patrick.net

At some point, we need to realize what are the risks ahead and take a plunge. If you continue to save, the inflation might make your savings worthless. So, If I ever in that position, I would rather take a loan with min possible down payment(say 5% or 10%) keep the reserve. In this economy, I need one year salary in reserved. We are one income family. But, if you are two income, I think six months is more than enough, and put as much as down payment.

dont_getit says

If you continue to save, the inflation might make your savings worthless.

But just the opposite is also true: Deflation in house prices might make your savings worth more. And for a couple of years, we have been seeing housing deflation, so savers are winning, much to the annoyance of the Fed.

Inflation is a risk, but not certain. I'm betting that deflation in housing will continue for at least another 2 years.

Some Guy:

Depends on where "Here" is. The only stuff in my neck of the woods for that price are either

a) small (under 800 ft2)
b) short sales foreclosures
c) need MAJOR work.

I simply grabbed some numbers to prove my general point, but I managed to flubb the math :( I also neglected to account for the closing costs associated with the transaction. I've edited the original post accordingly.

My general point remains.

Is the necessary fuel is available (available cash or credit) to keep the engine running at a level sustainable for growth

Housing - summer buying season, 1st time buyer incentives, low rates and relatively lower housing prices led to a decrease in inventory. People were hungry to buy and those who could did. Primarily first time buyers - no movement up the chain.

In the general economy - companies scratched and fought to reduce their inventories and were fairly successful from what I've read. They have also cut costs to the bone and bottom lines have increased to some degree. But they still need to increase sales and I don't see that happening in any significant way for a while.

The engine will stall again and we will see the "W" shaped recovery hitting in all areas of the economy - including housing.

It's the taxes... and yes, the taxes are that bad where I live....

Anyhow, I'm not buying just yet, but when I do buy, the "how much do I keep in reserve" is something tha twill impact how much I am willing to spend. My bet is many don't consider the "reserve" when they are looking at how much they can afford.

EastCoastBubbleBoy says

It’s the taxes… and yes, the taxes are that bad where I live….
Anyhow, I’m not buying just yet, but when I do buy, the “how much do I keep in reserve” is something tha twill impact how much I am willing to spend. My bet is many don’t consider the “reserve” when they are looking at how much they can afford.

You make a great point in keeping enough savings in reserve especially given today's economy. Who knows how bad it'll get before things start to improve on the employment front. I find it hard to believe that the housing bottom is in for most metro areas. I am of the opinion that we are in for U shaped recovery not a V (recovery-less recovery). Here in San Francisco I believe that we are still in the early stages of the housing meltdown and watch out below due the tsunami of foreclosures on the horizon.

What if we start from the other end? I would expect you to buy either after market recovery (to, roughly speaking, 1999 + 30%) or when inflation finally hits. In the first case the economy would be likely at nadir and the state of job market would not require a 1-year cushion. In the second, more likely case, we will have no choice but to buy because I do not know any other option but RE to save a couple hundred thousand from inflation.

If your down payment + closing costs would wipe out all of your savings, you have not saved enough.

I've just recently closed the gap and have about $110k set aside for a down payment, but we're not going to start seriously looking at places until we decide for sure where we're going to live, and we have at least another $20k or so stashed away (we figure that should cover us for about 4 months should the worst happen). If inflation is high enough to make saving that extra $20k worthless, then you might as well say fuck 20% and get an FHA loan anyway.

The secret is jobs and most that have been lost are not coming back. We are in deleveraging and a credit crunch. We will not see consumption rebound; at best it will be stable with very slow improvement. Many have lost their net worth's in the housing debacle and others are being hurt by commercial real estate and to some extent stocks/bonds. Returns on money are low---people in their 50's and older need to save more $ to cover retirement costs. People that are retired do not have enough income to feel comfortable with former spending levels. This is a permanent shift away from consumption towards savings. It will prove to be a jobless recovery and very likley a "W". Growth due to government spending in the 3rd and 4th quarters and then a return to negative growth. Manufacturing recessions are "V" shaped and the last two recessions, and the current one have involved more services. Service jobs do not come back quickly--a jobless recovery.

The choices are a "W", an extended "U" or an "L". The "V" is not in the mix.

