Real Estate the Ramsey Way - Buying In This Crazy Housing Market? (Watch This)

Episode Date: October 9, 2023

How do you know you’re ready to buy a house when the market is crazier than your Uncle Joe at Thanksgiving dinner? In this episode, learn whether you can afford a home, plus learn the number one thing that controls your housing decisions. Helpful Resources: Find the only real estate agents in your area endorsed by Dave Ramsey.

What's up, guys. Welcome back to another episode of Real Estate, the Ramsey Way. The housing market has seen some pretty weird times lately. And while things aren't as crazy as they were just a couple of years ago, it's still not a walk in the park out there. Interest rates are up, prices, while steady are also high, and there just aren't enough homes for sale. Bottom line is you really need to be informed on what's happening in the market and how it affects you. So stick around and listen to my conversations with folks struggling with things like. affordability and refinancing in this unusual market. Caitlin joins us up next. She's in Arizona. Caitlin, welcome to the show. How are you? Good. How can we help today?

Yeah, I just had a quick question in regards to overcoming a negative mindset. So I'm 29. I live out in Arizona. I'm a single mom. And as you know, our housing market has been to Zell Intent, to say, at least. And I'm paying about 60% of my take-home pay and rent. I can't buy in this market. I don't make enough.

I pulled down to about 40 last year. And I just feel like I'm spinning my wheels. And that treading water feeling is really starting to get to me. So I was hoping you could provide some insight on that if possible. Yeah. I mean, I'll be honest, Caitlin. I'm like, I would feel that too if more than half the paycheck is going to housing. That's a big chunk.

So tell me a little bit more about kind of the situation because you are obviously in a more expensive, I don't know if it's an area or apartment or what it is. Is there other options for you to change locations just to at least catch your breath and bring it down to at least, you know, we recommend 25, 30%. But even if it went down to 35%, that would change your world. Right. Yeah, I live in a two-bedroom apartment right now and I pay about $2,000 a month. I had looked at going down to one bedroom, the only trouble with that, it would only save me maybe 300 bucks in months, but I actually work from home.

So I need, and I have my son here with me too. So I don't know how we would make that work. Yeah, no, too better. Yeah. Yeah. Have you pressed? Oh, sorry. I was going to just say, have you, have you driven, you know, 20 miles either direction of where you currently are just to see other prices?

Right now I'm already kind of on the edge of what I would consider to be a safe area. So I can look maybe a little bit deeper in the Phoenix, but I just want to make sure we're still safe and everything's good like that. So I work remotely. So I could probably buy in other states and other markets, but my son's father's here and I really just don't want to leave the home state. For sure. For sure. And how much do you make a year? I pulled down about 40 last year.

Okay. What are you doing for work? I work at a call center for an insurance company. Okay. So there's only two ways we can go about this. I mean, we can spend less and we can make more. So do you have any payments in your life that we can get rid of? Do you have any debt?

I don't have any debt. I do have that going for me. I don't have any debt. And I do anticipate my income going up. Actually, I had a conversation yesterday with my supervisor that made me feel like maybe something close is on the horizon. for getting my pay up. I think it's just this waiting period between making more money and trying to find something cheaper to rent.

It's just, it's mentally been draining me, I think. Sure. Well, especially as a single mom, I mean, you're, you got your, how old your, how old your son? He just turned six. His name's Mason. I think he might be listening. That's awesome. Hi, Mason.

That's awesome. Oh, well, you're doing an incredible job, Caitlin. I mean, you know, the, the hard thing is, it's nothing that you're doing wrong. it's just that the numbers are kind of stacked against you. And so like George said, you know, an option of bringing in more. I mean, right now the job market is just insane. And so I would push and look to see if you can even, I mean, 40 grand, you know, you're doing fine. But man, people are paying just insane amounts of money right now for jobs.

And since yours is not like very specifically specialized, you know what I mean? Like I feel like you could do all sorts of things, even with the experience. that you've had in this insurance role. So, you know, I don't know if it's looking for something else or a different apartment, but one of those two things really probably needs to shift for your own sanity, Caitlin. You know what I mean? Even temporarily. Yeah, to have the numbers work for you, it's going to be a big deal.

