6 Reasons why buying your dream home is less expensive than you think

How much does it cost to buy your dream house? A lot less than you may think.

Whether we’re dreaming of purchasing our first home or selling and moving up to our dream home, studies show that most people would love to get the keys to a new home. However, many people are scared away from even looking into buying because they fear that it will be too expensive.

I’m not minimizing that it can be intimidating to sign on the dotted line when a lot of zeros are involved. However, I think that you’ll find that buying your dream house is a lot less costly than you anticipate – especially when we factor in the time value of money and the opportunity cost of not buying your dream home now.

Here are six good reasons to back up that assertion:

1. People grossly overestimate the down payment needed to buy.
Of course, for most people, the biggest impediment to buying their dream home is coming up with the down payment needed. However, there’s a clear discrepancy between what most people think they need to put down for a home purchase, and what is actually required.

Perhaps that perception stems from the fact that in decades past, buying a home meant coming up with at least 20% of the purchase price. But these days, most buyers don't stick to those rules, committing only the minimum that their particular loan requires in most cases. In fact, the average down payment on a single-family home purchase is now only 14.8% - and that number is skewed higher by all-cash buyers.

Speaking of loans, many of our home buyer clients are benefiting from mortgage loans that allow them to put less than 20% down, often 10% or even 5%. Likewise, a significant portion of home buyers – particularly first-time buyers or those with marginal credit – may be able to put even less down with FHA loans.

Of course, I’m not a lender, so consult your mortgage broker or ask us for a referral if you’d like more information.

2. Down payment assistance may help lower the cost of buying.

Gone are the pre-real estate crash days when 100% financing was so easily available, and down payment assistance thrived and often made up the difference. But most people don’t realize that there are still great programs, grants, and funds available to assist qualified applicants with their down payment. In fact, there are about 78 million single-family homes and condominiums in the U.S., and 87% of them (68 million homes) could potentially qualify for some sort of down payment assistance program, grant, or other down payment help.

Reportedly, there are more than 2,400 grants, funds, and assistance programs across the country, and 85% of them have funds available for homebuyers at any given time.

Sure, they usually aim to help first-time buyers, lower-income buyers, or folks purchasing modest homes – not exactly your dream mansion. But about 14% of down payment assistance programs are earmarked for individuals that play important roles in our communities, like educators, public servants, healthcare workers, and military veterans.

Down payment assistance programs aren’t just for first-time homebuyers, as 37% of these programs do not require a borrower to be a first-time buyer.

Why not at least ask your mortgage broker about down payment assistance programs since less than 10% of home buyers even apply for a down payment assistance program?

3. Buying is cheaper than the alternative of renting.
Rental demand is hotter than ever in the greater Sacramento area, with little new construction going up for affordable rental units. With a shortage of rental units as well as record-low housing inventory for sale, we’ve seen extreme upward pressure on rental prices. Therefore, waiting to buy your dream house may cost you more if you DON’T purchase now but wait. That logic is sound whether you want to keep renting a house or if you already own a home and are thinking of waiting to sell down the road.

In fact, when we track the monthly allocation of income toward mortgage vs. rent across the country, renting is now twice as expensive as owning a home. (That also means that it’s about half as expensive to be a homeowner than it is to rent.)

And if you think that renting is expensive now in California, economists expect it to keep skyrocketing – particularly in Sacramento, where at least half of all renters pay more than 30% of their income toward rent.

4. Stability saves you money
Some pennywise financial bloggers will tell you to spend within your means when it comes to buying a new house, but what they forge to factor in is the future cost of stability. Consider that every time you move, you have to put your house on the market and sell (paying about 6% to us pesky Realtors), as thousands in other affiliated closing costs; then pay for a moving truck, new furniture, fixing up the new place, etc. By buying the house you truly love and want to be in for the long haul (aka your dream home), you'll avoid paying those selling and moving costs two or three times over the next decades.

5. You’ll probably pay a lot less for taxes.
Owning a home is still one of the best tax breaks you´ll ever find. The government doesn't want to be in the business of housing 300 million+ Americans, so it long ago decided to offer huge tax advantages to promote home ownership and investment. In fact, you can deduct the interest on up to $1.1 million in mortgage indebtedness on your primary home; write-off a lot of repairs and upgrades you make; and sell your primary home for tax free profits up to $250,000 for singles (or $500,000 for married couples) if you’ve lived in the home two of a five years.

Consult your CPA or tax professional for specifics, but he or she will most certainly reinforce that buying your dream home now is a great financial move!

