Wanda's Blog From Billings, Montana

I saw this, too and to have 8 months of savings is ideal but reality hits and I know not all first-time homebuyers are there. Most don't have problems with the payment schedule but with closing costs.

I saw this too Wanda! Suzie is very conservative so I can understand why she thinks home should have at least 20% down and eight months in reserves. I agree with you, 20%  is very steep and very unattainable for many first time home buyers. If home buyers are buying to stay in the home for along period of time and buying simply for an investment, I think 3.5% is a safe down payment.

Wanda --- I saw her as well(wow---a new book, television and radio interviews, newspaper articles and NOW all this free Active Rain press) but Suze is saying the same things as Dave Ramsey has been saying for years --- have your financial house in order before you decide to commit for home ownership.  It's a rather retro way of thinking --- not such a bad thing in my opinion but everyone has to make their own decision and hopefully it will be a financially sound one. 

Ms. Orman's advise seems awfully conservative. I'm in North San Diego County and our average detached home price is in the low to mid $400s.  Even if first time home buyers are buying less than the average, 20% is a lot to come up with.

That's the thing I don't understand about these financial gurus.  How can renting for long periods of time be better for the pocket book than making a mortgage, when the payments are so close?

Hi Wanda, I didn't see the show. Her advice is conservative and for those few buyers who are able to meet the 20% down and 8 months of expenses saved up it is sound advice. However, in my area there would be a scarce few of our first time homebuyers who could meet that and consequently, a scarce few first time homebuyers.

If everybody listened to these Armchair experts than we would be a nation of renters and only the elite would own homes!   Following her advce the market will stabilize in about 20 years, give or take a decade.  Of couse if the whole country was PLEASANTVILLE (the movie)  her advice if right on target!!

That would knock off 90%  of all first time home buyers. . 20% is a lot . .plus 8 months of reserve??? 

Unrealistic

Wanda, Suze Orman's advice is correct; however, I also dont't think first time buyers will have the down payment much less the eight month of reserve.

Part of the problem with that advice is that we've been at the bottom of the market (in Phoenix) for almost 2 years. Our inventory is now declining, and sales are increasing. Buyers started hitting the streets on January 2 and they keep coming. We're doing the same volume today as we did last year during the tax incentive months.

Eventually the price will begin to follow the supply/demand trend and will increase. If a first time home buyer has the down payment for an FHA loan today, but waits until they can save 8 months reserve and 20% down, they may be priced out of the market, and have a much higher interest rate.

So while the advice can be considered conservative, it can also be considered faulty.

That advice would have been better 2 years ago.

Wanda, I saw this also - glad you have written a blog about it.  Suze Orman is a great speaker and presents her perspective in a very convincing way.  But one would have to agree that her base point is right on; but her base point is an opinion, and not necessarily the opinion of other economists.  Her point of view about 20% down, etc., is good for anyone who can do that, but it is not the only safe way to get into home ownership.  I like what she says about living more conservatively financially, but I'm still of the opinion that home ownership is far better than renting.

While I believe that Suzie Orman's expectation of 20% down nd 8 months in reserve is, perhaps, unrealistic for most, as someone who specializes in foreclosures - I understand her thought process.  There are so many people losing their homes right now because they had a job layoff or a short term medical issue.  Had they had 8 months of reserves in the bank, they would be still in their home.  Not filing bankruptcy and looking for a rental they can't afford either.

20% also keeps away the PMI which allows that much more of your payment to be applied to principal thereby knocking down the balance faster.

While Suzie may be far out on one side of the financial scale, I am afraid the general American public got way out on the other end and over-spent their earnings capability.

When I face a young couple looking to buy their first home I would rather work with them for a year to save money and work on credit issues THEN sell them a home rather than selling them now and watching them lose it in a couple of years.

I think she is right but she wouldn't sell a lot of homes.  LOL. 

Our real estate market would not be in the trouble it is in right now if it was an all cash market or a heavy down payment market.

I do think many people get started with an FHA.  I did as well and I appreciated the opportunity. 

I saw this too . She is not real estate friendly at all.  She also say's you should never pay the realtor fee that you agree to.  Always negotiate it down.

Wanda, Great blog!  Suze's advise is good, ideal, and yes conservative; however have to agree with many such as Bill... if a 1st time home buyer has the down payment for an FHA loan now but waits to build up 8 months reserve and 20% down ...  they may miss the opportunity of right timing.  Snooze you loose.  Buyers and investors have already started buying up the properties in our area since last fall.  I agree, too, home ownership is better than renting.  Follow the Golden Rule of Thumb: If you plan to rent for over a year, then you should buy and own.  Now is the time to plan ahead and if able, buy other bargains and rent them out.  Equity will build up again, don't go into it to flip, plan to hang on for your retirement.  Sell later or reap the in the rental income when property is paid off.

Suzie is not a friend to the realtors.  She should sell real estate herself before she makes statements.

Most first time buyers have the energy and enthusiam but lack funds in doing their first transaction.

Lets be honest...how many people really have 8 months savings tucked away after just purchasing a new home with 20% down....I must say sometimes Suzie is over the top and at least very conservative....

The whole process is all the more difficult because hardly anyone has job security anymore,

In our area we have honest lenders who will determine what is right for the buyer. Our local lenders are honest enough that we have very few short sales or repo's. The repo's are that much different in closed escrow price than any other comparable home.

