If you pay attention to any real estate related news headlines these days, it certainly sounds like THE SKY IS FALLING!. It seems the safest option would be to sit on your predictably rising average rent payment of $1350/mo., and wait for interest rates, the cost of living, gas, and housing to drop back to where they should be. That’s what I would have done- 14 years ago. Or at least that was my plan. My wife had other ideas.

We’d been paying $690/mo for an 1100sf 2 bedroom, 1-3/4 bath Wedgwood apartment. It was a block from the local Safeway, the bus stopped at the front door, and was within easy reach of downtown Seattle. We were comfortable, and after 3 years there, I saw no sense in nearly doubling our housing allotment to over $1200/mo. (We didn’t have much of a down payment) to move 12 miles away, into the ‘burbs’, or as our Ballard friends called it, “Canada”.

We saw about 35 homes before our agent, Linda, called one evening to say, “this is it, it’s just come on the market, and you’d better run up here to see it, now!”

We’d familiarized ourselves with the area by that time, and the search criteria had been honed down to ‘needs’ vs. ‘wants’ out of economic and practical necessity; although how a yard ended up on the list for a guy who has many more hobbies than time, is still a mystery to me. And the whole family thing had (so we thought) been resolved by mutual lack of interest, so how we serendipitously ended up in one of the areas best school districts is also one of those happy occurrences we’re better off not questioning. The yard and the school district are now major features in our world, as the bemused parents of an energetic, soon-to-be 2nd grader.

When we arrived at the cul-de-sac location to which our agent had summoned us, it was nearly dusk on a late October evening. The home had been on the market for a day, and the sellers were lounging in the living room watching tv as we made the circuit through. Garage: check; fireplace: check; 3 bedrooms: check, and down the list we went. Good condition, decent neighborhood, what about that gun range across the road? And the main road that borders the backyard? What did you say the price was again? OK- so we’re pre-approved for $150k, and this is listed at $140k. Can we negotiate that?

Bear in mind that the market in 1994 was heated, interest rates had moved up 2.25 percentage points from a low around 6.25% at the beginning of the year, to 8.5% when we finally closed the week before Thanksgiving, and I was half-convinced this purchase was our ticket to financial destruction. At the time, our combined income was a little over $50k/yr, so the sticker shock of a nearly 3X income purchase price was dramatically at odds with my renter’s brain. I had to sell my beloved motorcycle to cover an earnest money check, and borrowed from my boss to scrape together funds for the down payment. I was struggling with the concept of homeownership being worth this much hassle, and bemoaning the loss of my coveted freedom.

The escrow and closing processes were uneventful, and we learned in the Appraisal that we would realize $5000 in equity at closing, as we had negotiated the original $140k list price down to $138,950, and the sellers had left some money on the table. Woo Hoo! It wasn’t going to bring my motorcycle back, but it was something.

In the haggling to finance we had decided on a 5/1 Arm, in an effort to get a slightly lower rate, and I was pretty traumatized over the idea of any financial commitment lasting 5 years- we’d only been married for 4! The original plan was to sell in 5-7 years, so we figured the 5/1 Arm wasn’t too much of a risk, and we could always refinance. As it turns out, several housing market bobs and weaves and 14 years later, we’re still here; and this miserable albatross I was sure would be our financial waterloo has nearly tripled in value. Assuming we’re still here in another 15 years, I fully expect we’ll see close to that return
again. It’s been an interesting lesson; maintaining a longterm perspective while negotiating around short term obstacles.

Now that we’ve refinanced into a 30-year fixed, low-interest (5.875%) mortgage, and have grown a bit smug with the realization that our mortgage payments are less than today’s average Seattle rent, I’m recognizing that my wife saved us from certain financial ruin. If I’d had my way, we would have waited until the market slowed, the rates came down, and real estate was ‘affordable‘ again. Fortunately for us, she is really persistent.

And, realistically, when I pull out my crystal ball for the coming year, it’s a little cloudy. Sorting out all the drama from the various media about what it means to buy in a ‘down market’ is daunting. There are too many voices, each with an agenda. The bottom line can be summarized by answering a couple brief questions:

1) Can you reasonably assume you will be living in the same area 5 years from now?
2) Will you still need a roof over your head?
3) Are you a good credit risk, with a decent FICO score, and income documentation?
4) Do you have the intestinal fortitude to suck it up to achieve a longterm goal with some short term sacrifice?
5) Have you managed to put aside a down payment.

If you’ve answered yes to these 5 questions…

Fortunately, we’re not in the crazy, speculative, free-money financing environment of the last few years. Any responsible adult will tell you that’s a good thing. You should be required to prove you have an income, that you have some savings, that you are able to make payments, and that you’re willing to stretch a little in the short term to attain a longterm goal. Those aren’t just old-fashioned values, they’re common sense. Once again, we’re seeing there’s a reason it’s called ‘hard work’.

And, while the slower market means appreciation rates have come back into the single digit range, that’s also good news for buyers. It means there’s a window of opportunity to be selective, in a market rich with options, and then to negotiate on a home, as sellers are currently quite motivated to work with you. It may also be one of the last opportunities we’ll see to lock in a decent interest rate before the Fed’s next meeting in August, at which time they are rumored to be looking at a hike to prop up the weakened dollar, and stem the tide of growing energy-related inflation. Barring unforeseen positive economic changes, current indicators are pointing at rates beginning to climb before the end of 2008.

If you have short term, get-rich-quick expectations for your real estate purchase, you are probably out of luck. But if you look at the longterm trend line, which is the only time-tested way to measure the value of any investment, I will lay odds on a solid return for any home buyer – anywhere. But making the decision to buy a home shouldn’t depend on my musings, or experience, or the arcane calculations of some talking head economist; it’s about what fits your particular longterm goals. If financial stability is one of those goals, then a home should unquestionably be considered a valued part of your investment strategy. And the sooner you stop paying your landlord’s mortgage, the better. Then again, who knows… someday I might be one of those landlords!

For an easy-to-read, informative guide to the longterm investment value of owning your own home, I have just finished reading, and strongly recommend ‘Houseonomics‘. The book lays out a disciplined approach to utilizing equity for wealth-building, and thoroughly analyzes ways you can leverage what they refer to as your ‘home dividend’.