Sunday, August 29, 2010

Useful "rules of thumb" for home buying

I don't own a home yet, but every time I think of buying one I do some research and find some useful information.  I've read each of these in different places at different times and this is my attempt to consolidate all of them.

What are the costs to be aware of?
  • Mortgage payments covering principal and interest.
  • Property taxes.
  • Home owner's Insurance.
  • HOA dues. Usually for condos, but nowadays many gated communities and new neighborhoods have these.
  • Other taxes, such as Mello Roos bonds in newer neighborhoods.
  • Estimated on-going maintenance costs.
Another thing to watch out for with condominiums are "special assessments" which are one-time levies to pay for significant repairs or renovations to the complex.

Aside from the very first expense above, one would have all of the other expenses even if one owned the home outright.

Typically, only the portion of the mortgage payment towards interest and the property taxes are tax-deductible.

How much home can one afford?

One rule I've heard is that one should buy a home that is no more than 2.5-3 times one's gross annual income. I've seen this ratio recommended to be as low as 1.5 and as high as 3.5.  Incidentally, this is what the price-to-income ratio looks in countries around the world.  As of 2014, this ratio is reported as being 2.4 for the US and it is one of the lowest.

Another is that the PITI (principal, interest, taxes, insurance) should be no more than 30% of gross pay, assuming no other significant debt.

Is the home a good value?

There's the cash-flow analysis where all of the expenses listed earlier in this post must be less than what the property would rent for.

Additionally, patrick.net has the following suggestion:
  • Annual rent / purchase price = 3% means do not buy.
  • Annual rent / purchase price = 6% means borderline.
  • Annual rent / purchase price = 9% means OK to buy.
Indeed, I've often heard that the general rule of thumb is that this ratio should be 10%.

Based on the above analysis, some low end condominiums work out to be "OK to buy", but if we were to subtract the HOA dues from the rent, then the ratio falls to where it's no longer favorable to buy. Condominiums are kind of tricky in that way.

Patrick.net provided an awesome "Should you buy that house?" calculator which allowed you to plug in a price for a given and address and used market rents off of craigslist to answer the question for you.  The calculator is no longer active.  However, one can get rent estimates for any given property/ area from Zillow, but those numbers may not be as accurate.

Rent vs Buy Calculator

This is straying from the main topic of the post (which is supposed to be about "rules of thumb"), but I got a note from a friend who suggested adding it. Rent vs Buy calculators, such as this one offered by the NY Times attempt to tell you whether you'd be better off renting or buying depending on things like:
  • Current rent,
  • Current home value,
  • Length of time that one plans to live there,
  • Prevailing mortgage rate (no provisions for a variable mortgage rate),
  • Projected annual increase/decrease in rent, and
  • Projected annual increase/decrease in the home's value.
Since the last 2 of these variables are almost impossible to predict accurately (especially given the current economic climate), it becomes really hard to get any concrete guidance from the calculator. But I guess it is still fun to play with the numbers.

Researching a purchase

These are some of the things one should get answers for when buying a home.
  • Research the school district.
  • Check with the local police station about crime in that area.
  • How old is the home?
  • How old are the plumbing and electrical systems?
  • What type of roof?
  • Have there been any losses or significant damage?
  • Is the home in a flood zone?
  • Check the Walk Score if you like to walk to stuff.
Of course, anything that's broken will probably be caught during the inspection, so this phase is mostly about catching things that may be about to break or that are not covered by a normal home inspection.

For new homes that are not yet built, check the following:
  • If considering a single story home, will it be surrounded by any 2-story homes?
  • Locations of public utilities such as transformer boxes, fire hydrants, mailboxes, etc.  Will any of those be on your property?
Looking for a home

Here are some websites that allow you to search and view the MLS listings that match a user's criteria.
Other useful stuff
Update 8/20/2013

Came across this video titled Don't buy a house without checking these 5 things.
The checklist includes: mold, pests, outdated fixtures and wiring, cosmetic headaches like painted over wallpaper and poorly done DIY flooring, and drainage problems.

Update 4/8/2016 

I did end up buying a house in May 2015.

