Buying a Home

What It Means

For most people the biggest purchase they will make in their lifetime is that of a home. Owning a home has many benefits: it is great to be able to call a place your own, to put down roots in a community, and to personalize your living space however you like. Buying a home also makes a lot of financial sense: instead of paying rent to a landlord, you pay off part of your mortgage (home loan) every month and come closer and closer to owning the place outright; meanwhile you can deduct the interest you pay on the loan from your taxes. As you build equity (the value of the property minus the outstanding balance, or what you still owe, on the loan) on the home, you increase your financial security.

But owning a home is also a huge responsibility: on top of paying the mortgage each month, you must pay property taxes, sewer bills, and various other costs. You will also spend time and money on maintenance and repairs; everything from pruning the trees to fixing the furnace is up to you. You cannot afford to neglect this upkeep, for if you do, you will lose value on your investment in the long run. Another potential drawback of owning a home is that it is more difficult to move on short notice. Depending on the real-estate market where you live, it may take time to sell the house, and in the meantime your money is tied up in the property. Remember too that while owning a home is generally considered to be one of the safer investments you can make, it is not risk free: the value of the house can decline for a variety of reasons, including a downturn in the economy, the closure of a school in your neighborhood, or damage caused by a natural disaster.

Because buying a home is such a major commitment, it is important to inform yourself and consider many factors carefully before you take the leap.

When Did It Begin

The history of land ownership varies from country to country. In the United States, where owning one’s own home has long been thought of as a fundamental part of the American Dream, it was Thomas Jefferson (1743–1862) who established the notion that every citizen has the right to own land. “Nothing is ours, which another may deprive us of,” Jefferson said in 1786.

After the Civil War (1861–65) and the onset of the Industrial Revolution (the rapid, major change from an economy based on manual labour to one dominated by industry and the manufacture of machinery that spread from England to the United States in the early nineteenth century), the concept of the American home shifted away from the independent farmstead, where the family cooperated in both economic and domestic work, to a headquarters for the wife and mother and a place of comfort and refuge to which the children and husband returned after long days at work and school. In the late nineteenth century this notion of home was available only to the privileged few, while the working classes lived in crowded apartments. By the end of World War I (1914–18), however, there was a movement afoot to make home ownership available to a broader segment of the American public.

Still, the most significant rise in single family homeownership came in the aftermath of World War II (1939–45). We trace modern notions of the American Dream to this postwar period, when a generation of young adults, eager to put the sacrifices and communal necessities of the Great Depression (1929 to about 1939) and the war behind them, sought privacy, security, and space in home ownership. Fueled by this demand, the housing industry experienced a massive boom in the construction of affordable single-family homes within driving distance of urban centers of employment. This was the beginning of American suburbia as we know it today.

More Detailed Information

The first step in buying a house is to assess what you can afford. A number of factors, including your income, your monthly expenses, the amount you have saved for the down payment, and the interest rate on your home loan, will determine this figure. Financial advisors recommend using the same ratio of income to payment as when you rent an apartment: your mortgage payment should be equal to or less than 25 percent of your monthly income.

Once you have a rough idea of your price range, it is time to shop for a loan. There are several different types of home loans, but the safest ones are fixed-rate loans: the interest rate and the monthly mortgage payment stay the same over the entire term of the loan (usually 30 years). In order to calculate the specifics of your loan, a mortgage broker (a person working at a bank or mortgage company who arranges home loans) will need to see many of your financial records, including tax returns, recent pay stubs from your job, credit card statements, bank account statements, and so forth. The broker will also obtain a copy of your credit report (a detailed record of your credit history compiled by a national credit-reporting agency). The higher your credit score (a measure of how financially responsible you are) and the lower your debt-to-income ratio (the percentage of your monthly income that goes toward paying off credit card debt, student loans, and other debts), the better the interest rate and the higher the loan amount the broker will offer you.

It is a good idea to prequalify for a loan before you begin house hunting. Being prequalified means that a bank or mortgage company has promised to give you a loan for a certain amount, and the paperwork just needs to be finalized. Shopping for a home with a loan in place puts you in a good position to negotiate when you find a house you like, because the seller can be assured that you can get the financing.

The best way to begin your house hunt is by listing your personal criteria: How many bedrooms? A garage? A basement? A garden? Make separate lists of your wants and needs, and try to find a balance between the two. It is also a good idea to narrow down your search to a couple of neighborhoods that meet your location priorities (for example, where the school districts are good or where your commute to work will be short). Especially if you are a first-time home buyer, it is a good idea to work with a realtor (or buying agent), as he or she will have access to more listings than you and will be able to represent you in the negotiating process.

When you find a house in your price range that you want to buy, the next step is to make an offer. The seller has already listed a sale price, but the amount of your offer will likely be lower unless the real-estate market is extremely competitive. Your realtor will be able to advise you in making an offer that is realistic and fair. He or she will also do the work of drawing up a formal offer in writing. The seller may make a counteroffer, and eventually both parties will agree on a price. Before the deal is closed however, it is wise to get a professional home inspection. An inspector will alert you to any problems with the condition of the house that might cost you serious money, or even health problems, down the road. Usually there is a contingency in the offer you submit stating that if the inspection uncovers major problems, you can walk away from the deal or renegotiate the price.

Other important steps before you can finalize your loan include buying a homeowner’s insurance policy (the lender will not sign off on the loan until the property is insured) and paying closing costs (a long list of fees and payments associated with transferring the property into your name). Finally, after all the requirements are met and the documents are signed, the keys to the home are yours.

Condominiums

For those who wish to own their own home without taking on the full burden of caring for a single-family house, condominiums offer an excellent alternative. A condominium can be a unit of a larger building, like an apartment, or it can be a freestanding structure, like a townhouse. In either case the condominium belongs to a group of similar units, where maintenance of the entire complex (including the lawns, lobby, laundry room, and any other spaces that are common to all the residents) is centralized. This means that a management company takes care of the work, and all of the condominium owners share in the cost. The sale price of a condominium is also more affordable, in general, than that of a detached single-family house, so a condominium can be a great option for people who want to reap the financial benefits of property ownership, such as tax credits and investment value, but are not ready to be solely responsible for a house.

Recent Trends

In the early 2000s interest rates on home loans reached historic lows in the United States. Whereas in the late 1970s and early 1980s the typical 30-year mortgage carried an interest rate near 20 percent, a buyer could get a 30-year mortgage in 2003 for around 5 percent. These low interest rates contributed significantly to a major real-estate market boom. First-time homebuyers entered the market in record numbers, and many people approached home-buying as the best investment they could make. In 2004, while the stock market experienced a downturn, more than 8 million homes were sold in the United States, many of them to buyers purchasing second, third, and even fourth homes as investments. These buyers planned to rent out the additional houses while the property values continued their steep increase and then sell the houses a few years later at a substantial profit. Indeed, in desirable metropolitan areas in Nevada, California, Washington D.C., and Florida, property values went up an astonishing 30 percent during 2004; it was not uncommon for sellers in these markets to receive multiple offers on a home and often to see competitive bidding drive the sale price well above the original asking price. By 2006, however, although interest rates remained favorable, many regions of the country were experiencing significant slowing in real-estate markets, and investors were rushing to unload their properties while they could still expect to make a profit.