Do you have an emergency fund, Caitlin? I do, yeah. Okay, three to six months in there? I still have my baby one. I have a $1,000 emergency fund and then I have about $4,000. in my actual emergency fund. So I still need to build that up. Okay.

I think building that up may help with a little bit of that financial piece and anxiety about what if something happens if one check doesn't come in, what are we going to do? And if you get that in place, then I'm going to start saving up for a house slowly. And I know it's hard because there's not a lot of margin right now, but that feels like it's the long-term goal. And I'm hoping that all this craziness is not forever. And so a year from now, hopefully we're looking at a very different picture. And you are work from home.

And so it does open you up, but I know you've got to still stay close. close to home because of the situation with your son. And so there's not a ton of options here other than let's look at the budget. Let's do a budget audit. Where can we save every single insurance premium, every single expense? I'm going through that with a fine tooth comb going, how can I shave off $10, $20, $30,000. Yeah, absolutely. And then the income, I mean, the, yeah, income and apartment situations would change too, you know.

But you're doing a great job, Kail. And you really are. You're doing a great job for where you're at. Incredible. No debt. you have savings. I mean, all of it. You really are, but that 60%, oh, that hurts me. That's a tough situation. And this inflation stuff, I mean, it's hitting people all over their pocketbooks from rent to gas to food. And so there's just batten down the hatches and

let's get to work. Let's get the second job if we have to. Let's trim the subscriptions that we're not using right now. And all the little luxuries that we once enjoyed might need to go away temporarily. Yeah. For a season, because they're saying, you know, I read a report and they think in the next 18 months with just even the supply chain, all of that. But I'm like, I mean, the hard thing is after two years, I've just learned, who knows? Who knows? That's right. We can predict all day.

I remember April of 2020 doing Instagram lives. I did one like every other day just to answer questions. And I remember I said, I guys, I think by August, all this is. So I'll be over. It's all going to be over. Here we are. So I'm not predicting anything. But I think you just have to prepare with where we're at, the reality of what's going

on and what sucks is that that means cutting back some because the numbers, everything is going up. Yeah. And if you're single, you don't have kids, there's more options because we can go, all right, let's get you a roommate. Now, it's more difficult when you have a family, when you've got kids involved. It's not that simple. Right. But if you work from home, that can open you up to a lot of options too. You may not want to live on the outskirts of town, but temporarily for a year, if we have to sign that lease to go, all right, we can now breathe and still hit our other financial goals. I'm okay with that. And it's amazing what peace of mind even does. right like we can talk about the numbers and the percentages and all of that all day long but there is just

something to be said about when you do have margin it gives you a level of peace like a level of like you can take a breath and sometimes it's worth the things you never thought you would do i never would live this far from wherever right people make these claims and then when life starts hitting you and you think okay is it now i would rather live far farther away yeah and actually have peace of mind and margin and enjoy life a little bit more than everything just getting sucked out of the paycheck. So much out of our control, too. And so I always like to go, what is in my control? Yeah.

So in Caitlin's situation, if I'm anyone listening right now, I'm going, all right, let me make a list of ways I can make more and ways I can spend less. I'm going to make a list of five things. And I'm going to go, okay, which one can I go do this week, this month? And just start trying things. What can I sell on Facebook marketplace that's been sitting in the closet for a while? What is that second job I can take for a few months to just supplement my income, temporary, rarely. Yeah. And so if you start doing all of that, and that's why I love the budget audit, it's kind of a real nerdy thing, but you go, man, I'm way overpaying for auto insurance.

Let me connect with Xander. Oh, my gosh, I just saved 100 bucks right there. And you start doing that in all areas. We've talked about this on your show, Rachel, with cable and internet. And how can we start shaving all of this down, our phone bills to where now we have $200 a month and margin? We can breathe a little bit. And it's not easy. I'm not trying to make it sound like it's just... No, but it's the stuff that's kind of the auto draft, the auto pay, where you're just like, oh, and then you look up two years. You're like, wow, I've never pushed on that or seen that. You know what I mean?

