year old loan, but not for a younger new home buyer. At 15 years for the same payment you get 27% less house.

Answer:  you get 27% less house, but pay 100% more in interest!

•·         Bill: Not in the first year? Does your spouse know that marriage is only a continuation of playing house? It's no wonder you don't recommend buying mortgages are for 15 to 30 years, you appear to believe marriage is day to day.Did I miss something, your's is strange advice for a real estate professional?

Quote of Upton Sinclair:

"It is difficult to get a man to understand something if his salary depends on his not understanding it."

Alex

Loreena

I am thrilled to find a realtor who has the integrity to give good advice - most of the realtors I know are unable to resist the conflict on interest as a home-salesperson.  This is why Bill found your advice "strange for a real estate professional".  It is like a a hair-stylist telling you your hair looks fine and you don't need to spend $60 today to get it done!  Rarely happens, because 'professionals' often put their profession ahead of sincerity.

 I wholly endorse your advice, and you may be happy to know I have been practicing exactly that for over 15 years.  I am free of consumer debt, pay off my credit cards in full EVERY month.  I buy things that I can afford, and when they add value to my life, not because some ad told me I should buy.  My cars were both bought with cash, including one luxury car.  And guess what?  My wife and I have near perfect credit scores (700s).  It is a LIE to say you need debt to improve your credit score.

 I bought my house with a 15 year mortgage - even though I could have bought a (slightly) bigger house with a 30 year mortgage, I didn't need a bigger house, a bigger property tax bill, bigger utility bill, etc. that came with it.  Unfortunately, the realtor who 'helped' me buy a house was not like you - she tried every trick in the book to get us to buy a bigger house, spend more, and even tried to encourage us to raise our offer so we could win a bidding war.  Some 'professional real-estate help', huh?  In the end, we did what was prudent, succeeded in buying the house without raising our bid and have never regretted it.

May your tribe increase

Sincerely

SP 

Loreena,

I am encouraged that you are advocating such quality, common sense advice given the current environment of NAR scare-ads and ever aggressive realtors and mortgage brokers.  Your words used to be considered good, solid common sense.  It is a shame that today we're congratulating you on what should have been expected behavior.  

To William J Archambault Jr of The Real Estate Investment Institute:

There are no shortage of renters in San Francisco, or the Bay Area as a whole.  I honestly think your leading rhetorical question belies your insincerity from the outset.  One click would have revealed that rents in the SFBA are increasing faster than inflation, primarily due to rising demand (from a strong employment market).

I like the idea of being debt free, but your program would leave people with no or a very low credit score. Most advisors would recommend judicious use of credit, to establish your credit worthiness!

I love that people continue to echo this myth.  The credit agencies employ extremely sophisticated algorithms in determining credit scores.  Perhaps 20 years ago, Mr. Archambault Jr's warning might have been more true.  But today, this is complete bunk.  Credit agencies primarily rate you on your ability to pay obligations over time, weighted by your income consistency, job consistency and debt ratios.  So "having credit to raise your credit score" can very often do the opposite if you end up stressing your debt ratio.  By the way, the primary source of early credit scores are not credit cards or loan payments, it is utility bill payments.  Don't pay your cable or gas&electric bills late for 5 years and you'll earn more credit score than buying junk you don't need with a credit card.  And another thing, carrying any type of revolving credit, including home-equity lines, damages not enhances your credit score.  I arbitrage debt regularly, and such activity always brings my score down closer to 800, whereas sitting on investments pegs it.

It's nice to have a down payment, but it's better to buy sooner. In many areas inflation makes waiting downright foolish!

"Buy now, or you'll be priced out forever!"  If I had $100 for every time I heard that tired scare tactic.  Simply, Bull!  What the NAR never tells you is that, even in the most inflationary areas, real estate is *cyclical*.  All up cycles always end with down cycles.  Last time real estate corrected in the SFBA we saw about a 12-15% real-price drop over a half-decade period.  Don't believe me, look at the data.  There's no shortage of it available.  And I'm not talking the apples to acorns NAR pseudo-data.  I'm talking about people who do this for a living like HSBC, GS, Dataquick, or the CME folks doing the Case-Shiller index work. 