Great post Wanda, and am glad you spoke up.  Suze has never been  proponent of real estate investing, and I have heard her tell people in the past to sell their home since it caused them so much stress when they were in debt.  She really is not well versed on the benefits of home ownership so your report on her advice does not surprise me.  It is her opinion, and not a very well researched one.

Dave Ramsey says mostly the same thing, except he tells everyone to take out a 15 year mortgage with the payment being no more that a fourth of your take home pay.  Doing this and having an emergency fund would have saved a lot of people a lot of grief these past few years.

It sounds like your market is similar to ours. I also agree that its few and far between when a first timer has any savings, let alone eight months! It's fortunate for us that alot of people don't listen.

I had seen this as well. While some may agree with her suggestions, the problem with this in my mind is that what she suggests is just about impossible for most and only fuels the fire for further decline in the real estate market, with comments way to general in nature. She is a respected financial expert, but not really a real estate expert, but unfortunately her name alone carries weight with many and those people will not necessarily dissect this advice to the level that applies to them personally or in the case of real estate, locally, creating more negativity in the real estate market.

Suze Orman gives great advice! Her advice for first time homebuyers is even more relevant in this economy!

It seems this topic of rent vs buy comes up quite a bit. On top of that considering FHA is considering increasing their minimum this is a nice little twist. Here are my thoughts

#1 - If we are ASSUMING that we are dealing with buyers that can make the payments you would be out of your mind not to buy a house right now! We constantly hear about home values but most people forget that the cost of borrowing will usually have a larger impact than prices in the long run (thinking amortization table anyone?)

If you plan on living in this home and it is in a great location for at least 5 years you will be ok people. Do we REALLY THINK home values will be less in 5 years than they are today?

#2 I love the speaker you have mentioned & at the end of the day what she is talking about is de-leverageing yourself as a homeowner.

For 1st time home-buyers I would agree that often times they need to come in pretty light, but at the same time I CAN GURANTEE that we have all worked with buyers that chose to go FHA so they could go after a bigger house.

So, I think the moral of the story is that EVENTUALLY (2nd purchase and thereafter) homeowners need to constantly be deleveraging themselves as they get older. If they continually are moving and only puting 3.5% down they are always paying practically all interest and no principal.

 

I am not one that agrees with Ms Orman, I have tried to watch her show several times and there is just something about her that rubs me the wrong way....  Yes buying a home today is a tricky proposition, and yes you can't be living from check to check but eight months and 20 down is a little to conservative even for this right-winger.   No better time then now to own, no better opportunities then now to buy !!!  As our parents before us and ourselves we struggled to get into that first home...  My parents first home was half of what my first car payment was and they had no clue how they would make that payment with six kids...  They did and the profited from the risk because the reward of home-ownership was well worth it...

I would agree more with the reserves than with the 20% down payment advice. With all the economic uncertainty of the last few years, cash is king and I'd much rather have money in the bank than equity in my home.

They're really two separate issues. Everybody, not just first-time homebuyers, should save  an emergency fund something like Suze (and Dave Ramsey, my personal favorite) suggest, 6-8 months of living expenses, just like everybody should be rid of credit card and other unsecured debt. That should be the priority over buying a home or any other investing.

I think the harder part is to do that and then to save up 20% down payment. I believe that real estate is one of the smartest investments, so a buyer can find a home they like that is affordable, that a 20% down payment is not unrealistic. A first-time buyer who does do that and then buys wisely (guided by a great agent!) will be positioned to use that investment in the future to sell and buy up, use as a rental and get tax and principal reduction benefits, or pay off quickly and have a real asset.  The first home purchase for a buyer is the most important one!

Frankly, someone who does have the savings and is debt free is more likely to make the smart decision when buying a home, and not overextend like so many did in the mortgage bubble. Home ownership is still the American dream, but it doesn't have to start with a McMansion and a huge mortgage. It can start smartly and grow from there.

20% down and 8 months reserves sounds great, but not very realistic.  The majority (at least 90%) of my 1st time buyers do not have even close to that, but were 1st timers the main cause of the housing bubble?  I don't think so.

I remind all of my buyers that additional expenses will pop up and that they should have money set aside for those expenses, repairs, etc.  But 8 months...?

so for a 200k house she expects buyer to come up with 40k down, closing costs of probably 7k and then an additional 10-15 in the bank. Unless the parents are footing the bill, I don't know any buyers that could buy!

I absolutely agree with Michael #3 above. Everyone needs to make their own decision. I personally think that from a strictly financial point of view , she is correct. But I also think that it is hypocritical to say this if you weren't saying 5 years ago and just started saying it with the release of your latest book..

Hi Wanda ~ Very well put together post.

20% down and 8 months of reserves sounds perfect. Since we don't live in the Land of Perfect though I don't see this being a realistic goal at all. I don't know many (any) buyers who can come up with 20 down and still have money in the bank!

I tend to agree with Julia. the money in the bank part makes more sense than the big downpayment.

Hi Wanda, Billings Montana sounds like a nice place to live:)

Jason

Financial Planners and Financial Advisors are not ‘real estate friendly'. The Downtown Toronto market is very active comparatively speaking, and yet, I have potential clients tell me, that they are differing buying because of their financial planner/advisor's advice.

