While no one knows whether or not we are in the bottom of this real estate crisis, one thing is for certain: houses are cheap! During a recession, or times when the economy are weak, IÂ recommend boosting cash supplies, reducing debt, and especially not adding to debt. But the question remains, if you’ve done your homework, you’ve got a decent emergency fund, and your debts are low, should you buy a home is this depressed real estate market?
It takes guts to buy in the stock market when there is blood in the streets so-to-speak. Nobody wants to buy until they’ve seen an upward trend. By that time, you’ve already missed five to ten percent. For some, it is worth the price. For others, it is a costly mistake. Right now there are houses selling at greatly reduced prices, some in foreclosure. If you do not have too much debt, and you have sufficient cash savings to weather an economic storm for six months to a year, it is a great time to buy a cheap house, particularly now that interest rates are low. In fact, many wealthy real estate mongols, such as Eli Broad, take advantage of times like these to increase their real estate portfolios at rock bottom prices.
However, for those that aren’t prepared, it might not be such a good idea. If you buy a home, and can’t sell your home, you may be stuck with two payments, cash flow problems, and maybe faced with the possibility of foreclosure.
If I were to buy a home, I would not recommend an ARM (adjustable rate mortgage) if you plan on staying there a while. ARM’s are meant for homes you are going to be in for less than six years. This fits the bill for most homeowners, but for the conservative wealth builders I am use to working with, it is not a good idea to get an ARM. However, I also do not suggest a thirty year mortgage. I prefer twenty or less. This is because it greatly reduced your overall purchasing price for the home, and keeps the amount of home you are buying at a level where you may not be spending on lifestyle, and living beyond your means. I suggest not buying a home more than two times your gross income. This is supported by research done by Dr. Tom Stanley in his millionaire mind series. Most people think the bigger the better, but never realize that the highest payment they can afford for thirty years adds to the amount you pay for the home, and causes cash flows to dry up, with no room for savings. Bottom line, it is a great time to buy a home, but only if you are prepared with a large cash cushion, little debt, and a stomach made of steel.