Buying A Home

Here are some issues to consider:

• In general, the longer you are likely to remain in a residence, the more advantageous it is to own rather than rent. If your job and family status are likely to be stable for the next few years, then your housing needs should also be stable. This means that it is time to think in terms of buying.
  
   
• In general, if your salary just shot up by 20 percent or more, now is not the right time to buy a house. Instead, use the extra income to save up for a year for a down payment, and you will find yourself in a much better position to buy at that time. 

( Note: the opposite advice applies if you have just received a one-shot bonus or capital gain. With a large lump sum, now is a good time to consider buying a house.)

In general, if the price of a house is not more than 20 years' rent on a comparable residence, market conditions are reasonable for buying.

Compare the rent on a residence with the price of a comparable home for sale, and figure out how many years of rent is represented by the house price.

For example, if the house costs $90,000 and a comparable residence rents for $500 a month, then the house price represents $90,000/$500 = 180 months = 15 years of rent. It is a good time to buy when this figure is less than 15 years. It is a good time not to buy when this figure is more than 25 years. Otherwise, this particular indicator is not decisive.

This simple formula does not apply to condominiums, because it does not include condominium fees. Personally, my inclination is to recommend that people who are buying their first home should shy away from condominiums altogether. Condominium complexes that appeal to first-time homebuyers have a tendency to turn into rental communities, because of the high degree of overlap between young renters and young buyers. Therefore, as an investment, condos can be highly speculative, and the price easily can go up or down 20 percent in a hurry depending on luck and timing.

Decide Where to Buy

The next big question about your first home is deciding where to buy. As the saying goes, what matters is "location, location, location."

The first step is to identify a neighborhood where you would like to live. People take into account factors such as crime rates, school quality, commuting time, and neighborhood amenities. Also, families with young children want to make sure that there will be other children in the neighborhood. List the criteria that are important to you, and focus on neighborhoods that meet those criteria.

Many people find that they cannot afford the perfect house in the perfect neighborhood. This means that you have to compromise. In the long run, most people find it easier to live with a less-than-ideal house in the right neighborhood than the other way around.

The best time to engage the services of a real estate agent is when you have identified the criteria that matter for you in choosing a neighborhood. Once you can articulate the factors that you consider important, the agent can tell you which neighborhoods meet your criteria and help identify houses that fit within your budget.