6. Buying now can help fund your savings, net worth, and retirement.
It may feel like purchasing your dream house now is expensive, but two years, five years, and twenty years down the road, you’ll be ecstatic that you made the move. Part of the reason for that future optimism is that statistically, owning a home is the best path to wealth in America.

First off, a study by the Federal Reserve found that median home equity in the U.S. for all homeowners is about $80,000. That means they have a “savings plan” of $80,000 on average (although home values can go up and down and are not liquid - or easy to access). Just as important, the average homeowner keeps $7,300 in liquid cash savings, compared to extremely low savings levels for renters that keep them living month-to-month.

Likewise, statistics show that the average homeowner’s net worth is 34 times that of a renter, and 77% of homeowners say owning real estate helped them achieve their long-term financial goals.

It’s no wonder that 94% of millionaires attribute real estate ownership as a significant part of how they obtained and held their wealth.

Signs, signs, everywhere signs (of the real estate market)

“Signs, signs, everywhere signs, 
blockin' out the scenery, 
breakin' my mind
Do this, don't do that, 
can't you read the signs?”

So goes the old 1970s song originally by Five Man Electric Band but redone by Sacramento's own Tesla in 1990. Those lyrics certainly still apply not only to highway billboards and guide posts along old country roads, but also signs of things to come in just about every aspect of the economy. In fact, there are signs we can look for that will tell us if the market is on the rise or ready for a slight decline; a seller’s or a buyer’s market.

Of course, home sales don’t act in a vacuum and things never line up perfectly, so some cities or regions may show several conflicting signs at the same time. But, in general, by tracking certain telltale data, we can see trends in the real estate market and know when it’s a smart time buy, sell, or invest.

Signs of a hot (sellers) market:

1. Buyer demand is high, especially in the starter and mid-price ranges.

2. At the same time, housing inventory is low, feeding demand.

3. Based on that combination, sales keep closing at steadily rising prices.

4. Houses don’t stay for sale long, with Days on Market low and dropping.

5. The volume of home sales is higher than average and increasing.

6. You’ll see multiple and competing offers on many listings.

7. Sellers offer few amenities, credits, or incentives to buyers.

8. You see few price reductions, as home usually sell at or above asking price.

9. Realtors see a lot of traffic on their listings, including on-line and in-person visits.

10. In fact, the release of new listings are often an event unto themselves!

Signs of a cooling (buyers) market:

1. Unlike a seller’s market, you’ll actually see increases in the housing inventory available.

2. The Days on Market climbs steadily as homes don’t sell nearly as quickly.

3. Even when priced right, sellers see fewer offers on their listings, and far less bidding wars or competing offers.

4. Listings get less online and in-person views, and there is far less traffic at open houses.

5. Increasingly-desperate sellers start reducing prices at a greater rate.

6. They also start offering more incentives and credits to attract and appease potential buyers.

7. Bucking the trend of ever-escalating prices, new listings are priced at the level of recent closed sales or even lower.

8. Homes also sell for a smaller percentage of their original list price.

9. Due to decreasing demand, the volume of sales starts to lag.

10. Real estate ads get bigger, louder, and more extravagant!

Like we mentioned, these are just signs that point to a destination, but there are many stops along the way. Somewhere in between a white-hot seller’s market with fast-climbing prices and a stagnant buyer’s market with price declines sits many degrees of more balanced markets.

Here are some signs of a balanced or neutral market:

1. Inventory levels are normal compared to previous years.

2. There is no excess or surplus of housing inventory, with three to six months active inventory considered a normal range.

3. New listings are priced at or near prices of recently closed listings.

4. Sales volume is consistent and typical with the same season in previous years.

5. Median sales prices have stabilized, which can mean a normal negative or positive range with no huge spikes or valleys in prices.

6. Homes that are priced correctly sell within a typical 30 to 60 days, but Days on Market aren’t abnormally high or low.

7. Real estate ads (and blogs!) are a little smaller and less loud again!

Of course, Sacramento is in an extremely hot seller’s market right now, with a huge inventory crunch, rampant demand following redevelopment in the region, low interest rates, steep competition for buyers, and rising equity for sellers and homeowners.

But in the coming months and years as the market goes through normal and healthy seasonal and market corrections, you’ll be able to identify some of the signs along the way!

The lessons Warren Buffet wants to teach you about real estate.

The world’s third richest man has something he wants to tell you.  He’s practically imploring you to listen as he dispenses a parcel of the wisdom that’s made him the third-richest man in the world.  We hardly need to check his resume to convince us to listen, but the billionaire Chairman of Berkshire Hathaway and Svengali of investing has this message for you:

Buy real estate.

Of course it goes deeper than that, as there’s a right way to buy real estate and a lot of wrong ways.  Thankfully Buffet, always generous with sharing his philosophies, has left enough breadcrumbs for us to decipher his formula.