Most people go into foreclosure because they lose their source of income.  While a 20% down payment is nice, I would rather have that money in the bank instead of in my house.   You can still avoid PMI by getting a piggyback mortgage.

Simple question.  Who would you rather be if you lost your job?  The guy that put 20% down and has 8 months reserves or the guy that put 10% or even 5% down and has 25 months of reserves?  I can tell you which one will wind up in foreclosure first all things equal. The guy with the larger down payment.

I'd much rather have smaller down payment and access to liquid cash reserves.   Remember, once you put that money into the house it is then no longer liquid and you cannot get access to it in an emergency.  You should only put down money that you will not need access to under any circumstances.

Suze is very conservative.  Most of my buyers are challenged by the closing costs.  But I do agree that 20% down is a good goal.

In a perfect world, we'd all pay cash. I'd rather hang on to my down payment for when I need it for those emergencies. Her advice is probably good for some, but not others. Taking a longer view, at least here in Utah where Real Estate and the related businesses account for a third of our economy, if everyone took her advice we'd crash, and no one could move. Or save the 20% down because our unemployment would soar...Great discussion!

Though I cannot stand her she is right in theory. But she should add that it really depends on the level of pricing in the different markets. Her statement means that the level of home ownership in pricey areas needs to be very much lower than in less expensive areas.

Wow, somebody pull the plug on her ! I would not have sold too many houses over the last 20 yrs. if buyers had followed this advice !!!!!!!!!!!!!

I think the market has really turned around...at least in our area. First time homebuyers should buy a new home now if they can.

Advice from folks like Orman are good for the ideal world, not necessarily the real world. First time home buyers typically need a little more information and direction to help them understand what options they may have. The more we know about financial options, the more we can help buyers ask better questions of their lenders.

I agree with much of the sentiment about Suze Orman's conservative advice. Again, she's not in the business of selling homes, but selling fiscal stability. A good number of first time homebuyers can manage with a lower down payment and smaller reserves, but I doubt Suze would ever suggest that strategy.

In our area rent is more expensive than a mortgage. Everyone needs to live somewhere so making a purchase makes far more sense.

Suze Boreman . . . what is she trying to do??  Topple the banks single handedly?!?  What would they do if people actually took her advice and never again applied for an FHA loan?  HA HA HA  And why do people need to hear common sense from a woman who's only success is to point out how dumb (she thinks) we all are?  People that give advice (en masse to the masses) are really saying "HEY DUMBASS, you don't know what to do . . . but here I am to save the day!  And that'll be $39.99" (the cost of her latest "I'm Smarter Than You'll Ever Be" book. 

Wanda - Don't even get me started on that nitwit (yes, that's right, I don't like her).  I too have read a lot of her advice, seen her interviews and even listened to her webinars.  Without getting into the gory details of what I think about her and why I don't like her, suffice it to say that I am so glad that none of my buyers have heeded her advice.

While I agree that homeownership is not for everyone; there are just some people who are simply not mature and responsible enough to buy a home.  However, when a mortgage payment becomes less than a rent, then anyone who wants to stop throwing their money in order to own their own home, then there is nothing wrong with them using the various programs and options available to them that will help them become a mature and responsible homeowner.  JMHO 

LOL.  Good shot, Carla.  Suze do love to hear herself talk.

I'm so glad you wrote this blog. I'm always a scuttlebutt when someone thinks she knows where our money should go. Always conservative stance has its downside, and while I agree it's a risk either way, the timing for such advice is a little out of place.

Jane Pacheco

I am glad you wrote what I have always felt in reading or hearing her!  Kudos for you in being outspoken and honest.  As I agree with some of her philosophy...I do not agree with it all.  Im glad to hear you challanged this! 

As Michael above in #3 said, it is a "retro" way of thinking... and in that respect... way back when my parents bought... in the 1940's... a home was something you bought to live in... not something you bought to ride the investment curve.  So yes, they put their 20% down, and yes they lived in it for over thirty years and paid it off.  But now... we do not find ourselves in a "retro" time.

But... this is one of the many things that I very much disagree with Suze Orman over.  Some of her "recommendations" are really, simply just wrong.  Sure, she has many good ideas, but in some things... she is not simply being "conservative..." she is wrong... and it irks me to see her being interviewed, come out with some nonsense, and then see the interviewer sit there... sharking her head yes... as if it is the gospel.

Ya gotta start someplace... and I believe as long as the income fits the ratios, and you have some reserve... that if you can relatively safely buy a home, you should.  Sorry, Suze fans... but she flubbed this one.

I am pleased to read the reasoned, thoughtful and mostly financially cautious comments on this post.

Wanda,  I agree with most of the comments that Suzie is way off the top with 20% down for first time homebuyers.  I have been around for sometime and can remember when you had to at least put 10% down or get assistance from family if you didn't have this in your savings account.  In the future going forward I do feel that first time homebuyers should have money to put down whether it is 3.5 %FHA or 10% Conventional then get closing cost from the seller with a fair market price. 

@Russ -right on dude! 

20% is almost impossible for most of the buyers we see here.

That would be tough to pull off in my market here in San Diego....

