Purchasing Your First Home: Questions and Decisions to Consider

I’ve recently talked about some topics related to housing, such as the advantages and disadvantages between a house and a condominium, as well as the difference between a variable-rate and fixed-rate mortgage.

I must admit that my interest was more than just academic, as I now have a personal stake in the matter as well: In January, I’m going to be moving into my first home! We’ve purchased a condo in a new complex under construction, and our unit will be ready by the beginning of next year.

Due to the large amounts of time and money involved, buying a first home can be a stressful experience. I know that it’s been a stressful experience for the both of us. There are a lot of decisions to make, and a lot of important factors to consider.

The main factors to consider

When looking for a new home, there are many important questions you need to ask yourself, before you start looking:

• Quality: What kind of area do I want to live in? What kind of home do I want?
• Location: How far am I willing to commute? What am I looking for at this stage in my life?
• Price: How much am I willing to pay? How much are the taxes and fees?

Due to economic uncertainty, I insisted that the total amount we paid had to be under a limit. The place had to be affordable, the taxes and fees had to be reasonable, and there had to be a buffer in both of our incomes in order to handle a sharp interest rate hike. Since our closing date would likely be either late 2010 or early 2011, we also had to think of any possible impacts of the 2011 tax credits.

The market in our area has risen greatly over the past few years, so sticking to these criteria necessarily meant that a lot of properties had to be excluded.

We didn’t completely agree on what we were looking for in the beginning. I was interested in somewhere peaceful with some sun and land, but located close in to the city. She was interested in somewhere downtown, where all the action is. I already travel downtown everyday for work and study, so I don’t really miss it that much. On the other hand, she doesn’t have as many excuses to go downtown, so that’s why she would have liked living there.

The problem with what we both wanted is that a house near the core is incredibly expensive, and a condo downtown would have insane property taxes and condo fees. We could conceivably “afford” it, if by “afford” you also mean sacrificing long-term prosperity for short-term consumption, and spending most of our current income on the property.

I could not and I still do not see the sense in spending a lot of money just because it’s there; it may not be there tomorrow. After a bit of pushing and pulling, we both came to the realization that we would have to compromise and find something acceptable to both of us.

There is a rule that the most you should spend on your home should be no more than three times your income; I believe that cash flow is even more important, so I adapted this rule and said that whatever place we buy, all of the mortgage, taxes, and fees combined could not exceed 33% of our net income. Net income is a better metric than gross income, because you never receive all of your gross income. A big chunk of it is taken away by the government before it even finds its way to your bank account.

With these rules in mind, we also said to each other that if we couldn’t find a place, then we would just continue renting. Many people think that renting is just throwing money away, and my girlfriend used to think that too, but that is not really true. Whether you rent or own, you are exchanging value for a place to live. There are always costs associated with that; the costs just happen to be different and more direct when you rent.

Indeed, I believe the two real advantages to home ownership are the psychic “feel good” profit that comes from owning something, and the leverage that you get from the banks. Leverage, however, can also be a dangerous tool; when the markets go down, it can wipe out your equity. Leverage also eventually hits a wall; when interest rates and borrowing costs are artificially kept low, and when too much consumer credit has been issued, the bubble cannot continue and must collapse.

Deciding on our first new home

We finally decided to purchase a unit in a new condo complex being built not far from where we live. It is not the perfect unit, but it meets our needs and what we are looking for.

Our total expenses, minus principal, will be less than what we currently pay in rent. Our total expenses including principal will be less than 33% of our net income, and will still be less than 33% of our net income even if interest rates rise by a couple of points.

There is really nowhere where we could have gotten a house for a similar price, unless we went much further out which would mean 2 cars and longer commutes, or we went for a small, old house closer in.

Taking all of the considerations in balance, the condo probably makes the most sense for now; it’s next to a subway terminus, the vacancies in the area are very low, the rents are high, and a new university campus is opening up, increasing activity and demand in the area. With all of these factors in consideration, it could even make a decent rental property if/when we do decide to go for a house.

Compared to the condos downtown just a short distance away, it is also much cheaper, and the property taxes are half of what we would have paid downtown; even the parking space is only half the price. We would have been throwing away so much money had we bought over there, instead!

Pitfalls encountered along the way

No two individuals are alike, as me and my girlfriend re-discovered during our search for the ideal place to live. We each had our own idea of what we were looking for, and at times it became a tug of war between us, as we each wanted something different.

We then remembered that our preferences were largely subjective, and there’s no reason that we should force them on the other person. We came together, as a couple, agreed on objective price and location metrics to help guide us, and then we eventually decided on a unit that we could both agree on.

After purchasing, we went through a period of buyer’s remorse and cognitive dissonance. Here are some of the thoughts that we had:

* Man, this place is SMALL. Where am I going to find the room to put all my stuff?
* Our view could have been better! I wish we had started looking a couple years ago, then we could have paid less, and with more choice! (Except, we were new graduates two years ago and didn’t have the money.)
* Are we really paying THIS much? What if we’re actually in a bubble and prices collapse? Man, am I going to be pissed!

We realized that we have to pay anyways in the end, no matter where we live. Our apartment right now isn’t exactly cheap, either, and we could only save serious money there if we were also willing to take a serious hit to our quality of life.

A bubble isn’t that big of a risk, given that we’re not relying on the capital appreciation of the property to make a profit or to keep ourselves afloat. We’re buying it as a home to live in, and a home that we can afford through our income. So long as the value merely keeps up with inflation, we aren’t losing much there. If the shit hits the fan, then so be it. We’re not up to our necks, and we’ll deal with the situation if it comes.

Here are some things that we’re going through now, as we prepare for the new place:

• Getting rid of old furniture.
• Preparing for the move.
• Thinking of how we’re going to decorate the new place (my girlfriend is most excited for this!)

In my next post, I’ll talk about questions we asked when deciding how to finance the property, and the decisions that we made.

So, have you recently made a big purchase and moved into a new home? What do you think about our choices and decision criteria? Is it folly, given the Canadian ‘housing bubble’?  As always, I’d love to hear your thoughts and take on things.