15 year, fixed mortgage? Is a good idea for someone refinancing a 10 to 20 year old loan, but not for a younger new home buyer. At 15 years for the same payment you get 27% less house.

Apparently math is not a pre-requisite for becoming a real-estate-investor.  If I have "27% less house" doesn't that mean I have more equity in the house I do buy with the 15 year mortgage (which by the way amortizes principal faster and front-loads the tax benefit iterations)? 

Everyone should carefully realize what he's implying by this logic.  He is implying that buying "more house" is "always better".  Why would that be?  Well, because he's assuming that "prices always go up!"  Well, they don't.  And leverage cuts both ways.  Buying 27% more house than you can afford might make you a genius during a real-estate bubble.  But easy come, easy go, and if you get caught losing 15-20-30% during a correction you're looking at either paying for "40% house you no longer have", or you send the keys in to the bank.

Seriously.  Why is "buy what you can afford" so controversial.  If there's no other evidence of a bubble, that is enough.  When people advocate buying beyond your means they're assuming that prices will only go up.

Did I miss something, your's is strange advice for a real estate professional?

Marriage is "playing house"?  And you're calling her advice strange?  Again, once upon a time not that long ago (the early 1990s in fact), newly wed 20-somethings were not *expected* to buy homes.  They lived in apartments, often in the larger cities, pursuing their careers and saving for the time when they'd settle down a bit, maybe have kids, and usually migrate to the suburbs.  Then they'd buy a house.

Randy H

 www.capitalism2.org

Loreena,

Your points are good common sense that more people need to hear and listen to. Becoming indebted to have more square footage or bigger, plumper furniture to fill your oversized McMansion (with a formal living room and formal dining room plus an extra bedroom and 'bonus' room that are never used) is ridiculous.  Increasing your debt load to help you 'build your credit score' is the surest way to marital strife and an ulcer.   Anybody who believes that they can only be happy with a large house that they can't truely afford ( and if you can't scrape together a down payment you can't afford that house)  is fooling themselves, and trying to fill up a personal void with purchased stuff.

Loreena,

I commend you on your civilized and polite approach.  I am sorry if my above comment seemed heavy-handed.  It's just that I've grown impatient with the seemingly endless army of "real estate experts" who run around dispensing the type of financial advice which legitimate professionals in other industries are prevented from offering.

You will not find a financial adviser, stock broker, investment banker, mutual fund salesman, etc. who will make conclusive forward-looking statements.  Yet, mortgage brokers, real estate agents and self-described "real estate investors" happily offer specific financial advice to people without fully educating them about the risks.  How many in the real estate industry have cajoled marginal buyers into stretching into homes they cannot afford by using dubious mortgage products, like interest-only option negative amortizing adjustable loans?

No, if someone working for a mutual fund or public corporation pulled anything like that they'd have the SEC all over them -- especially in the post-Enron environment. 

Yet, the irony is that buying & selling one's home is the single largest financial decision most families will ever make.  Anything is fair game.  Scare people into buying at the top of a real estate hyperbubble with the "waiting would be foolish; buy now or be priced out forever" rhetoric.

I'm sorry but people like Mr. Archambault are not simply honest folks with differing opinions.  They have and continue to be the principal agents in facilitating an enormous amount of damage which we will *all* have to pay for.  Every time the Fed inflates your money away a little more to ease the damage done by the real estate bubble we *all* pay for it.

And why?  Because people are running around telling us that _we_ are the fools for not buying things we cannot afford.  And for the record, I have been a homeowner for many years.  Yet I, and over 3/4 of my peers -- folks who can afford most of these homes with 80% down cash -- are renters now.  I leave it as an exercise to anyone who cares to figure out why so many highly educated, successful folks are selling their homes and sitting things out; or at least selling off their vacation/2nd homes.  The author of one of the recent famous "real estate will make you rich" books is, himself, in fact a renter in Manhattan, even though he writes that owning a home is the only way to get rich.  Hmmmm.