Suzie is not always right about real estate.  I saw her on a show where she featured a home in my area as a great buy.  It was a beautiful home, but when I looked at the comps, it was over priced for the area in which it was located.

Hi Wanda...Yes, it would be nice if saving so you had 20% down and an 8 month reserve but it would be nice if we all had pearly white teeth and naturally curly hair or at least hair with body.  (Getting any ideas on what I'm lacking?)

If a couple earns $60,000 annually between the two of them, they would need to save $40,000 to have an eight month reserve and $40,000 plus closing costs for a $200,000 house.  That means they need to save $85,000 or more.  How long will that take them?  How many years of renting?  What might a $200,000 home cost then...in a normal market

Wish someone interviewing Suzie would point that out to her.

Kate

 

Wanda - I can see Suze Orman's reasoning, but I think you make a lot of sense for first time buyers, especially where rent is more than mortgage.

Russ has the right idea. If only American's weren't at the near top of the list of world's worst savers!

What Suzy doesn't factor in is the interest write-off of a mortgage. In a 33% tax bracket, that is a significant reduction in your taxable income. And it's pretty much the ONLY write-off of a vast majority of homeowners. It's not like a lot of homeowners get the EIC or other deductions to their income! So while you're desperately trying to save a year of more of your net income to get to the 20% down, plus your 8 months of reserves, the price of the same home goes up.

And what if prices go down? Let's say they drop 10%. Anybody here think we aren't going to see an increase in mortgage rates in the next year? Let's say they only go up 1%. With a 10% reduction in home price and a 1% increase in mortgage rate, you're at a COMPLETE WASH as to the COST of the home purchase. You get the same monthly payment!

I don't do real estate all over the country, so I can't speak to what prices are going to do anywhere else. But, in my area, we've seen a nice, steady increase in home prices of 3-4% year after year after year. And the prediction is that will continue for at least the next 3 years. At the same time, almost ALL industry pundits in the lending industry are saying long-term monies are going to get more costly. A large percentage of these people, from the Fed to others, are predicting at least a 1% increase in the next 12 months and maybe more. It's not hard for me to see us at 7% on a 30-yr FRM by the end of 2012.

Plus, with Secretary Geithner's address to the House Finance Committee Friday last, it's apparrant that the Obama administration is calling for huge changes in the lending industry. The dissolution of Fannie and Freddie. A further increase in FHA's mortgage insurance rate. An increase in downpayment for government guaranteed loan programs (FHA, VA, USDA). Even changing FHA's focus from single-family financing to multi-family financing only.

It's true that for many American's, homeownership is seen as a forced savings "piggy bank". That being said, if the value of a home goes down, and you are forced to sell (for whatever reason) I'd much prefer to have as much savings in savings as possible.

As to paying down a mortgage? I don't believe (this is for myself. I don't tell this to clients) this is a good money-management path. Why would I put capital into a non-interest earning vehicle? And, of course, the faster you pay down the mortgage, the sooner you end your ability to claim the mortgage deduction to reduce your taxable income!  Many people believe your taxable income will be lower at retirement. Really? Know anyone who this is true for? And if you are paying less at retirement based on having less income how are you living on that vast reduction in your income?

If the value of the home goes up (which it ALWAYS does over long periods of time in this country), then the balance of your loan is not affected by this increase in market value! The value increases based upon the VALUE of your home, not it's debt level. I'd rather put as little capital into my home as possible and buid up my savings through safe, conservative investments (preferably tax-free with post-taxable income). Again, most American's don't have the discipline for this.Many people will respond "Oh, but look what happened to everyone's 401k's and mutual funds a couple of years ago!" That's true. For that period of time. Anybody who pulled their money out then got screwed! But we're talking long-term savings here. Unless it was your company's retirement account which got raided, investment portfolio values are back up.

What we're mostly concerned with as Realtors is helping our clients buy and sell homes. With last week's presentation from our Treasury Secretary, I wouldn't want to wait even a YEAR to buy a home, and I'm screaming that from the rooftops to my clients! Put a little chart together showing the 10% to 1% cost of waiting and that's a pretty powerful tool in your presentation to buyers.

 

Wanda:

Suze Orman give very conservative advice about money.  She wants the buyer to be covered in the event of loss of job, illness or other problems.  Ideally, her advice is good.  However, most first time home buyers are not in the position to have 8 months of expenses in the bank.

One other problem about putting a significant amount of your savings into paying down the mortgage. If you DO lose a job, and after your reserves are gone for day-to-day living, how do you access your equity in your home? You can't get it by refinancing. YOU DON"T HAVE A JOB! Lenders don't lend if there's no income to pay the mortgage! Are you forced to sell? Great! What happens after the reserves are gone and you waited to sell until you only had 2 months of mortgage payments left in the bank? You'd have to sell in 60 days. So, you reduce your price to get it sold quickly. There goes some of that equity you built up by paying your mortgage down! Maybe a lot of your equity. I'd rather have that money available to me in investment savings for that eventuality, then I wouldn't be forced to sell, and if I was, I'd have a longer cushion of time to sell the home in at a less distressed price.

