When Should You Start Worrying About Buying a House if You're Young and Broke?
As you acquire the trappings of adulthood, you'll someday want to own a house. OK, but how do you do that?
Illustration by Wren McDonald
I only know one person my age who owns a house: A girl I went to college with who moved to middle-of-nowhere Arizona with her boyfriend after graduation. They both got jobs working for Intel as engineers, then they got married, then got a dog, then posted a million Facebook photos of said dog, then posted a sole picture of a house, until finally (and mercifully), they disappeared off of social media for good—presumably into an abyss of Pottery Barn catalogs.
Out of the list of adult milestones this respectable twosome has already accomplished, I'm personally ready for zero. But should I be thinking about saving for a house, or at the very least, know what it takes to do so? More to the point, should you?
Previously: My Attempt to Fix My Terrible Credit
Millennials have the reputation of not being in a hurry to settle down, and it's true that young people are waiting longer to purchase property than previous generations, a trend that's likely contributed to historically low homeownership rates. But this is changing as my generation acquires wealth and starts to want the stability my adult-but-boring Arizona friends have. So, fuck: I guess this is something I need to think about. How do people get houses?
Deciding to Buy a House
This house costs less to rent per month than my room in Manhattan. And $126,000 to own. Photo via Craigslist
I recently realized I pay the same amount of rent in New York that my parents pay per month on their mortgage. When people in NYC hear about the real-estate market outside the five boroughs it seems like a paradisiacal fever dream. Case in point: A friend recently posted a Craigslist ad on Facebook to demonstrate out that a two-story historic cottage with a fenced yard in our old college town costs the same as a windowless room in Bushwick.
The Internet never tires of making fun of people who pay $800 to live in a literal box, or $775 to live in a 90-square-foot apartment because of its "location." But her post made me realize that I could literally afford to buy that cottage, or at least think about buying it. I'm nowhere close to married, and would rather die than spawn offspring, but I do wonder if it makes sense to actually invest in something as opposed to paying landlords for the rest of my life.
Fernando Ferreira, a real estate professor at the University of Pennsylvania's Wharton School, empathically says no. Instead, he thinks, young people should be worried more about getting a good job or getting training that will eventually land them one. And if you're already in a good place, he stresses, go out and have some fun.
"Young people move quite often, to different cities, different jobs, etc., so renting is a more reasonable proposition," Ferreira told me. "Only think about buying a house when you get old and boring, and have to spend days and nights taking care of your kids."
That is my kind of financial advice: Go out, have fun, and don't worry about serious shit like houses until you have to.
However, when I called someone else for a second opinion, things seemed less chill.
"I think it depends how old you are," said Morris Davis, a real estate professor at Rutgers. "If you're 23, no, you should not be thinking about buying a house. But if you're 28, yes."
That stopped me in my tracks: I'm 26, which is closer to 28 than it is to 23. I also can't use the excuse that I'm not partnered up: Some research shows that only 40 percent of first-time homebuyers today are married, as opposed to 52 percent in 1980. The Federal Reserve also just declined to raise interest rates from a record-low of almost zero, meaning loans are relatively affordable and now's a pretty good time to buy. But where should my hypothetical house be?
Picking a Spot
In the Arizona city where my college friends bought their starter home, the average house price is $329,000, according to Realtor.com. But I do not live in Arizona, I live in one of the most expensive real estate markets in the country—according to the New York Times, the average cost of an apartment in Manhattan peaked this year at $1.7 million, with the median price of a one-bedroom a whopping $716,000. Would I have to be insane to consider staying here? Would I be better off in a suburb of Phoenix where the most noted cultural event is its annual Ostrich Festival, which actually sounds kind of amazing, but still?
"You have to buy smart and get lucky at the same time," explained Davis, the Rutgers prof. "So for example, if you knew to buy real estate in London in the 50s, it would have been the most spectacular investment you could ever make. But you had to know to buy in London—if you bought in Manchester or Nottingham or Dover, it would have been lousy."
Basically, he explained, when you buy a house, you're taking a gamble on the future economic prospects in the area. For example, if you bought a house in Flint, Michigan, in the late 70s or early 80s, your house would be worth nearly nothing now, because the city was in a state of financial emergency from 2011 to this past May. Pretty logical.
"People think New York is overpriced," Davis continued, "But is it? It's cheap compared to London and San Francisco. If you think it will look eventually like either of those places, you should buy a home there."
This is all a fantasy, since I'm roughly a million dollars away from being able to afford a million-dollar property—but if I could trick some really rich person into loving me by the time I turn 28, I would likely buy a house here in New York City. None of the experts I spoke to had advice about how to con someone into giving me half of their income, but one did an excellent job of breaking down the logistics of purchasing real estate. Which was, I guess, helpful.
Actually Paying for It
The first step to buying a house is saving up a huge chunk of money. A good rule of thumb is to expect needing to front 20 percent of the total cost as a downpayment. Once that happens, you have to find someone willing to help you finance the rest.
In the past, you would have to go to individual banks and try to find out what loans they'd offer you, like that scene in Boogie Nights in which Buck tries to get money for his stereo equipment store. Now there are automated tools, like one on real estate site Zillow, that allow you to get quotes from several lenders without leaving your apartment. You put down info like your credit score, income, and what other debts you owe, and the site spits back some numbers.
This is a good option if you're lazy, or if, like Buck, you used to be in the pornography business and don't want to be embarrassed by some moralistic banker. Zillow's algorithm is much nicer and much more impersonal.
"You should really should shop around," Skylar Olsen, the senior economist at Zillow, told me. "People spend more time shopping for a car than they do shopping for a mortgage. But that mortgage is going to stay with you much longer."
There are several different kinds of mortgages. There's a fixed-rate mortgage, which you pay off with regular monthly payments. But there are also adjustable-rate mortgages (ARMs), which initially cost less per month, but can then increase wildly in expense after a set number of years. ARMs get a bad rap because people are tempted by the low initial payments and don't understand—sometimes because predatory lenders don't explain it to them—that they should make sure they can afford the higher payments or they'll be screwed. (This is basically one of the reasons the financial crisis happened.)
Once you've identified what you can put down and how much the bank is willing to give you to pay for the rest, you should seek the services of a real estate agent. He or she will know the area well, presumably, and can tell you what to expect in terms of hidden costs, like property taxes and home owner's association fees, which can add up to additional $9,000 on top of the downpayment. Then comes putting in a bid on the house, and if you're the winner, a marathon session of paperwork.
"I think the reason people get nervous before a closing is that there's no turning back," Olsen explained. "You should expect to live in this home for if not several years, then at least a few years."
That hits the heart of why even contemplating buying a house makes my palms sweat with anxiety: That sort of decision requires projecting yourself years into the future, imaging the kind of person you will be and anticipating that person's needs and wants. My middle-of-nowhere Arizona friends picked up all the trappings of adulthood, but more than that they picked up the ability to do that, to see a path to a maybe mundane but actually probably very happy existence. To mangle a famous Scarface line, first you get the job, then you get the pet, then you get the house, then you get the kids. If that kind of stability sounds like a nightmare to you, you may not be ready for a house, and you might never be. Which is perfectly fine, of course. You can still go to the Ostrich Festival if you're into that sort of thing.
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