William,

Your math is ok, your basic assumption is not, thus making the whole point moot. In a true RE bubble area (read East and West coast) rent is not even close to a 1% value of the house. I live in the Bay Area, my rent for 3br/2.5ba is $2300/mo. The house I live in (1800 sq ft., nothing spectacular, tiny backyard) is estimated at $850,000. Eight hundred and frikkin' fifty thousand dollars. It brings my rent to 0.27% of the "value" of the house - almost four times LOWER than in your example. Now you can surely apply your math again and tell me how much per month I am SAVING by renting. Definitely, I can scale down and live in a dump or move to a really unsafe neighborhood, but even then 3br/2.ba will cost about $450k-$500k. If I could buy this house for 230,000, even for 350,000, assuming I have to pay "California premium" - I would've done it years ago.

Bill,

There are many good reasons not to buy a house, but the numbers are not one of them. 

First pull you[sic] pants up and put you socks back on were not going to count on your digits! 

I assure you that I am quite competent at the mathematics of the question at hand.  I have created a model too (who hasn't).  The difference is that mine is publicly available, transparent, and has been refined by an intense community process over the past year.

I invite you to download it from my blog.  www.capitalism2.org.  It is called "The Bubblizer", and if you can find any verifiable flaw in the mathematics of the model I will revise the model and fully credit you or anyone else.  I have already done so twice prior.  A warning:  a lot of people who are indeed very good at math have contributed to this model...folks like quantum physicists and financial engineers.

Regardless of my model, HSBC created an extensive body of work (which I also reference on my blog) which also details myriad reasons why *not* buying a house is precisely a numbers conclusion.  And I'm pretty sure their economists, econometricists, and financial mathematicians can count on more than their tows.

Oh yea, and then there's the half dozen papers by the Federal Reserve which predict a 50 year real-price recession for US residential real estate.  I don't agree with this conclusion, but it's not because of the math.  Their math is solid.  Yours is not.  I'd plug all your numbers into my model and prove it, but I've done that so many times now at Patrick.net and other blogs...why don't you plug your numbers in and tell me where the model is flawed. 

-"tows"

+"toes" 

Bill,

My Area is California, although my point applies for all USA and Canada. We are in a global economy; there is not local economy any more. I laugh every time I heard people telling my "But here is different".  What triggered my comments was that in order to throw away Loreena's points (I agree with Loreena 100%), you went personal. I do not have any personal issue with you. I do not know even who you are. My only intention is endorse Loreena's points, which as I said, they can not be more close to the true. A close person of me has bought a house in 2005, and now he is stack with an asset that is depreciating and he is having a difficult time making the payments. He has 2 small children

Although Real State is not my specialty (Data Analysis and Implementation of Financials/CRM systems are) and I do not have anything at stake if housing go up or down. I follow the housing market because a crash of it will generate a ripple effect in the service sector, which I care about. USA is already in a recession because of it.

I have been a consultant for different industries (Financials/Communications/ Manufacturing) in several countries, including Argentina, Chile, Canada and United State, and, if I have learnt something in my professional life, is that all markets go up and down (Not only stocks, but commodities and assets as well). There is only one rule in the market, and it is offer Vs demand. Knowledge, information and common sense are kings in this century.

I am currently living in CA, USA.

Although your math is right, that is only part of the equation. Before answer your points, lets clarified same misconceptions:

• Houses are assets, therefore, they depreciate. (A house became an investment if it is part of a business model with the intention of generate a profit. I.E. Renting)
  
• The media value of a house after inflation and keeping costs(Maintenance) since 1929 to 1998 has increased roughly $0. it means the ratio between the cost of the media house and income was almost the same (off course, there were several fluctuations in between for different factors that affected the market, like wars, natural disasters or market speculation).

• Since 1928 to 1998, the ration of people holding a house title (You are the owner if you do not have a mortgage) was between 64% and 65%. Today is higher than 70%!. Although the ratio of real owners is lower!!!!!. (ATM house has born!) 