20% would be amazing.  It can be a total fantasy in my region though.  In the city of San Francisco a 2 bedroom condo easily goes for $650,000.  An 8 month reserve for us would be something close to $45,000 which means that we'd have to save up almost $200,000 as first time homebuyers.  While the average income is higher in The City then other regions in the county, young homebuyer's that make decent money get killed on there income taxes when they have no property.  It's almost impossible to save that much money, and if they did have much in the bank, I'm not sure putting it into a home would be wise.  As other's have brought up, it's difficult to get liquidity from your home.  I feel it's more important to keep that money in reserve if you've got it, and if you qualify for FHA loans with a cushion of a few months go for it!

I agree with the conservaive approach to home buying.   A large downpayment and a strong nest egg is most certainly an enviable position for any home buyer. In the "old days" a lending institution would not even talk to you if you did not have a substaintial downpayment.  I perceive a lot of the problems that we have recently experienced is that too many homes were purchased by people who could not afford them. I have my opinions as to how this happened but crossing political swords won't right the wrong.

Whether you love or hate Suzi Orman, you have to her some credit. If people took her advice, we would not have the current housing crisis. What is the definition of "Has a good job." in todays economy? Many well paid people do lose their jobs with little or no notice. People do get sick or injured, start accumulating medical bills, etc. You need reserves. I advise clients to have a minimum of six months of reserves.

Yes, I am real estate agent and I do want to close as many escrows as I can, however I will look out for the well being of my clients first. If I feel like they want to buy more than they should be buying, I will let them know my opinion. After that, the ball is in their court.

I wish I went to the closing table each time and the buyer (either first time or not) would have 20% to put down. That is just not a reality these days. Especially for first time home buyers. IN many cases, it takes that first home to help someone build up that 20% for the next home. I do agree, buyers need to invest something into a home so they would have something to loose and they would not just walk away when times get tough.

Dear Wanda -

Great discussion starter!  I love posts that stimulate animated comment conversation!

Contrast Carla (#44) and Michael (#39) with Bill & Cindi (#12), Julia (#27) and Michael (#3).

Thanks for the post!

Have a happy day -
Lynn

In our area of Idaho....many home buyers who picked up REOs and shorts in 09-10 are THEMSELVES now going into foreclosure!!  I agree with Suzie.  Put some skin in the game!!!

I also have to remember that this is a REAL ESTATE AGENT blog of which selling homes is the primary goal regardless of how stretched the buyer is. Well done!!

I agree with the 20% down and 8 months of expenses. The problem is that used to be standard, not the exception. That is why the current housing market is still inflated.

I think Suze Orman is right about reserves. Of course, there are exceptions.  Someone who has a handle on their finances, very stable employment, etc, can get away with less.  They also might make a conscious decision to put less down, although they have more cash.  I think she is relaying a standard some might aspire to.

You'd be surprised how many people lament the fact of the 20% down but they are DRIVING their 20% down in their new Silverado or F-150. I own many homes and the first thing I asked myself was "what is more important.....being seen in a new vehicle or amassing wealth via property?" MOST people can do this but do not have a financial goal and fall prey to the Madison St. advertisers.

Terrific post & excellent conversation here to be sure. Certainly shows that there is not really one solution for all people, which is indeed my point. While Ms. Orman & her conservative advice has some sound logic behind it, real estate is not national, it is regional. People to, are not all the same. Advice is great, but one should be careful in the taking AND giving of it, and consider their own circumstances AND abilities, especially before taking the advice of someone that they have NO personal connection to, and from someone who has NO notion of what their particular area situation may look like. General advice is just that, general. It is meant to be used as a guideline. In this case - I am glad my clients are not taking too much of what Ms. Orman says on this matter to heart!

Our average buyer in NJ who finances with my team puts down anaverage of about 7%.

The average FTHB puts down 4-5%, and has maybe 1-2 months of reserves.

20% down is a nice target, but...I agree with most of the comments above, it's just not realistic.

Suze's advice is the "ideal" which is hard to come by.

Also, she justifies rent vs own because if you are spread too thin, you don't have the reserves or equity to finance repairs or improvements as needed; or survive a job loss.  

Makes sense...but first time buyers can still make it work with less than the ideal reserves/downpayment IF they realize homeownership requires a lot of sacrifice and self-discipline...ie. don't blow your reserves in decorating/furnishing if you have little or no equity. 

Although much of the comments about Suze Orman's "advice" talk about hurting the Realtors business... the real monetary damage is done to the poor buyers who happen to listen to Ms Orman... and end up NOT buying when they should have.  So much equity lost.  Part of me wonders just how many rental properties Ms Orman owns... and would benefit from if these buyers continued renting.

Suze Orman sits there, smiling and giving her ill-conceived "advice"... and ends up hurting buyers instead of helping them.  Way to go, Suze !

A recipe for another housing industry crash with the rest of the economy cascading to oblivion.

Coincidentally, I saw her last night where she was going into detail about her advice - a program called Money Class where she played the teacher. I had heard a lot of buzz about her new book and its subject. therefore, I was excited to hear what she had to say.

I came away thinking that this is not so different from much of the information consumers are receiving today. It is all subject to interpretation. Many of her points were definitely things a prospective buyer (or seller) should consider. However, taken on a case-by-case basis, each market area and each individual buyer and/or selller can have vastly different scenarios where her rules can easily not apply.

Thanks for an excellent post.

20% down?

What is she smoking? This is the cheapest money you can borrow.

Put down the minimum and invest the rest.

