After hitting a record of almost 70% in 2005, home ownership in the United States has declined to about 67%. In Canada, the home ownership rate is around 70%. However, if you were to ask citizens of each nation, each would tell you a different story about whether you should purchase a home. In the last year, US, home prices have crumbled 20% nationwide while in Canada, home prices rose around 7%. So what does this have to do with whether I should buy a home? Well, if I was considering the purchase of a home, this are several things you should consider:
Determine whether it is overvalued / undervalued – Research your area and find a historical chart showing the prices of the area. Is it overvalued or undervalued compared to the income of the area. Historically, the price of a house is three to four times the average income of a city. For example, if the average yearly income of a city is $75,000, then the average house should be valued around $225,000 to $300,000. Please note that I am looking at the average home, not the upper or lower end of the market. For example, the average price of a home in Vancouver, Canada is over $1,000,000. The average income in the city is about $83,000. Fundamentally, this just doesn’t work and people who own here will soon find out what happened to many parts of the United States that were overvalued. There is no point to purchase a home and be paying into the mortgage only to have the value of the house decline year after year. In the United States, year over year price declines have been eroding equity since 2006.
Determine current and future needs – Have a look at your current situation. Are you planning on changing jobs, getting married, having children? These areas weigh very heavy on where, what and how much you buy for. If you don’t have a stable job or you know you will be getting transferred, do not consider purchasing a home until these are finalized. If you are planning or at least considering marriage or having children, do yourself a favor and purchasing something a little larger than than you normally would. This would help you keep the place for longer if a kid came along.
Ensure that you have minimum 20% down payment – Back in the good ‘ol days, when prices were stable people use to save up for their down payment before they purchased their house. Nowadays, with the massive credit bubble giving money to every man and their dog, their is no wonder why prices have exploded and then imploded. In the United States for example, many people who shouldn’t have been able to buy a house, did so. Many of the mortgages were given to people with No Income, No Job, No Assets. Because of this, homes were over valued and anyone who purchased a home at their peak were vulnerable to a market correction, which is exactly what happened. Ensuring that you have the 20% down payment will ensure that you have learned how to save for your future and prevent you from getting into financial difficulty.
Purchase a home close to work – There is very little point of purchasing a home that is 75 miles from work. In many cases, the cost of the commute pays for the difference in the price of the home which is closer to work. Not to mention the aggravation of sitting in traffic for two hours a day. In addition, the increase in gas prices in the next decade will continue to erode the cost difference of the home.
Calculate the total home ownership costs – Before purchasing a property, many people only take into account the cost of the mortgage, However, the mortgage is only the largest payment of a list of bills that a homeowner is required to pay. These include:
Home Owner Association / Maintenance / Strata Fees – These costs are associated with building or complex and represent a fixed cost that after time may increase depending on the condition of the building. These fees typically run you about $100 to $700 per month depending on what the fees cover. Most fees cover a complex’s landscaping around the building, maintaining the pool or gym, maintenance of all of the common areas including the building, concierge if applicable, insurance (building only), garbage and sewer costs, however, some of these vary from HOA to HOA.
Property Taxes – These are a yearly fixed costs that are paid to the City.
Maintenance – Remember that if you own the house, you will be responsible for the maintenance of the house including the yard. Depending on what you buy and where, the maintenance costs could run you a from a few hundred dollars a year to tens of thousands of dollars (depending if you hire someone to do everything around the house)
Insurance – Owners insurance is required in case anything happens to the property. This is separate from contents insurance although you are able to get them combined.
Renovation Costs – If you are planning to go into a house and gut it to upgrade everything, this should be included in the purchase price of the house. Renovations should only be completed if you have extra income. Do not use your line of credit or borrow money to complete renovations. It’s just not worth it.
From the list above, you can see how expensive home ownership can be. The cost of actual home ownership is up to 40% higher than that advertised on many sale ads. Remember this and it could save you from getting into financial trouble.