And doing that, it does. It gives you some more margin. Yeah, you've got to advocate for yourself and get yourself in a better financial position. And that's why our plan works in good times and bad. I mean, imagine if she had all these debt payments looming their life. Yeah. Great work, Caitlin. You've done a great job.

Good job. Tanner is with us in Washington, D.C. Hi, Tanner. How are you? I'm good. How are you? Better than I deserve. What's up?

So my question is, I'm curious about the, The flexibility of spending more than 30% of your take-home pay on rent, found that pretty difficult to do, especially in like an urban area, like DC in downtown. I make around 90,000 a year post-grad 23-year-old. I got that $20,000 in cash and $7,000 in an investment account, and my only debt is around $7,500 in student loans. And I spend about $2,000 a month in rent, which is my biggest expense by far. But I still find myself able to save and spend less on other things.

I'm just curious your take on that approach. Okay. Well, we tell folks to put 25% of their take-home pay aside for housing. And, no, math works in every city and in every state. You don't get a pass on math because you're in Washington, D.C., even though Congress thinks you do. Yeah, I was getting ready to say. A lot of people think they do. Yeah, a lot of people in D.C. think you do.

you don't. And the purpose behind it is not that 25% is magic tanner. The purpose behind it is don't be house poor. If you find yourself able to save and able to invest because you keep all other parts of your lifestyle so low, then you're okay. But what happens to most people is when they've got a high cost of housing in their budget, it squeezes their budget and there's not room to save up to buy the next car so the next car becomes debt and there's not room to save up for Christmas and Christmas becomes debt and there's not room to save up for a couch and the couch becomes debt because it's all going out in house payment and so in effect what you did is you you didn't you know by by squeezing yourself you did that now you're telling me you've made room

in your budget and you're doing okay then you know if whatever you want to do brother but here's the thing. Whatever you spend on rent is gone. I mean, you're just setting fire to $100 bills in the middle of the floor. And so the more $100 bills you burn in the middle of the floor, the fewer less money you got, man. I mean, it's a pretty simple equation. Yeah. Yeah, definitely reduces the ability to buy down the road for sure. Yeah, yeah, I mean, because you're giving it to them and rent. And so I don't know how you fix that exactly necessarily.

your situation. Maybe your commute is longer. Maybe there's a roommate involved. Or maybe you just say, it's going to cost me this and it's my choice and I'm an adult. Well, yeah, you're allowed to do all that. But our reason to give you, giving you the 25% guideline, it's not a rule. It's a guideline. It's so that you don't become house poor because if you're, for instance, going to get a mortgage folks in America, the stupid mortgage company will approve you for almost double that. and they'll approve you close to 50% of your take-home pay, 36% of your ratio, you know, and so, and that's not based on take-home pay, the 36, you can get a house payment up close to half of your dad-gum take-home pay. And there's just no way that budget works, people.

And, well, I'm in California. Well, California, they got to do math, too, even though your governor doesn't think so. You've got to do math, you know, it's not an option. Math is math, and it's not a moral construct. It's a math thing. Well, to win, Tanner, in professional world, financial world, you've got to sacrifice. Everybody who wins has to sacrifice something. And what we've done here with this 25%.

You are now having to choose. Do you want to sacrifice money, as Dave said, by burning those extra $100 between the 5% that we're talking about? Or do you want to sacrifice a little bit of your time? Now, you're living downtown D.C. That's premium. And I get it. You may work on the hill. Who knows what you do?

But you're there for a reason. But if you move out into the suburbs in Northern Virginia, I know it well. Yes, it's a headache. But we'd rather you sacrifice the right thing. And that's why we put this. I want people to understand what we're teaching here. It's not to be hard and fast on a rule. It's to help you learn what you need to sacrifice.

And in my situation, if I were in your situation, Tanner, I would be sacrificing my time, not my money. Yeah, 23 years old. Yeah. Yeah. You know, I will tell you this, Ken. I did it worse than he's doing it. Sure. worse.