 

I do agree about having cash reserves though...... I only wonder what orifice she pulled that "8 months" number from?!?!?!?

 

Suze Orman clearly demonstrated yet again that these "National Experts" truly know nothing about Real Estate on a local level.  To quote Brian Buffini, "Today is the Good Ole Days!" Someday first time homebuyers who buy now will be able to say "I bought my first home when rates were 5%, you only needed 3.5% down and the seller could help pay some of my closing fees"  Those days are fading...

I agree that in a "perfect" world this would be the thing to do. Unfortunately, we do not live in that world today. I do counsel my buyers to make good decisions about their money and their home choice. I think the biggest thing that resonates with them is this; I tell them that I don't want them to be married to their home. I want them to (if they are married) "date" their spouse, go out with friends, take vacations. If they are married to their home they will become resentful when they have to pay so much towards their house note and not love their home the way they should. I always see the lightbulb light up when I say this. I believe that it is part of our duty to do some financial counseling when working with first time homebuyers.

Suze, your comments on first time home buyers from a Realtors perspective is DENIED!!!!!!!!!!!! She needs to stick to watches, jewelry, cars and boats. She's way too unrealistic. The time it takes someone to save 20% down on a home they could have a huge chunk of prinicpal paid down. Example- I had a renter in an investment property pay me $1200 a month for 5 years. Thats $72,000 dollars worth of rent. Suze, your silly.  

hehe,

Look up Suzy's educational background and then scratch your head as to why someone would follow her financial advice.

She has made millions telling people that they should have a budget and not live above their means- duh! I mean why I didn't think of that. Ben Yost says.......

Got to go and bury the cash I have in a can in my backyard - where it will be safe.

Suze's advice is often a) completely wrong, b) unrealistic or c) beyond obvious and of the 'eat your veggies and go running' type.

I just cringe when she says 'cut up those credit cards and throw them away'......Yeah maybe if you are a shopaholic or live in the casino. I've pulled approx 50,000 credit reports and I know what that does to your FICO score. Or if you lose your job, you might be able to buy things like FOOD with your credit card.

I must say, she does have some pretty crazy stylish jackets though :)

Folks who purchase and cannot afford it end up perpetuatingthe problem we have now with a declining market.  All the old models regarding rent vs purchase need remodeling to sync up with the reality of an ever changing job market.  Yes, folks made money on their homes over time - time being the key word.  Today's first time buyer doesn't expect to be in a home long enough for the old models to work.  Regarding the 20% down, I paid $28,000 for my first home and 20% of that was $5600.  I've seen updated versions of that same age and style home offered for $160,000 today.  Today's buyer would need $32,0000 for a 20% down payment.  Then there are the closing costs which were minuscule in 1972 compared to today's thousands needed to close.  Today's first time buyer is often not financially prepared to purchase.  

Oh my goodness, just got on AR and noticed the feature, thank you.  Went to wine tasting 201 at our local college last night instead of jumping on my computer.  Now I need to get another cup of coffee and read comments!

20% down is simply not realistic unless we want pre-depresssion era homeownership where 60%+ of all people rented unless they were pioneers and built their own log cabin (without pulling building permits).  I agree though that a decent cushion of expenses is needed. 6 months in the bank at least.  Homeownership is not cheap.  Seems like you are always fixing something.

Hate to see what her advise would be if she were a MARRIAGE counselor!  There'd be a whole lot more single people out there.  While I agree it would be great if folks had the level of income and job security to meet her "goals", most simply don't...even most RESPONSIBLE and DISCIPLINED people don't.  She advises from the "ideal" perspective, not the real world for most.

Carla, that was funny.

Follow Suze's advice for a minute.  We have cheap money now and inflation concerns on the horizon.  So she's suggesting that you rent during a time that rents will go up, buy a home later when rates are not like these, and when you do so, lock up most of your net worth in an illiquid vehicle like equity. Wow.  I hadn't thought of that.

Real estate and mortgages are anything but static right now.

Guidelines will have at least two or three major overhauls per year.  PMI is changing in every market just about every month.  Mortgage rates are changing 2-3 times a day.  Her book; however, it will be in print for a long time.

The gap between the 30 year and the 15 year has averaged .43% over the past 6 years and was about the same when she started writing her book.  It's currently .73% spread.  Coupled with single premium MI at a 90% loan, is 24 months reserves and 10% down better? 

I don't know.   I just don't believe that mortgage advice is one-size-fits-all.

Suze makes sense for people who have unlimited ability to accumulate unlimited money in an instant.  While, at times she adequately explains the time value of money, she has no concept of the time value of time.  For a perfect first time buyer to comply with her guidelines, they could buy a home in maybe six years.  That's a third of a newborn child's life with parents, and half of a nine year old's remaining time. 

Family economics is a compromise between economic perfection and a family's chosen lifestyle.

Good post, and yes in the perfect world, not this one... her advice is stellar!

I agree Wanda we all started somewhere and it is the goal to have our castle paid off!

I feel this is a great time to buy and still hold strong on renting is a waste of money IF your in a position to buy. But if your going to move around and get transferred and many other options... maybe renting is for you. OR if your not willing to keep up your property and home, then rent and let the landlord do it!

Every one has a different opinion and makes no one person opinion right for all!

happy selling!

