Wow, hard to believe that it is the middle of August. Hopefully you had the opportunity to take some time to spend on relaxation, recreation and got some much-needed downtime. Catherine and I spent a lot of time with family and friends over the past couple of months and it was truly a blessing.
Since the beginning of the year, I’ve covered several topics that span the financial planning. This month, I’d like to take a slightly different tack and discuss the ins and outs of buying a home. For many, it will be the biggest purchase you will ever make, one that is an enormous investment with plenty of long-term potential.
But the process can come with a great deal unanticipated stress that can diminish the joy of searching for your own place and viewing homes. Some of you are actively in the market and hope to become first-time homeowners. Others are looking to trade up, while some are contemplating the possibility of downsizing and may be in the process of listing your house.
For first-time home buyers, the process can be daunting. For those who may soon downsize, it has been many years since you’ve purchased, and the process has changed. So this month, I want to include a checklist of items you may want to consider when making a purchase. It’s not all inclusive, but understanding the basics, arming yourself with the right information, and putting a plan in place will ease stress and enable you to successfully land the home that’s right for you.
Let’s get started.
- Do you have a down payment? Putting at least 20% down is ideal. It avoids the need to purchase mortgage insurance and communicates to the seller that your finances are strong. If you don’t have 20%, there are programs for first-time buyers that allow you to put down as little as 3-5%, but expect to pay mortgage insurance. If savings is an issue, start today! Bonuses, tax refunds, and automatic drafts can be socked away. And family gifts can go toward your down payment. If you are downsizing and have owned your home for many years, you may have plenty of equity. In fact, you might just be able to buy your new home with cash. This may or may not be the route you should take, but we’d be happy to offer our thoughts on whether an all-cash offer is the most appropriate avenue.
- Time to budget. If you are a first-time buyer, how much can you reasonably afford each month for your house payment? Many first-time buyers forget to factor in property insurance, homeowner's insurance, and private mortgage insurance, if required.For those looking to downsize and head into retirement, you may be balancing a different income stream with a new monthly payment (even if principal and interest aren’t part of the mix). In either case, we can look at the numbers and offer our thoughts. But please understand me when I say that I’m just looking at the finances. We can’t put a price on the intangibles – a new community, living closer to family, your grandchildren, or your kids.
- Secure the services of an experienced real estate agent. A good agent is worth his or her weight in gold. Typically, the seller pays the commission, so it behooves you to enlist the help of an experienced professional. He or she will explain how the commission works. An experienced agent knows the ins and outs of the market, how to best handle the many details you are sure to encounter, and how to negotiate with the seller. If you have owned your home for many years, you may not know that new listings hit the Internet hourly. Gone are the days when you get into your agent’s car and receive a list of homes you will be seeing that day. A good agent will empower you by setting you up to receive new listings via email based on your specific criteria. And don’t be afraid to be proactive by researching websites that accurately reflect what’s available. If you spot something of interest, your agent can set an appointment. Finally, some buyers don’t realize they can enlist the help of an agent when looking at a new home. But bring him or her along on your first visit to the models. In fact, some builders require an agent to accompany you on the first visit.
- Pre-qualified vs. pre-approved. At a minimum, get pre-qualified. It only takes a moment and it tells the seller your credit is solid and your income is adequate to handle the mortgage payments. In some areas, today’s market is extremely hot, and multiple offers aren’t uncommon. If this is the case, your agent may recommend you get pre-approved with a lender before submitting an offer. The process is much more detailed, and will require tax returns, W-2s, recent bank statements, paystubs, and more. But once you are pre-approved, it enhances your position with the seller, as it communicates that you are financially solid, almost eliminating the odds your financials will sink the deal. Either way, your lender will require extensive financial information. Having the information readily available will ease the process.
- Location, location, location. What part of town do you want to live in? Whether you have kids or not, the school district is important and can bolster values down the road, since families buy in desirable school districts. What about your daily commute? Can you handle 45 minutes or an hour in traffic each day? What are the amenities you require in terms of parks, recreation, restaurants, shopping and so on? Much goes into targeting an ideal neighborhood.
- Don’t sweat the small stuff. You love the neighborhood, the floorplan looks great, the schools are top-notch, but you don’t like xyz. Remember, paint can be changed, lights can be replaced, and the powder room vanity can be updated. Besides, the personal touches you add will make the home feel like it’s yours.
- The myth of the dream house. Be prepared to make compromises. One home will have just the right layout but the kitchen will be too dark. Another will back on to a park or have a beautiful view of the city, but the yard won’t be big enough. What do you want in a home? What’s most important? What projects can you undertake? Prioritize!
- Credit reports. This is important, so listen up. You’ve signed a contract but haven’t closed on the house. Don’t quit your job! And stay away from purchases that require new debt, like an auto loan! In either case, you may completely ruin your debt-to-income ratio, and your loan will fall through. Roughly translated: You won’t get the house.
- Get a thorough home inspection. In very hot markets, some buyers are willing to waive a home inspection to entice a seller who has received multiple offers. While inspections have limitations, you are rolling the dice if you forgo a comprehensive review. Attend the inspection and ask questions. One more thing: minor cosmetic issues that could surface may or may not be worth bringing to the seller’s attention in a very tight market. Do you really want to lose a house over a small issue? Again, an experienced agent can guide you.
Bottom line—Buying a home is a significant undertaking, but one that can be wonderfully rewarding. Preparation and research is well worth the time for what may be your biggest investment and a place you will call home for many years.
Now let's take a quick look at the current economy and markets.
Climbing to new highs
A recent report that came across my desk (LPL Research) showed that the S&P 500 Index has closed at 42 news highs since July 11, 2016. That’s the day the S&P 500 hit its first all-time closing high in almost 14 months. A quick review of data from the St. Louis Federal Reserve reveals the index of 500 large companies added five additional closing highs as July came to a close. Low interest rates and a Federal Reserve that is reluctant to aggressively raise interest rates has been a support for the market.
But I believe the most important long-term driver of stocks remains corporate profits. Note that I said long-term driver. We will experience bumps along the way. For example, we have had four declines in the S&P 500 Index that totaled less than 20% since the bull market began in 2009. However, the economy did not sink back into a recession, and corporate profit growth continued in a general upward trend, preventing a more serious decline, in my view.
With the end of July, Q2 S&P 500 earnings are forecast to rise a strong 10.8% versus a year ago (Thomson Reuters). While that’s down from a stellar 15.3% in Q1 (Thomson Reuters), nevertheless it’s the second double-digit increase in as many quarters. In addition, we’ve been witnessing an uptick in revenue growth, which has been aided by an acceleration in global growth.
Put another way, the fundamentals have been dominating the investment landscape.
Table 1: Key Index Returns
Dow Jones Industrial Average
S&P 500 Index
Russell 2000 Index
MSCI World ex-USA**
MSCI Emerging Markets**
Bloomberg Barclays US Aggregate Bond TR
Source: Wall Street Journal, MSCI.com, MarketWatch, Morningstar
MTD returns: June 30, 2017-July 31, 2017
YTD returns: Dec. 30, 2016-July 31, 2017
**in US dollars
I hope you’ve found this review to be educational. Let me emphasize again that it is my job to assist you! If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call. As always, I’m honored and humbled that you have given me the opportunity to serve as your financial advisor. Kind Regards, Rudy