Do you have a 401k? I know it's generally verboten to take from your retirement, but if you do have sufficient downpayment for 20% and the mortgage is 1/3 your gross income, then you can go ahead and buy, save up again, and if anything should happen before you've replenished your cushion, you've got the 401k as the absolute final safety net. Not advice, just a thought if you really want to buy right now and cannot wait.

It's refreshing that you even ask the question. Just a few years ago, people were melting down their dental crowns and breaking open their kids' piggy banks just to get into an overpriced house without any regard whatsoever for a cushion. You know, because real estate just goes up and up and they were going to become bazillionares in a few short years, yada yada yada. Good on you for being rational. It's why I come to this site.

It depends on how long it would take to get back to 6 months. And do you have anything you could liquidate if necessary? I'm currently making offers but still have 6 months of reserves. My job is secure but I'm still slightly worried (I'm a pessimist). However, I own my truck and could downgrade if really necessary. I also have several toys I could dump.

Question for you EastCoast. You say that taxes are eating up your potential investment dollars. How would a mortgage mitigate that? I'd long been under the impression that the mortgage interest deduction was just a deduction, so instead of paying $5 to the IRS you pay $5 to the bank for the interest, but you're out that $5 either way.

Someone set me straight about that impression.

Bap33 says

@A1 …. I vote for a continued “\” followed by some more “|” and then an “L” . The only people on the West Coast of America that think the bottom is near or that there will be anything better than a deadcat bounce are the rotten MFers that make a living selling stucco-wrapped piles of crap to stupid people willing to get into debt.

I don't agree with everything you say. But I do agree an "L" is coming. A long, prolonged, "L". And for me, it's not a 'stucco-wrapped pile of crap'. It is a 'rotting pile of sticks'. But either way ...

As for the shape of the recovery... I head a guy on Bloomberg a few months back refer to it as a "Nike Swoosh" shaped recovery. Great visual. On the national level, this may make sense, but real-estate is so localized, that the broader trend really is not that important. I have seem some areas starting to bottom, other areas still have a way to go.

As far as the interest deduction goes... I've never been a fan the argument that you should by a house simply for tax reasons.You pay $5 to the bank, reducing your taxable income by $5, thus lowering your actual tax by $5x (your tax bracket). If your in the 28% bracket, then your spending $5 to save ($5x0.28=)$1.40 in taxes.

(Bap33, feel free to comment on my math)

About the 401(k). I have one, I contribute a reasonable amount given my age, income, and monthly obligations. If I were really up against it, I could always scale back how much I put into it per pay period, but I'm trying to plan in such a way that that doesn't matter.

As far as the numbers I threw our original (and then adjusted) they were off-the cuff, and not particular to my specific situation, as my concern is more the general idea of "how much cushion should one leave" in terms of months of living expenses, rather than get into the minutia about a particular individual situation.

I think that as a first time buyer six moths would be an appropriate reserve, as things always crop up. That said, when push comes to shove its hard to stick to. People such as Kevin are the exception, rather than the rule.

zetabeos1 says

I dont know why people use the term “credit crunch’ to describe ‘rational conservative credit/lending guidelines’

Economists and people who know what they're talking about were never using that term to describe home lending -- they mostly applied it to what was happening in commercial lending. Home loans were one of the few things you actually could get for the first few months of the year.

What was happening back then was neither rational nor conservative, it was just plain fear. Banks didn't want to lend any money to anybody because they had no confidence that they would get paid back. If that had continued, the depression would be far worse than it already is.

The sad part is that it wasn't the vile bastards who caused most of this mess that suffered during the crunch -- goldman and co were all busy betting on the collapse. The people who got hit the hardest were companies that have nothing to do with banking and local governments who normally rely on short term loans to make sure that bills get paid while waiting for payments to clear (in most industries, 30, 60, or 90 day periods before repayment are the norm).

Access to credit is one of the most important ingredients in a successful capitalist society. Without it, people couldn't start businesses or deal with catastrophy, and that would mean that those businesses simply never get created.

I think that as a first time buyer six moths would be an appropriate reserve

I think a lot of it depends on how safe one thinks their job is and if you have a backup income source (spouse, etc). The reason delinquent payers continue to rise is because many simply don't have the money to continue paying but are remaining in their home as long as banks let them.