Recently I had a call from a friend who is trying to buy his first home. He is currently buying into a very hot real estate market and has so far had no luck getting a house. The major reason he hasn’t got a a house is the market is so hot he has to overbidding the asking price by at least $20,000 with no conditions just to get a shot at a house.
During the discussion it came out that he is trying to get a house near the top of his range given to him by the bank. He knows that he would end up house poor if he did it, but he is still shopping in that range. Why would anyone over extend themselves like that? Simple, he thinks he deserves a single detached house regardless of the consequences.
At times like these I hate to do it, but at the same time someone has to point out what he wants and what he can really afford at this time are two different things. It is time to face reality that overextending yourself is never a good idea. Your cash flow situation ends up so tight that you end up frustrated and often tempted by credit to buy all those things you need for your first house like a lawnmower and appliances. I know this can happen because I ran the numbers myself when I bought my first home. I could afford the over $250,000 the bank approved me for, but I wouldn’t have money for anything else. I’ve seen the pain this causes for people when they get into this situation a few times now, it isn’t very nice.
So what’s the solution? If the plan isn’t working perhaps it is time to change the plan. Perhaps my friend should start out in an apartment condo and keep saving for a few more years. Then when the market isn’t so hot go shopping for want he really wants with a larger down payment and hopefully a larger income.
Shopping in a hot real estate market is a brutal thing to have to go through and I don’t wish it on anyone. Yet markets like that tend to produce bad decisions based on emotion rather than facts. If you are in a hot market take care to avoid overextending yourself otherwise you might find yourself selling your beloved house when interest rates go up because you can no longer afford it.