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Posted by adam.dada on August 28th, 2007
Zion, IL
By A.B. Dada
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Now that the housing market is tanking — as I’ve been saying here for well over a year and in private conversations for 3 — many of my previously bullish friends are now turning bearish. The most common question I get today is “How did you know, if the media said housing prices always go up?”
Simple. For thousands of years, we’ve understood interest and we’ve understood debt. Those who spend beyond their means will either be slaves to the asset-owners who are loaning them the capital, or they will lose that asset because they can’t afford it. I have a few rules for buying a home:
1. Never borrow more than 3X your average annual income for the past 3 years.
2. Never put down less than 20%.
3. Never borrow more than 40% of your gross annual income for ALL your debt, including a home loan, credit cards, and auto loans.
4. If you MUST carry a credit card balance, pay at least 6% monthly and don’t add any more to the balance until it is paid off.
5. If possible, and within your finances, borrow for 15 years.
6. Always always always get a fixed rate for the full term of the loan, with no pre-payment penalties.
7. Correlation to #6: Never ever get an adjustable rate mortgage, ever.
I created a new site that lets you type in your income and debt loads, and it calculates for you exactly what you can afford. Go check it out at True Mortgage Calculator and see how scary the figures are based on what you can afford.
Sidenote: Why 20% down? In the past, we’ve seen housing markets decline in value locally, and in those times we’ve seen housing prices fall 5%-50%. I picked 20% because this is a safe place to be compared to MOST market declines in housing so you aren’t upside down for the typical market decline.
August 29th, 2007 at 11:42 am
The fact that you may be upside down for a few years does not have any effect on what you are paying monthly, so just ignore the market ups and downs, and in the long run real estate always goes up.
August 29th, 2007 at 11:49 am
Replying to this in a new post today, thanks!
August 29th, 2007 at 12:01 pm
[...] Scary Housing Bubble Mortgage Calculator [...]
September 1st, 2007 at 9:54 pm
[...] A look at the housing market and the housing bubble from a free market perspective. Cities, make up your mind — cheap housing, or expensive housing? Now that the housing market is tanking — as I’ve been saying here for well over a year and in private conversations for 3 — many of my previously bullish friends are now turning bearish. In the past, we’ve seen housing markets decline in value locally, and in those times we’ve seen housing prices fall 5%-50%. I picked 20% because this is a safe place to be compared to MOST market declines in housing so you aren’t upside down for the typical market decline. read more [...]