I really want to tell this couple it's okay to buy a house.
Let's call them Grace and Jim, both 35 years old. They live at Jim's parents' place in Toronto with two kids, aged 2 and five months, and they have differing views on buying a home. Jim, a self-employed musician who describes himself as being conservative with money, is nervous about taking on the financial burden and sees houses as overvalued. "These are mainly my issues, not my wife's," he said. "I am well aware of that."
Grace, who stays home with the kids while doing a little freelance writing on the side, is ready to buy. "We just keep saving and saving and putting it off," she said. "And now, here we are with a sizable down payment, and we're still hemming and hawing. We've got to bite the bullet."
I've written a lot of contrarian columns on buying and owning homes in the past couple of years, but I'm not anti-ownership. If you can truly afford a house and have realistic expectations of where the market is headed, then go for it.
Based on what they told me, Grace and Jim can truly afford to buy. What keeps me from giving them an unreserved thumbs up is their insistence on living in Toronto, rather than the less expensive suburbs outside the city. "All of our family is in Toronto, and we were both born and raised here," Grace said. "My husband travels quite a bit, so with the two young kids we want to say close to my in-laws."
In terms of a down payment, this couple is golden. They pay $450 in monthly rent to Jim's parents, but save enough to have $120,000 ready for a home purchase. Their income is a little more problematic because of Jim's non-traditional job. However, Grace plugged their household income into my Real Life Ratio spreadsheet and came away encouraged.
The Real Life Ratio is designed to show prospective or current homeowners whether they can balance the financial demands of home ownership with saving for retirement and household costs such as daycare and car loans (Download the Real Life Ratio interactive spreadsheet here). Grace got a score of 71.6, which means a home is affordable based on her and Jim's income and frugal, debt-free lifestyle (See Grace and Jim's Real Life Ratio).
The complication: She used their preferred maximum mortgage payment of $1,700 per month, which means the couple's borrowing ceiling is roughly $350,000 (assuming a 3-per-cent five-year mortgage). Even with a $120,000 down payment, that doesn't buy much house in Toronto.
Grace says the couple is willing to live in a townhouse, or buy a home with a basement apartment that can be rented out. In any case, a quick run through the Realtor.ca website did uncover a few townhouses in the city in the range of $470,000 or so.
Jim, the housing skeptic, worries that prices are too high right now. "My first degree is economics and, looking at this market, I'm thinking, whoa, it's way overvalued." And yet, he concedes that waiting for prices to fall hasn't worked out. "We've been doing that for years."
It would be unfortunate if Grace and Jim bought just before a price decline, but they shouldn't worry if they can stay put for 10 to 12 years at least. That would be long enough for the market to recover from any setback in the next few years.
Grace and Jim say they're willing to stay in the house they buy, but will they? I recently asked the people in my Facebook personal finance community how old they are, how long they've lived in their house and how much longer they plan to stay. The surprise was how many younger buyers with just a few years in their homes had near– to medium-term plans to move.
So, are Grace and Jim good to go? Provided they buy on a 10-year plan and make any needed home-buying compromises on location rather than price, the answer is yes. What's more, they should get moving.
For one thing, delaying a home purchase for years could compromise their ability to retire with ample savings and a paid-off house. They also need to act soon if they want to lock in today's low mortgage rates. If they wait, they might learn the hard way that a modest rise in mortgage rates has more of an impact on affordability than a comparable fall in home prices.
Grace and Jim, home buyers through history can tell you that money worries and a house are a package deal. But I think you can handle it.