Thursday, August 26, 2010

Favorite financial blogs

Around early 2004 I was considering buying a house, but what I saw then made me feel we were in a bubble. Basically, between the time I put a deposit on the house to the time I was supposed to go into contract, the house price appreciated 5% -- this was just a few weeks. Suspecting there was a bubble, I decided to do some research and started with a post to misc.invest.financial-plan. Someone pointed me to the CEPR website and on doing further digging found that a prominent economist, Dean Baker, had concluded that there was a housing bubble and had consequently sold his house and was renting! To me that was reason enough not to buy, and I backed out. I'm glad I didn't buy then. There was a period of time when I wondered if I would ever be able to own. The house that I was looking to buy appreciated by about 50% by 2005, but is now down about 50% from its peak, well below what would have been my purchase price in early 2004. Around that time was when I got interested in financial blogs and reading about the economy. Some of the sites that I have found useful are the following (listed in order of preference and subject to future updates):
  • Calculated Risk - This is an excellent blog. It's a super high-volume blog that contains snippets of economic news from all over the place. There are too many posts and I find it hard to keep up with this one. The real-estate forecasts from this blog simply cannot be beat. It's as though the blogger has inside information. Here is my post explaining all of the data that he follows.
  • Doug Short - This is a website that is not organized as a traditional blog, but rather a collection of continuously updated articles.  He provides excellent analysis of various economic indicators and end of the month market timing data based on the Ivy Portfolio,
  • MishTalk - Mish has made some great calls and provides excellent commentary on the news and has a humorous writing style. He also has a faithful set of regulars that post in his comments section.  He tends to cover things like politics and economic news from around the world that the above blogs do not.
  • Market Ticker - A decent blog but includes lots of non-economic discussion as well.
  • Patrick.net - One of the earlier ones that I used to religiously visit while home prices were still on the way up. This is mainly a collection of links. If you ever feel the pressure to buy, this is a great place to visit for a reality check.
  • TIPSwatch - I refer to this blog before making any TIPS purchases.
  • ZeroHedge - This is a high volume blog probably written by multiple people.  It is a "gloom and doom" type of blog but brings interesting pieces from all over and is not just limited to economic data.  I wouldn't recommend relying on their analysis or investment recommendations, though, as they tend to be a bit hyperbolic.  Often makes a big deal out of things that Calculated Risk regards as noise.
There are several others that I've read on and off but because they haven't been constant favorites for a long period of time, I've excluded them. If something else warrants being on this list, it will be added.

Updates

Sunday, August 8, 2010

My journey into meditation

I had heard about meditation as a child but it seemed something esoteric and "out there" and I never really bothered exploring it.

Fast forward to 1993-94. I was in graduate school and trying to deal with the pressures of it. Someone asked me to look into meditation saying that I needed to practice detachment. Since I didn't know where to start, I asked for some recommendations and was told to read "Zen Mind, Beginner's Mind" by Shunryu Suzuki. Having had no prior exposure to meditation, I found the book very hard to read. However, I got through it and tried to start practicing. I practiced for a few minutes for a couple of days. Then life got better, I stopped practicing, and I forgot all about it.

Fast forward again to 2002. I was going through a lot of stress in my work and personal life. As a result my physical health started to get affected. A myriad of stress-related symptoms -- high blood pressure, hormonal imbalances, etc. started appearing in my body. I experienced mild panic attacks. The message from the doctors was clear -- I needed to de-stress myself. But how do I do this? Some doctors recommended getting on anti-anxiety medication. I thought it was too early in life to start taking pills that would probably have to continue lifelong, in increasing doses over time. There had to be a better solution.

Around that time I visited India to get checkups from specialists there. They found the same things as the doctors in the US and some said I needed to start treating the symptoms aggressively before they get worse. Rather than starting treatment, I decided to seek some wise people to discuss my problems with. One of those people recommended that I read "Many Lives, Many Masters" by Brian Weiss. I bought the book and read it cover to cover on the flight back to the US. I was so inspired by the story, that I got on the net and searched for Brian Weiss. On his website, he had listed his book titled "Meditation: Achieving Inner Peace and Tranquility in Your Life". Included with the book was a CD with a 20-minute guided meditation. I bought the book and started listening to the CD. The first couple of days I listened to it in the morning and evening. After that, I only listened to it in the evening after work. In the morning, I started practicing "watching the breath" which I had learnt from "Zen Mind, Beginners Mind" several years ago!

A few weeks into this simple practice and I did much better on my health checkups. They started showing normal results, even though they were borderline. This encouraged me to stay with the practice. Since then I've taken other meditation courses. And through the years, I've tried to maintain a regular practice even though the technique used may vary. I'll write about some of those techniques in future posts.