I am from the Dave Ramsey camp, so Suze's theory isn't too far off base for my thinking. It makes me wonder if this country would be in the mess it is in if people had invested more in their housing to provide equity in the event of a downturn in the market and if they had money in the bank to help them through the hard times when they hit. Before judging conservative financial principles, take a look at what landed our nation in this financial crisis we are in today. It was because of rampant consumerism and overspending including on houses. In my market, 70% of foreclosures were not new originations, they were people yanking all the equity out of their homes under inflated appraisals so they could live beyond their means. If it takes a lower down payment to get into a home, do it but plan to get equity built by making extra principle payments from the get go. If real estate is going to be viewed as an investment, it needs to have the earmarks of an asset. People mortgaged to their eyeballs with no equity who are on the brink of losing it all because they have no cash reserves or manner in which to maintain their property are not holding an asset, but rather a liability. I agree with Dave, pay off that house ASAP and live debt free....people without mortgages don't usually get foreclosed on! Baby steps...build a $1,000. starter emergency fund, eliminate your debts smallest to largest until everything is paid off, save up 3-6 months of living expenses in savings, invest 15% of your household income for retirement, fund your kids college, pay off your home early, build wealth and give. If our nation ran under this plan it wouldn't be bankrupt.

Wanda,

Thanks for sharing this. I just bought that book and Suze Orzman coming to our town next week cant wait to hear what she has to say. I think if a home buyer has enough money to put down and a 6 months savings, good income and they are practical about what it costs to maintain a home monthly they should buy.

It would be great to see Suze and Robert Kiyosaki go at it.  She may be on TV, but I would bet that Kiyosaki has a greater net worth. 

To the person who mentioned Suze's claim that Realtor fees should not be paid and be negotiated down, I seriously doubt she would appreciate the networks refusing to pay her speaking fees.

Chris is correct:  Mortgage advice cannot be one-size-fits-all.

Hi Wanda,

I was going to write a post about this too, I believe I may have seen part of the show you are talking about, but I have also watched her Saturday evening show on MSNBC at 9pm (Florida time).  I haven't read all the comments but our unemployment rate here is above 11%.  I happen to agree with her point of view about the 8 months (no matter where you live), if you watch her weekly show for awhile - she has a very unique dramatic style - but her 'Can I Afford it' segment grows on you and you agree with her 'Approved' or 'Denied' results. 

I don't agree that she is conservative, if someone has something happen to them, or lose a job, or lose overtime, they are in trouble.  Our housing market probably wouldn't recover if everyone tried to adhere to the 8 months reserves and 20% down payment - I realize FHA and low down payments are the bulk of the transactions.   I had one buyer in the $120,000 range that was looking to rent but she qualified to buy - it didn't go through because her overtime was cut in the middle of the transaction and she didn't qualify anymore.  They had just barely enough to pay the costs and were fighting for seller concessions.  What if she had purchased and lost her job shortly after that???   I have done mortgages in the past and always wondered how someone would think of buying a home with only a few months reserves and if they don't have the down payment and have to ask for seller concessions.  I know it's done every day and adhering to it would kill our housing recovery, but I agree with it.  Buyers should also realize it will cost 3-5% per year to maintain the property properly.

After watching her show for awhile, I dont' think she is being conservative, I believe everyone should think this way, especially in today's market.  I haven't yet brought it up to people yet, but I think it's a good idea for buyers to watch her show for a couple months and they may change their thinking about how they live.  It's amazing how many 20-somethings watch the show and call in and have the 8 months reserves, and investment and retirement portfolios.  It's inspiring and motivating and makes you start that budget and how you plan your future.

 

 

You can't give blanket mortgage advice, it just doesn't work that way. Every scenario is different.

The obvious question is, what exactly is gained by putting 20% down?

"oh, well, um, you dont' have PMI".

So what? If it allows you to buy the property you want with a monthly payment within your budget,  PMI is a means to an end. A $300,000 house with 20% down and a $230,000 house with 5% down have roughly the same payment. If you don't have 20%, you have to change your price range. If you have a target budget in mind, the amount of your downpayment in no way affects your ability to pay your loan, it just impacts your ability to sell later if the market dips. I typically work backwards with clients, asking how much cash they are looking to part with monthly and at closing, and then work a sales price and loan amount out from there.  If you are serving in the armed forces, its difficult to save up 20% on a typical soldier's pay, which is why we have 100% financing VA loans. According to her advice, we should do away with USDA, FHA and VA loans. I'm sure if she had a secret decoder ring for her followers, it would say, "Drink your Ovaltine".

 

 

Great points. I guess that she is just thinking that if the buyers don't have at least 20% equity, what if they had to sell before 4 years? They would be upside down (like most people are now). 

Unfortanately that rules out 80% of the potential buyers out there. It is great in theory but not in reality where there are good buuyers, Vewtyrns and fha buyers iwth great credit, low to no debt and not alot of savings that make great buyers in this market

Russ hit the bulls eye's center. Suzie is living a different reality.

