Leave the Stretching to Exercise- Not Home Purchasing

"I've been approved for $200k- so let's find something at that price."

That's a sentence I heard last week. Change the dollar amount and it's a phrase that real estate agents have been hearing for quite some time.

Though this mentality might work under certain conditions, it can spell disaster. Let me explain.

Let's look outside the U.S. market for an extreme case. In the 1980's inflation in Brazil was in the triple digits. People would buy the most expensive house they could find under the assumption that the high priced home would be a bargain in a matter of months. High inflation and high appreciation helped the home buyer. Those who stretched were hedging on (not against) inflation.

America went through a mini-Brazil phenomena five years ago. Homes received a massive value surge that made low-end homes appreciate nicely. The real gainers though were the middle and upper end homes. America was experiencing a massive expansion phase and the market's appetite fueled a frenzy. Credit was easy- banks had global sources for any type of borrower.

Fast forward to today. Brazil-thinking can lead to disaster. Many of the homes purchased before the frenzy experienced a massive equity boost. In the past couple years much of the gain has been erased. Those who purchased at the peak are the most severely effected.

Now homes in many areas are not increasing in value. Sure, there are a few locations where prices are rising, but they are not the norm.

Those who finance to the last penny, that is, those who seek to spend the full value of their approval could face any or all of these consequences:

• Pre-approval does not equal final approval. The home you're building today may not meet appraisal on completion date.

• Interest rates fluctuate... though relatively low today, rates could rise tomorrow... especially if the economy is experiencing inflationary pressure. Though inflation can raise home prices, the effect on rates could exceed the difference.
  

• Recessionary conditions tends to deliver a bag of bad news that could impact your future income. Such times call for belt tightening not lavish spending.
  

So... if your lender says you qualify for a certain amount, my advice is to set your mark lower. Purchase a home you know you can afford. Try not to make your mortgage a stretch. I know... that's probably not what you want to hear. But that's the advice I'm currently giving. It's just a safer rule of thumb.

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Chuck Willman is a real estate agent specializing in relocation, first time home buyers and investors.

Gentry Realty - 480.292.0600

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Photo by Aaron Neifer