Property Grunt

Monday, July 10, 2006

Am I stupid? No you are not.

Below from a reader that was feeling a bit edgy about a purchase. It has been edited to protect the identity of the reader.

am i stupid?

My family and I are moving to NYC We are about to go into
contract on a coop. in a really nice area or just over 1 mil -- we can
afford to pay the mortgage, but barely. Are we gonna get creamed?
Would we be better off renting for two years and then looking to buy?
What do you say?

This was my response.

First of all you are not stupid. You are in fact showing a tremendous amount of intelligence by asking whether this purchase is viable for you.

Since I do not know your financial situation and the specifics about your apartment, I am going to make some assumptions. If I am incorrect, please feel free to address them with me.

We are entering a buyer's market with rising interest rates and more inventory hitting the market every day. What makes things particuarly interesting is the new attitude that "there is a mortgage for everyone." Those of us that are armed with interest only and balloon mortgages are now walking into the heart of darkness and it is unlikely some of them will find the light. Yes. I read alot of comic books.

Market conditions do play a key role in your purchase however who you are and your circumstances are also important factors.

In your words you state "we can afford to pay the mortgage, but barely."
What type of mortgage have you chosen? If it is a fixed rate mortgage, what measures are you going to take insure that you make those payments? If you decided to utilize an adjustable rate or interest only mortgage have you done the numbers to see how high the payments will be once rates rise? And when they do, do you have the income to cover those payments? Does your income stream have the stability to cover these contingencies? What other investments do you have that can be liquidated to pick up the slack? It is imperative to get an idea of your financial health.

You mention you have a family. I am assuming your household contains offspring. How many children do you have and what are their ages? If you have newborns, you maybe paying for a nanny, unless either you or your spouse are staying home. If they are entering preschool or private school that's more money out of your pocket. And don't get me started with tuition for college. Along with the mortgage payment, this will be also taking a big chunk out of your budget.

Here's the brightside.

Thanks to the population, that area has gentrified into a very family friendly environment. It also has some really good public schools with a great family community that can assist you with your household needs. So you have followed one of the cardinal rules of real estate which is to buy to sell.

Renting is good since it is gives you flexibilty. However that is two years of equity you will never see again. And there is definitely a psychological aspect to owning that is not only beneficial to you but for your entire family.

Regarding the popping of the bubble, there are those who are convinced that New York City is prepared to weather the storm and upon looking at these articles below it seems its position in the real estate world has been elevated.

Top Executives Return Offices to Manhattan

Paying Any Price to Live Here

However there are others who feel that the future of NYC is not so bright.

Any adjective works, as long as it's not "strong"
Current conditions in market invite many descriptions, few of them positive

Some argue that we are entering a new dark age for real estate.
Who is right? I don't know. By the time the smoke clears and we see who is left
standing, it'll be too late to do anything.

I have to acknowledge one thing which is New York City is a different animal comparing to other markets like Buffalo. If you were considering to buy in Buffalo, I would tell you to kiss your ass goodbye. I have nothing against Buffalo, afterall they invented a great way to eat chicken. But greasy chicken bits dripping with hot sauce is not enough to bring people to their city unlike New York City which has tons of people coming in everyday.

So what should you do? I don't know. I am not you. That is a decision that you and your spouse need to make. But what is important is that you have a strategy. So talk to your mortgage broker, ask them what the worst case scenarios are. Ask for comps from your real estate broker. Figure out if this is the right price for this apartment.

And remember. You are not stupid. By doing your due diligence you are not only protecting yourself but fufilling your responsibilties as a provider of your family. If anyone thinks otherwise tell them to go to Buffalo.


As you may have noticed I did not lobby the reader to make any particular decision. That they needed to figure out if making this purchase was in their best interest and they are the only ones who can make that decision.

I take a very conservative approach on real estate purchases, particularly with where the market is now heading these days. However I understand the subjective nature of real estate. People have to analyze the risk and reward ratio and see what decisions work in their favor.

You must be the best judge of what works in your favor because you are the one utlimately bearing the burden of buying a home. Thefore it is in your best interest to lighten the load as much as possible. Remember. There is no substitute for self preservation.

Even with current market conditions, there is nothing wrong with pursuing a good deal. Just make sure it is a good deal.