To say that the current housing market is likely to punish those who don't painstakingly evaluate their decision to buy a home would be an understatement. In most parts of the country, there's no strong tailwind of buyer demand to provide a safety net against home purchase mistakes. With all that in mind, here are three questions that prospective home buyers would be wise to incorporate into their evaluation process:
1. Are you prepared to own the house for five to seven years?
The housing bubble is long since gone, and with it, the old idea that you could count on a 5% to 10% average annual appreciation in your home's value. Today, that only applies in a few high-demand niche markets. That means if you have to move again in a few years, you're probably going to pay a high transaction cost. Between the costs of selling, and the possibility of a decline in value of your home, or a minimal increase, you may end up netting less money than your outstanding mortgage principle.
So examine your goals. If you're thinking you'll be able to flip this home for a quick profit in a few years, the odds are against you in most markets. If you don't see yourself owning the new home for at least five years, you're probably better off from a financial transaction standpoint in your current home, all other factors being equal.
2. Are you buying the best house in the neighborhood?
The value of the best home in a less-than-ideal neighborhood will always be constrained by its sub-par locale, but the effect is magnified in a soft housing market because buyer demand does not exist to offset the neighborhood factor.
The current situation is not a bust -- the housing market is recovering in selected markets -- but it's a sluggish, uneven recovery, with some metropolitan areas stabilizing, and others showing signs of falling into a double-dip. In such a soft market, think extra carefully about location liabilities: Does the street have many homes worth less than the one you're considering? Too many vacant homes? A rainwater drainage problem?
To guard against such issues, do the following test: Examine two homes to the left of the house, two homes to the right, and at least four across the street. If more than three appear to be of lower value than the prospective house, eliminate that home from contention, and proceed to the next potential house in another neighborhood.
3. Does your monthly budget have room for an oil shock?
Determine exactly how much it costs to commute to work from the prospective new house.
Some probably view this spring's $1 per gallon surge in gas prices as an oil shock, but the reality is prices could vault much higher if Middle East civil unrest worsens, or if some other factor reduces the supply of oil to the U.S. for a sustained period.
Given that uncertain energy climate, it's best to stress test your monthly budget for higher fuel prices. If your 45-mile commute to work at roughly $4 per gallon would become a serious hardship at $6 per gallon or $8 per gallon, then a comparable home closer to work -- perhaps one that has a 20-mile or 15-mile commute -- may make more sense, depending on other cost and location factors.
It's also worth considering your potential new home's ease of access to mass transportation, because as long as the U.S. continues to use gas as its primary transportation fuel, the nation will be vulnerable to an oil shock.
There's no way to sugarcoat it: Buying a home is more complex than it used to be. In addition to adequate living space, good schools and public services, and the potential for quiet enjoyment, prospective buyers have to think in longer terms, and gauge risks they might once have ignored. The boom is over, and the safety net is gone -- so be careful.