• Today, there is not a new permanent variable that will change the free market rules (Like the land is limited. If we were not having more land to build, we would have had people killing each other in the street for food before having a shortage in housing)

• In today global economy, there is only one Market. Local markets do not exist any more.

• The best moment to buy an asset is when the interest rate is higher than average historical ratio , not lower (There is a common misconception regarding this point, people believe that is better to buy when interest rate is lower than average, like nowadays) 

• The historic ration between annual income between the house you can afford and income is 3.x with 20% down. Today, the ration is between 6.x and 11.x, depend the state. It is a clear indicator that there is/are currently some factors disturbing the market.  

• Banks lend money at a rate higher that inflation, they are making business, not helping people. Nowadays inflation rate is close to 3%. Bank rates are higher than 6%. If you know any bank that lend money at a lower interest rate that the inflation rate, please, let me know. Sub-prime lender rates are higher than 6%.

• Another misconception: If you have a mortgage on your home, the owner of the house is the Bank. You only hold the right of being the 1^st party on buy the house is you can pay the entire mortgage/s.

When you bay a house with a mortgage involved in the transaction, you are renting money, you do not own the house. So basically, if you can not pay 100%, you have 2 options.

•1.     Rent a house

•2.     Rent money.

Depend market condition, one option is better that other.

   Some of the reasons because market today is so disconnected to fundamentals are:

• To borrow money was and still is cheap. Although it is starting to change. Last month several sub prime lenders were down. More coming!

Sadly, some industries related to housing are going down as well, and people are losing jobs.

• Loose lending - Anybody can take a loan, no down payment, Banks do not care any more, they sell the loans to the sub prime market.

• Prices were up as creasy because a huge speculation, people buying houses per dozen. Have you had a chance to see this website? http://iamfacingforeclosure.com/ 

The guy recognizes he has made fraud,  but nobody cares! He bought 5 houses with liar loans, he liar in his income and nobody cares!!!

• In California, 75 % of the mortgage between 2004 and 2005 were ARM! They pay only interest. Now that home values are decreasing, the foreclose rate is going to increase at records levels!!! 

• I can also detailed you a lot of different types of fraud that go around in the industry, but it would make this e-mail to longer. Already it is ;)

Bill, do you know that historically the length of the downturn is roughly 1.6 longer that the length of the increase in the bubble? 1.618.. is the golden ratio, also known as the divine proportion.

The golden ratio, usually denoted with the greek letter   , expresses the relationship that the sum of two quantities is to the larger quantity as the larger is to the smaller. The golden ratio is the following algebraic irrational number with its numerical approximation:

Golden Ratio=  (1 + square root (5)) / 2 = 1.618033989 

so, if this time is not different, and the rules of offer vs. demand still apply; Knowing that the media house value increased over their means since 2001 to 2005 over 100 % due to speculation and it was flat in 2006, it means we are going to have a depreciation period in housing for 50% of real value after inflation (50% down = 100% up) until 2013.

So, for a first time buyer, with no down payment, he will commit financial suicide if he buys now.

I do not care about investors, flippers or people that use their house as an ATM machine for pleaser. But I care for families like my friend that became the slaves of this century because people gave them bad advice.

"Knowledge is the path of freedom"

Bill said:

"Scores by the way only go to 850. I've only seen one at 800 but I've only been watching them from their beginning."

That's strange.....

My score, for the past 12 years I've checked it, has never been below 800 and there's nothing special about me or my circumstances.  Either you haven't followed scores very much or deal with a different sort of person.....maybe those who are leveraged up to their eye sockets.

As far as your comments about "anonymous" posters is concerned; these are simply people who are not part of the RE industry who want to comment on the blog.  They arrived because I shared the link with a friend, who shared it with a friend, and so on.  I've seen their "names" on numerous sites; always posting as themselves......sorry if you feel intimidated by non member contributions.  If anything, their comments carry much more weight because they aren't "selling a point of view"; as is the case with people who make their living in real estate.

Regards