Yeah, he's in good shape. My wife and I get out of college. And here's how stupid we were. We go and rent a, we have two dogs. We're just out of college. We've got two little jobs. We go and rent a three-bedroom, townhouse, luxury thing. Sure.

That's like five times what we needed because we thought it was cool. Do you remember what we're in the extra rooms? Nothing. Sure. Because by the time we finished paying the freaking rent, we had no money. Yeah. Yeah, so what we ended up doing was moving into a little one-bedroom apartment in a questionable, I don't know what those ladies down the hall were doing, in a questionable situation.

You were hoping you weren't on a vice episode. Indeed, man, I'm telling you. And we lived there for a year, but it was one-third the rent that we were paying before. One-third. And so that'd be like you had an $1,800 rent and we moved down to a $600 rent, right, you know, kind of thing today, in today's dollars. It was a lot less than that, and back when the dinosaurs were on the earth. But, yeah, but oh my gosh, wow.

Well, see, I hear that. I did the exact same crap. No, I get it. Because I wanted something nice and I had a job. Yeah. And I'd gotten out of college, and I deserved it. But I was stupid. A lot of 23-year-olds that are in a very similar situation to Tanner.

Now just think about this. If he gets a roommate and now he's saving, let's just call it $1,000, a month. Okay, splitting the rent. He's paying off that student loan debt of $7,000 really, really fast, and now he's just stacking money. So that's what we're talking about. Stacking cash. Stacking cash, man, so much smarter. The housing market isn't known for being easy to predict. That's why it pays to have a pro in your corner who's earned the Ramsey trusted shield. Ramsey trusted real estate agents are the top experts in their areas. Plus, they have experienced navigating changing market, so don't step into the ring alone. Find a real estate agent you can trust

at ramsysolutions.com slash agent or click in the show notes. Debbie is with us in Detroit. Hi, Debbie. Welcome to the Ramsey show. Hi, thanks for taking my call. Sure. What's up? My husband and I made a huge mistake. We moved into a house about two months ago and with the housing market being so crazy and lots of competition for homes, we made a mistake of buying a house for more than we wanted to spend. We paid over a list and appraisal, and we're now in a house that we just feel like we can't afford the mortgage payment. It also has a pool that is much more of an expense than we thought it would be. The house needs a lot of repairs and some things have come up in the last couple of months that we didn't realize we're going to need

to be repaired right away. So my question is, should we plan on selling it or stay for at least two years and then not have to worry about capital gains? But if we sell it now, we would probably walk away with, you know, losing about $40,000. There is no capital gain when you lose money. Right. But on the odd chance, if we were to make money. If you break even, there's no capital gain. Capital gain would only occur if you made a profit.

Right. So it doesn't sound like that's a problem. Yeah. But if we sold it for what we bought it, if we just broke even, we probably lose about 40 grand with closing costs and everything. So what's your house payment? Well, that's the other thing, too. It's more than what we're. We thought it would be with the property taxes are going to be more than we had planned for. So with property taxes and insurance, it's about $2,300 a month.

And what's your monthly take-home pay in your household? About $9,000. Well, you're slightly above what we would tell you, but not a huge amount. Right. It doesn't sound like this. Your house payment's not 40% of your take-home pay. This sounds more emotional than mathematics. We just we feel like we've been bleeding money ever since we went into the house because of the pool and the repairs that have been needed.

What have you spent on repairs? I'm sorry? What have you spent on repairs? Well, with the pool, it's been over $1,000. With a repair, we just had a garage door repair that was over $700. What did you pay for the house? So we paid $410 for it. And you had $1,500 with repairs and you're panicking?

Yeah. And you make $140,000 a year? Yeah, well, yeah. Yeah. This is emotional. It doesn't sound like you're bleeding out. It feels like you got a little scrape on the knee, but it's just a lot. It sounds like it's more stress of just we're having to do a lot.

I think you were super impulsive and you did something that you wished. you hadn't done and that's what's killing you. The math's not killing you. I mean, it's not ideal. Yeah. But I probably would just breathe a little bit here. Okay. You know, I, okay, here's the thing.

