The housing industry is starting to boom again. The latest reports show that sales of existing homes rose to their highest level in eight years, and the median price for an existing home sold in June rose to $236,400 -- the highest ever recorded by the National Association of Realtors -- and surpassing the July 2006 peak. The Case-Shiller 20-city home price index rose 4.9 percent in May.
Home builders also report their sales of newly built homes have reached a seven-year high. Only sales of existing homes disappointed, with many analysts saying the problem has been a shortage of inventory.
While the surge in home buying started with investors looking for bargains to flip, the most recent sales have been to individuals, based on mortgage statistics showing a much higher percentage of purchases being made to homebuyers using low down payment FHA loans.
The American dream of home ownership is coming back in a big way, as the nightmare of the 2008 mortgage crisis fades from memory. But before you jump in to buy, here are five things to consider:
1. Your home is your residence, not a trading investment. Now you know that home prices can go down as well as up. Don't speculate with the roof over your family's head. In fact, when counting your assets, don't even include your home equity.
2. The family home is not a liquid asset. If you think you might move in the next few years because of your job, think twice about buying vs. renting. While homes might be moving quickly now because they are in short supply, builders are rushing to build new, more desirable homes, adding to inventory. It could take months to sell your existing home -- and you'll be paying costly commissions on both sides of this transaction.
3. Pre-check your mortgage qualifications and costs. Get written confirmation from a mortgage lender about the amount you will be able to borrow. As well, check the interest rate you would be paying if you closed today. Of course, rates could move higher, but you want to know if you will be paying a higher rate than other borrowers because of past credit problems.
4. Check insurance costs. Yes, the cost of homeowner's insurance may also depend on your credit score. But the big unexpected cost would come if you are required to take out private mortgage insurance (PMI), which is designed to protect the lender in case you default. Typically this is required if you put down less than 20 percent of the value of the house -- unless you have a special deal like a VA mortgage.
5. Don't get caught in the middle. It's easy to fall in love with the next house. But put your current house on the market first. There may be enthusiastic buyers who don't qualify for a mortgage. Even worse, your house may not appraise for the selling price. I'd you get caught owning two houses you could be very vulnerable when interest rates start to rise.
The easy part of buying a home is the hunt. That's where optimism always overcomes financial common sense. Remember that remodeling always ends up costing twice the estimates, not only because of the problems you uncover but because of the three most expensive short words: "as long as...." Projects only come in on time and on budget on HGTV!
If you plan realistically, your home could be your best investment, especially with today's low mortgage rates. Just don't count your profits before you sell, and don't withdraw them in a home equity loan. That advice will let you sleep well. And that's The Savage Truth.