The biggest breadcrumb recently came in his annual letter to Berkshire Hathaway shareholders; a highly anticipated forum to pick his brain about the year’s fortunes, the market, and always-general advice about money the average person can chew on.  In this year’s letter, Buffet makes no mystery about his thoughts on real estate, "Home ownership makes sense for most Americans, particularly at today's lower prices and bargain interest rates."

So let’s pretend we had Warren Buffet in front of us and could ask him the basic questions about real estate and finance most Americans have.  I’ve assembled his answers from his annual letters but also interviews and articles.

Why buy now?
He’s oft quoted as to why now is a great time to buy, "It's a way, in effect, to short the dollar because you can take a 30-year mortgage and if it turns out your interest rate's too high, next week you refinance lower. And if it turns out it's too low, the other guy's stuck with it for 30 years. So it's a very attractive asset class now."

Is it better to buy real estate now or stocks?
"If I knew where I was going to want to live the next five or 10 years I would buy a home and I'd finance it with a 30-year mortgage... It's a terrific deal."

How about buying rental properties?
"If I was an investor that was a handy type and I could buy a couple of them at distressed prices and find renters, I think it's a leveraged way of owning a very cheap asset now and I think that's probably as an attractive an investment as you can make now." He’s also said, "If I had a way of buying a couple hundred thousand single-family homes I would load up on them."

What should we be cautious of when buying rental properties?
In this year’s shareholder letter, Buffet tells the story when he was a young man and bought a recently foreclosed 400-acre farm in north Nebraska.  He knew absolutely nothing about farming but had a family member who did ready to step in, and he did know about money.  What he understood was that there was value to the property as an asset because of the goods it could produce, and that those goods would increase in value as time went on.  He factored a humble 10% profit but the real boon was long term.  Now, the property is worth 5 times what he paid and profits have been much higher than expected.

So “focus on the future productivity of the asset,” Buffet advises.  In terms of real estate, that equates to the inherent value of the property in the market, not how much the property price will change in the short term.  “I thought only of what the properties would produce and cared not at all about their daily valuations,” Buffett said. “Games are won by players who focus on the playing field — not by those whose eyes are glued to the scoreboard."

With all the changes in the economy and the recession, is real estate still a sound investment?
Buffet still lauds home ownership as delivering on its basic benefit: that homes increase in value over time, and insists that still applies, in fact, more than ever.  "It's a totally sound premise that houses will become worth more over time because the dollar becomes worth less," he said at a Congressional hearing on the financial crisis.  But that doesn’t mean there won’t be fluctuations, and the recent real estate bubble was caused by overconfidence that prices would never go down, the ease of getting multiple homes, loans without proper income documentation, and no-money down loans, leading to greed in every sector that eventually serves as the pin that popped the bubble.

Is it better to wait cautiously for the perfect time to buy real estate?
If there is one thing Buffet teaches us it’s that there are micro markets within any market, and always deals to be had so there is no wrong time to buy, but there’s definitely a right time to buy.  Starting back in 2008 he admitted that buying when prices are low always feels risky and unpredictable because no one can tell what prices will do in the short term, but that’s exactly the best time to get in.  Once consumers wait until there’s some stability and predictably to the price curve, the bottom – and the best deals - are already over.  Luckily, we’re still in an ideal buying environment as prices are still low and interest rates are great, but that won’t last for long.

"If you wait for the robins, spring will be over," says Buffet.

Should people stretch to buy their dream home?
That’s the perfect formula for failure, according to Buffet.  Too often during the financial crisis homeowners spent more than they could afford, with volatile adjustable payments and stretched to every dollar of their income just hoping for short-term gain.  That’s the recipe to lose money.
"A house can be a nightmare if the buyer's eyes are bigger than his wallet and if a lender -- often protected by a government guarantee -- facilitates his fantasy. Our country's social goal should not be to put families into the house of their dreams, but rather to put them into a house they can afford."

So what three factors are most important when buying real estate?
Warren Buffet believes the three most important elements to buying a home as a great investment are: a fixed mortgage, affordable payments, and holding on to it for the long-term.  By keeping payments affordable (and stable) and looking to keep it for the long haul, you basically allow the asset to bear fruit for you.  "If home buyers throughout the country had behaved like our buyers,” Buffet says, “America would not have had the crisis that it did."

Does he practice what he preach?  
Warren Buffet, The Oracle of Omaha, is worth around $50 billion dollars according to recent Forbes estimates, but still lives in the 5-bedroom home in Nebraska he bought 52 years ago for $31,500.  That sounds to me like a he takes his own advice!