Even if the loan is non-recourse (OP is not buying in a non-recourse state), there are numerous downsides to walking away from the mortgage such as the credit rating hit, difficulty getting loans/mortgages for several years, tax consequences which can include underwater amount, possible influence on hiring decisions, harassment and stress, the awkwardness of needing to move out at what may be an uncertain time, etc. It’s not a good place to be for a young person.
It’s a great skill to be able to fix things yourself and spend weekends on home projects, but nowadays it’s common to instead just call “the … guy” and have him deal with it. I’ve known home owners who didn’t even own a screwdriver. I painted the exterior of my house a couple years ago. It was so unheard of for a non-professional in street clothes to paint their house in my neighborhood that I had the police called on me at least 3 times, with people driving by reporting me as a burglar.
Starter houses (400-500 range) in the DC area (inc MD/VA) go VERY quickly. There is not much supply. You might be able to get lower if one jumps into a gentrifying neighborhood at the ground floor.
I don’t know if anyone has brought it up yet, but lifestyle needs to be considered too. H and I bought our first house when we were 24. Every spare penny and most of our free time went to the house. Our life revolved around work (both had stressful jobs) and the house. NO travel, recreation, eating out, etc… NO buying new clothes.
We sold the house 3 years later (moved out of state) and lost money because the market dropped in that city.
I am not eager for either of my kids to rush into buying a house.
Buying my house in my early 20s has been a life saver. When I did get an itch to travel a bit, I rented it out. My son, 27, just bought a very nice 3B/3B just west of Baltimore for what you’d pay for a one bedroom condo in my tourist area. His mortgage is less than his rent was in his prior 750sf apartment about 30 miles from him now. My D, a junior in college, is already expressing an interest in owning her own home, most likely a small condo for her though to avoid trying to maintain a yard, etc, at least until she is settled down with a SO. One she determines her career goals and an approximate working area, she’ll most likely start looking.
I understand that real estate is not always an investment but in the the Northeast the prices and assessments just keep rising, and the rental costs are rising with them. There were a few stagnant years here but other than an isolated town or two in my immediate area where the opioid crisis has caused prices to fall considerably, everything else continues to rise.
@CountingDown, my S spent well over a year looking for a home in the MD/VA area and several times was outbid higher than the asking price. He moved from a Rockville condo (what a great town center) to a small town in MD that is so similar to where he grew up it was amazing. Both he and his GF are about a 30 minute commute from work, he in one direction, she in the other, but neither has to deal with that crazy traffic. I was really impressed with the house and with the town.
I wouldn’t want my S, who is 24, with good paying job, to buy now. IMO, the market is too frothy. Plus, interest rates are going to rise (3 planned for next year) and the loss of property tax deduction is going to hurt a lot of home owners - especially in the Boston/NY/DC corridor.
I “see” a big correction coming. Every time there has been big tax cuts for the wealthy and corporations (going back to 1921!) there has been a significant crash in US economy within a decade.
Also, young people don’t stay in jobs very long these days. My S only worked at this first company 1 1/2 years before leaving for another job. I have no idea, and either does he, how long he will be in at his present company, but I would be surprised if he was still there in 5 years.
I don’t think that’s accurate. It may be de facto accurate in the sense that most people don’t have much in assets to take if there is a default, but I think a well-off person who doesn’t have all of his net worth invested in a house can’t simply walk away from a bad outcome and be free of it. He’ll be sued and wind up with his other assets exposed.
Some of the federal law changes under the Obama administration, I believe, did retroactively relieve borrowers of their obligations, but the original contracts were mostly full recourse.
Actually, here’s an article that gets into this issue. It looks like in some states it is non-recourse.
Edit: as the to original question, I think some areas of the country still have downward pressure on prices. If you put your life savings up as the 20 % equity, you may well find it cut in half in a rather short period of time. At some point that pressure will reverse and head the other way, but its not showing signs of it outside of some regionally hot markets.
