It’s been a while since I’ve answered a readers question, I’ve been too damned busy like everyone else I’m sure. For those whom have asked questions and didn’t get a response, I’m sorry – I do try my best, if I don’t answer a question it’s likely because the answer is on the site, so please search the site before you submit a question.
And so let’s get to the mailbox, if you’ve got a financial question that you need answered, let me know, I’ll do my best to help you, just email me at Mark@FinanceDad.com, or simply fill out this form with your question.
On Friday, Jon K wrote the following:
“Mark great work you are doing!”
Thanks Jon, I dedicate as much time to this side project as I can, it’s a work in progress that hopefully helps others.
“Do you think this is the right time to purchase a home?“
Jon, this is a very tough question to answer because I believe the answer depends on a multitude of factors, of which I’ll list a few below. Ultimately, there’s the overall economic condition of the economy and housing market (and your local real estate market) as well as the employment factor, but also your own individual financial situation that needs to be taken into account.
Factors to consider when making the decision to purchase a home right now and or rent instead.
1. Your local housing market. Check out this guide that will provide you a starting point on deciding whether it makes more sense to rent or buy in your local area. The article looks at the price-to-rent ratio. “It’s the cost of the median home divided by a year’s median rent.” Many people are basing their decision to buy now because they consider home values to be considerably lower than just a few years ago, however, that’s not necessarily the best factor to hang your hat on when deciding. Home values still may be inflated in areas you live. The article also looks at how much do houses cost relative to income? This is called the price-to-income ratio. It’s the median home price divided by median household income.
As housing prices bottom, rent prices shoot up. That’s no coincidence, as less people are qualified to buy homes, landlords can jack up rates because demand for their rental homes increases. If it cost’s $1000 to rent a home per month, or $700 to own, and you feel home prices in your area have bottomed, it’s probably a good time to buy. Historically, prices and interest rates are very low right now. No matter what, you’ve got to live somewhere, the question is, if you buy now, will your new home lose value in the near future and if so how much?
There’s no question a risk to buying now, but there’s also a risk to not buying. My opinion is, it’s probably a good time to buy now if you’re financially sound and your local real estate market prices are not overly inflated.
2. How are your personal finances and local job markets? If you think your local job market is going to get worse and you could lose your job, does it really make sense to commit to a long term loan? Can you meet your new loan payment comfortably? Do you have an adequate down payment saved? Do you have an emergency fund ready to help you survive meeting mortgage payments and living expenses for a year to two? It doesn’t matter how much you can qualify for, it only matters what you can reasonably afford. If you’re confident you can do it, then do it, if not save, save, save. Can you stay with family for a few months to save up additional funds? Then do it!
Jon’s second question was: “Is this a bad time to be adding a child to the family?
Jon, similar to my response above surrounding an emergency fund and being financially comfortable, it doesn’t make sense to bring a new child into your family if you can’t afford one. However, for some folks, they would never have kids if this were the case. My advice, have 2 years of living expenses in the bank before you bring a child into your family. Avoid financial fights with a spouse or loved one before they start, and keep your new kids stress free from that side of life if at all possible. Kids are expensive, there’s diapers and food, and daycare, and college and so much, just be certain you’re ready before you commit.
Jon’s final question: “I have just come into some money not much ($2000.00), how would you make this money work for you?” Thank you for your time – Jon.K
Jon, by now you should see a pattern in my thinking, but I’ll take it one step further. Here’s what you need in place, in order:
1. Emergency fund (2 years of living expenses).
2. Minimum 10% income going to savings each paycheck.
3. Eliminate any and all debt.
4. Retirement plan, investing for your future.
If you don’t have an emergency fund, take that $2000 and start one, now. If you do, pay down any debt. If you have an emergency fund and no debt. Put that money in an IRA to save towards retirement.
Good luck Jon, hope this helps!