Everett, Wash.
Published: Sunday, February 8, 2009

Planning to buy? Consider goals, recession

By Steve Tytler

 Question: My partner is wondering if investing our savings and the equity in our home into a more expensive home is a good move these days. We purchased our Mukilteo townhouse a year ago and owe $257,000. The interest rate on our mortgage is 5.875 percent. We have $50,000 in the bank from the sale of two earlier homes that we want to invest. We have no other debt other than our monthly credit card bills, which we always pay in full. Our combined income is $140,000 per year. I am a federal employee making $85,000 a year and am very confident that my job is secure. My partner works for Boeing at $55,000 a year and has worked for the company for 29 years. If he were to be affected by the impending layoffs, he could immediately file for retirement and would draw about $2,100 a month. We have had our home reviewed by a real estate agent and if we were to sell we would net about $170,000.

We are pre-approved for a loan of $417,000 and have found several nice homes that appear to be within our financial grasp. We would put at least 20 percent down on a new home. I believe that with the interest rates at historical lows and a suppressed real estate market, this is an ideal time to move up. We both have Roth IRAs, pension accounts through our employers and personal investment portfolios, all of which have taken a beating. I had originally thought of investing in a piece of land to hold and possibly use as a weekend getaway or a retirement home at some point in the future.

K.K., Mukilteo

Answer: This is long letter, but I wanted to include the details because many readers may find themselves in a somewhat similar situation.

As I often say when answering these kinds of questions, there is no right answer. It all depends on your personal financial needs and goals. I will give you my personal opinion and some pros and cons to consider, and let you make the final decision.

First of all, I'm glad to hear that you have dependable income. That's a very important consideration in this economy. I am in the gloom and doom camp when it comes to the economy. I think this is going to be a very deep and very painful recession with high unemployment and business failures. I don't think anybody should buy a home right now unless they are fairly certain their income will continue.

And because I am very concerned about the economy for the next year or two, I think it's smart to hold onto as much of your cash as possible. If you decide to buy a new home, you should make a 20 percent down payment to avoid having to pay private mortgage insurance or taking out a second mortgage, but I would not make a bigger down payment than 20 percent. Hold onto the extra cash so that you have money in the bank in case of emergencies.

As to whether you should buy a home now, it's true that mortgage rates are at historic lows. You can get a 30-year fixed-rate mortgage with an interest rate of 4.5 percent to 5 percent, which is awesome. And home prices are down 10 percent to 20 percent from their peak values due to the collapse of the housing market. The housing market has not hit bottom yet, and nobody knows when that will happen. If you buy a home now, it will almost certainly lose value for another year or two until the housing market bottoms out. After that, I believe the market will remain flat for a few years with very little appreciation or depreciation.

If you are thinking of buying a home today with the idea that you could sell it for a profit in a few years, don't do it! However, if you are planning to buy your dream home that you will live in for the next 10 years or more, this may not be a bad time to buy. You could sit around and wait for the housing market to bottom out, but by that time interest rates may be much higher than they are today.

So it's hard to hit the perfect time to buy. Just be aware of the market trends so that you know what you are getting into.

I would definitely not recommend buying "a piece of land" for retirement because raw land is very risky. It is much harder to sell than a house in a down market and it's very hard to value properly unless you are a professional real estate investor. Recreational areas are especially prone to wild swings in property values, with prices shooting up in hot housing markets and crashing back down in slow markets.

If you are going to buy anything, I would recommend buying a new primary residence rather than a recreational lot. But as I said, there is no right answer. I hope I have given you some information that can help you make the final decision.

Mail your real estate questions to Steve Tytler, The Herald, P.O. Box, Everett, WA 98206, or e-mail him at economy@heraldnet.com..
© 2009The Daily Herald Co., Everett, WA