Well, it is, and investments can lose money. The fact that real estate is commonly leveraged (i.e. people buy with borrowed money, often around 80% of the price) means that small fluctuations in price can cause big changes in how much equity you have. For example, if you buy a $100,000 house with an $80,000 loan, and the price goes up 20%, you have doubled your equity. But if the price drops 20%, your equity is wiped out. (This is not including the effect of transaction costs, which are significant for real estate transactions.)
@NEPatsGirl – a lot of young people are heading out of MontCo to find something more reasonable. Howard County/Columbia and Frederick/Mt. Airy are pretty popular for folks who have jobs in/near DC/Baltimore but want to buy something sane.
That said, we didn’t buy til we were 37 and the kids were already in school. Had to get the student loan/day care/save for down payment years out of the way first.
I think it is essential for 20- and 30-somethings who are renting to actually SAVE some money. It is easy to blow every cent you have on eating out or ordering take-out almost every night, bar tabs, not to mention clothes, electronics, cars, and inflated rent in hip areas. Running up credit card bills.
Like, you are paying $200 or more a month for the latest i-phone and data plan and cable, etc, but can’t get to work when your car needs a repair because you don’t have $400 to fix it. I’ve certainly known a few.
OP- I would discuss his plans to rent rooms in his house. He needs to check on legalities and all of the hassles. There will be tax consequences as a landlord, paperwork… Who is he willing to let have access to everything… So many issues. Not quite the same as subletting your college aparrtment.
@ucbalumnus it should have read smart/good investment. I guess its hard for me to see the downside if you buy beneath your means, have a good down payment, can get in at the 4% offered right now (I just signed a refinance on Monday), and know your locale ins and outs, but I am by no means an expert on real estate.
@consolation, I agree that saving should be a priority for these 20-30s. I would also agree they live below their means to do that. Just because you can afford the lease on a BMW doesn’t mean you shouldn’t drive a Civic. And just because you can afford to rent a luxury condo in the city, doesn’t mean you shouldn’t buy a cottage in the suburbs. First rule of adult economics…pay yourself a minimum of 10%, either by way of retirement fund or other investment. Second rule…have a safety net for emergencies of at least 3 months pay, preferably 6 months, and then don’t touch it.
Prices continuing to rise rapidly is not a promise of future returns. If anything it is a warning of a future correction. The northeast also includes a wide variety of real estate market that have a wide variety of different trends. For example, Hartford Connecticut is in the northeast, yet shows a very different trend from what you described. The median sales price in Hardford was $165k at the start of 2007, reached a min of $93k in 2015, and is currently ~$120k. The metro closest to the area I grew up in upstate NY shows a different trend from both your description and Hartford. It had a median price of ~$165k in 2007, it reached a min of only $155k (2013), and is currently at ~$180k There was little fluctuation, but the increase was slower than inflation, so it would still likely be an investment loss.
We’ve talked to my son a bit about this. He’s in his first apartment in NoVa. He’s a few miles from his office, right off the beltway. I think right now being in an apartment is better for him, nothing to fix and an easy life. He could afford a condo in the area, but I’m honestly not familiar enough with condo’s to know if they’re a good idea or not. He is no handyman, though Santa is bringing him a starter tool kit that hubby insists everyone needs to own. His career focus is defense contracting, so I also don’t see him leaving the area. I could see him retiring from where he works now, he’s not one to embrace change. My positive I see with owning is it’s essentially rent control. His apartment will go up each year, once he locks into a mortgage, that’s it.
I agree. Except that I would amend this to say that all 20 and 30 somethings should try to save whether they rent or own. The irony was that when H and I were very young homeowners we not only did not have any money to spend on fun, but we also had no money to save. My D and SIL who have always rented have always been savers.
@eyemamom, our sons sound similar. My son has no real desire to leave the area, as long as he can afford to stay here. He is frugal with both his money and my money. He is willing to live at home for several months to help afford down payment, even if it means a relatively painful commute. I think he needs to work for at least a year, make sure he likes the job, and figure out where he would really want to buy. Safety is a big issue for me, even if he’s not too concerned about it. I’m happy he’s thinking in this direction, but I want him to have a little fun too.