The house payment's not out of control. The repairs are not $28,000 in one month. There were $1,400 in one month. And you make $140. There's nothing here that's causing red sirens to go off and fireworks and panic. in the numbers. Okay. Now, I understand you have a deep sense of regret because you feel like you

impulse and overpaid. But so I don't want to trade a $1,400 repair and a house payment is slightly over the margins we teach, which are conservative, for a $40,000 loss. Right. Well, the other thing that I'm worried about, too, is we moved with our jobs because now we can do our jobs from anywhere after COVID. And there is a chance that my salary could be decreased based on. where we're living now.

Well, if that happens and you can't afford the house, we can talk about selling it then. But we don't sell a house on what might happen. The house might get hit by a tornado, too. Yeah. But we're not going to sell it because it might. Right. Debbie, do you guys have any other debt other than this mortgage?

We do have a car payment. We're all about 12 grand on a car. We only have one car. And then just from the move, we've got about $6,000 on credit cards. So it sounds like there's some other pieces to this puzzle. that are causing this stress. Do you have an emergency fund? We have about $25,000 in saving right now.

I would write a check and pay off the credit card and cut it up and pay off the car today. Right. And you guys need to get on a budget. You are not in control with your spending. Today's question comes from Jimmy in Kentucky. My wife and I are on Baby Step 3 and would love to buy a home, but we're nowhere near able to put down money on a house. We are concerned that the market will continue to increase before we can get a down

payment saved up? Can we use my VA loan to take advantage of the zero percent down payment to get into a house sooner and refinance in three to five years? Jimmy, I'm going to say no. I mean, VA loans are just, it's just not, it's not a great option. I mean, there's so much with the fees, everything that that is in that, it makes it a difficult, it's a difficult mortgage. Between FHA, VA and conventional, it's the most expensive unless you are disabled. If you're a fully disabled veteran, then they wave a lot of the fees and stuff. But it's not a good deal for you. And basically what you're doing is you're trying to find a way to game the system. You know, you want to scam the system. And the system isn't broke,

and it means delayed pleasure. And yes, house prices are going to continue to go up. They're not going to continue to go up like they have been. The market has slowed down substantially. That is not going to price you out of the market, Jimmy. What will price you out of the market, is doing it dumb and moving into something when you're broke and you have no down payment and you're not ready to buy, you're going to get in a problem. You're going to create friction here in your life. It's not going to be fun. And you're going to turn. We want you to have a house. We don't want the house to have you. Yeah. And that's what ends up happening so much. We talked about it on the show yesterday with George, that, you know, your home, it's such an emotional thing, right? It's like

where your family is. It's where you sleep at night. It's where you do your meals. I mean, like, It is such an emotional part of your life. And so many people rush into that. So it's an emotional part of your life. And it's usually the largest purchase you ever make. And so because of that, it's like people make not wise decisions when it comes to their money with their houses because they just let their emotions get ahead of them,

whether it's fear, whether it's longing for something. Plus, there's all these stupid people that are around you telling you all the time to buy some. You got to buy house. You got to buy house. You got a house. You can be a renter. You've got to buy house.

Oh, God. Oh, God. Oh, God. You're going to get priced out. Okay, okay. And, you know, what is your beautician and economist? The lady doing your nails is not an economist. Oh, my God.

You know, so stop listening to these broke people with their craziness, because I've heard that for 30 years. Yeah. For 30 years, I've heard I'm going to get priced out of the market. And I can tell you, real estate's considerably more expensive than when I started this show 30 years ago. But, you know, and it'll be more expensive 30 years from now when you're still doing the show.

So, but the God willing, the Creek don't. But, you know, oh my gosh. But there's a lot of outside pressure, family members, and everybody else. Oh, you haven't bought a house yet? Well, that. You've been married 26 seconds and you hadn't bought a house. Oh, my God. And there's all this craziness out there.

Well, that, and then on top of all the emotion of just the recent. Yeah. Real estate. I mean, all of it, right? So it's, it's, I don't know. There's a lot going on. I mean, 2020 was one of the highest increases in house prices in history. Yeah.

Of all time. I mean, in modern history. and 29% it went up. Oh my, that's unbelievable. Unprecedented, as they say in the COVID language. But yeah, oh my gosh. Yeah, that's just crazy. And so it scares the credit out of you.

But it's not, it's not, that's not going to be what happens going forward. It's also not going to crash. For those of you waiting on the prices to go down. Well, let me, but let's talk about this because I've been, there's been so much. I feel like even in the recent, probably like, week or two about the real estate market. Because there's, I read an article. this morning, the seven cities where it continues to increase substantially, right? So there was, so I read that.

And then there are places, though, that they're seeing, you're seeing prices go down. Go down. And so the important thing there is to remember that that still buyers, or I'm sorry, sellers, some of them are still in the mindset of, oh, I can make so much. They're still looking for a sucker coming from another city. So when you're seeing those prices, I just want to know your thoughts on it, is it going back to just true home value of what the, what the house is really worth versus the inflated prices.

And so when do you know what your house is valued at? Like a true value, after all the craziness of it going up so fast, is it that you can you still run comps? Do you know what I mean? It's going up so fast is a reality. Okay, so the definition of market value for real estate. When I was in appraisal class, about a thousand years ago,

is still in college, it's still the definition. And every real estate test you ever take to get your real estate license is when a willing buyer meets a willing seller and neither are under duress. Okay. Webster. Okay. Well, I mean, so here's the deal.

So you have a buyer and a seller and neither one of them are freaking out. Okay. The seller is not motivated by a divorce or a bankruptcy or something else. Okay. Okay. The buyer is not over-motivated because the last three houses they put offers in they didn't get. and so the marketplace is so white hot that the buyer is under duress. And so some of these buyers were paying above market value, but their purchase does not enter into an appraisal.

That property is not an actual indicator of value. Okay. Because one of the parties was under duress. Yes. You can't use a, okay, foreclosure on your street does not affect the value of your house because one of the parties was under duress. Okay. So that's not a value. That's a price.

So how are you, so how people out there that are. wanting to buy or something like how do you run comps now because i'm like usually you just run comps if one of them sticks up and shows you all are going to stick up right maybe maybe i mean if you if everybody was a white hot buyer in the whole area then the value probably has gone up yeah because the marketplace was into rest right right but if you got some one-offs like you know we talked about during the thing i live in a neighborhood where like like almost all the houses that sold and it's a nice neighborhood sold recently where California people moving in with California equity and the Tennessee people are sitting there going, I got a sucker on the hook here. They're going to way overpay because

they can't get a house. There's a shortage. And so they're going to, they're overpaying substantially overvalue. And so enough of that happens. Then other people get greedy and they're like, well, I didn't really want to sell my house, but if I could sell it for that, I'd sell it. Yeah. What the heck? And one of the guys I was playing golf with. We talked about that during the streaming thing that we're doing. He goes, I put mine on the market and put an extra $200,000 bucks on it, looking for one of those California suckerfish. I'm going to hook me one. You know, and it didn't sell. Yeah. And he said, I haven't been able to hook one, so the market has calmed down. The market has calmed down. And the migration from California or New York or wherever into these other markets, you know,

the southeastern markets primarily is slowed down. But we've had a million plus people displaced from just California and New York. Just those two states moved out into other markets. And that, it adversely affect what is a real value. But real value should be based on a calm, reasonable, wise transaction by both parties. Yes. And even that goes up three to five percent a year. Remember, folks, you never want to let the housing market control your housing decisions.

Only your personal situation and finances should do that. If you're prepared to buy or sell a home, then it's a good time to do it, even if the market is changing. If you're not prepared, then it's not a good time, even if the market looks favorable. And if that's the case, it'll be worth the way to get in a better financial position to do things the right way. Trust me, thanks for listening. Make sure to share this with the people in your life that are getting hung up on what's happening in the market and tune into the next episode where we really get tactical. about the steps it takes to purchase your next home.