I cannot stand Suze, Dave Ramsey or Tom Sullivan.  They make blanket statements all of the time which apply to some.  They are in business to make money for themselves.  Suze does not live in reality.  Why not wait until a buyer has 50% down?  How about paying cash?  Dave Ramsey got himself into trouble and filed bankruptcy in his earlier years.  Tom Sullivan says that you should always pay your house off and that reverse mortgages are bad and to never do them.  Really Tom?  So that little old lady making $700 a month on social security who can barely pay for her property taxes,insurance and utilities shouldn't use some of her equity to receive a monthly annuity like payment so she can live out her remaining years comfortably?  You can't take it with you when you go, knucklehead.

 

These guys are idiots.  However I will cut Ramsey some slack- he truly helps people.  The other two just help themselves.

Local markets are all different, and her advice is unnecessarily conservative in mine, where rents are often significantly higher than mortgage payments for a starter home. I agree that there should be cash reserves and a financial cushion. I also encourage people to buy what they are comfortable with, not the maximum that they qualify for. FHA loans have helped many savvy young homeowners get started. By the time they save the 20% plus closing costs plus cushion, interest rates may be way higher!

As I heard them say on "Market Place Money" the other day on the subject of the advice to have 8-12 months' savings for the ordinary working Joe, and I paraphrase: "Which planet is he on?".  In an ideal world, yes, 'twould be nice, but get real.  If folks have a good, sound job, 3.5% down, good credit and intend to stay in the house for a good few years, then go ahead and buy.  I realize it's bad for my business as a Realtor to encourage people to stay put, but it's the way of it.  Earlier generations don't own their homes free and clear just because they put 20% down.  They own the house free and clear because they darned well kept it.

Let's not confuse who Orman is: A TV Entertainer for lost souls void of common sense.

I couldn't agree with you more, I think any first time home buyer that keeps their debt to income ratio in the 30% range and puts down 3.5% on an 30 year fixed FHA and has 6 months in reserves I would say that would be a great situation for a buyer being that interest rates are approaching 4.5% on FHA loans and home prices are what they were in 1990! 

Buying a home is a no brainer- 

I have lots of words for Suzy....none of them really good....since the day she chastized people for "over spending" who had both lost their jobs and were losing their home...bye bye Suzy....you don't get it.

I'm one of those conservative financial gurus (not like Suze, however), plus a Realtor and certified MLO.  I look at a person's whole financial picture and only recommend making changes when they are in that persons best interest, and suitable for their specific situation.  I tend to be bluntly honest.  Reality check is the key to making the right decisions.  Although buying a home is likely the largest 15 to 30-year debt anyone will take upon themselves voluntarily, lining the pockets of the landlord is equivalent to a lifetime debt.  Unless someone inherits money, I would guess that there is a very low percentage of the American population who are able to save 3-months reserves, let alone 8 months!  Lenders have their fists clenched tightly around their nearly zero-interest government money, while they insist on getting top-dollar for homes they've foreclosed, charging high interest on credit cards, and sneaking in extra fees whenever they can get away with it.  The housing market is still sick; the 'wound' keeps festering.  Bandaids aren't enough -- more aggressive action needs to be taken.  Sure, it'll be worse in the shortrun, but it'll actually get better and heal.  

I wouldn't trust a word Suze Orman spews out of her mouth as far as I could throw her which is not that dang far.  In fact, giving her a good chuck out a door or window might be just what the doctor ordered.  I think we should put her and Nancy Grace into a boxing ring and see which one comes out first, lol!

I would probably be looking for a job if they followed that advice that is a very difficult goal...just sayin

Suzi speaks some good advise but lets remember she is talking to a national audience and giving "general" advise.  Coming out of the last boom where anyone could get a house I am glad to see that Suzi, Dave and a few other gurus are giving ultra conservative advise and balance people optomism with some reality. 

With that said it is up to each individual to govern themselves and I think "most" first time buyers are very capable of buying a home with much less down.  I would rather see a buyer but 5-10% down and have 12-18 months reserves if we want to be really that conservative. 

Totally agree that rent prices are sometime more than a mortgage.  Judge wisely... I agree most people should consider buying.

So how is it that so many immigrants (legal) come to this country with nothing but their shirts on their backs and within a just a few years they have the 20% down and have reserve money. The answer is:
They do not go to Starbucks and spend $5.00 for a cup of puffy water. They don't drive fancy sports cars, very seldom they spend $12 for a movie, etc. They have a goal. The goal to own a home and their goal gets accomplished fairly quickly.

Years ago I read Suze Orman and liked her, but now... She's gotten a little far out. I didn't know she recommended "stiffing" your Realtor - that's just not nice at all. Wonder if she'd like someone to pull that on her!

She obviously doesn't respect the hard work that goes into helping people buy and sell homes.

Why 20% Down? The notion that making a bigger downpayment is more conservative reflects a lack of careful analysis. Every aspect of the investment decision needs to be taken in context with the whole.

If the buyer's income does not qualify them for the purchase, if their employment circumstances are so fragile that they may need to re-sell the property in the near future, if they are qualifying on a short term adjustable and the additional equity is necessary to insure their ability to refinance, then I question whether they should buy at all with or without the 20% down and the 8 months reserves.

Having less equity in the home does not lead to default; irresponsible borrowing and fraud are the causes. In many declining markets; a 20% initial investment when the market was strong would already have evaporated with the declining value. Then what? The cash reserves which could have helped them to get across this economic Death Valley aren't there and here comes the Sheriff.

I heartily agree with the reserve suggestion however, if the buyers can afford the housing expenses; less downpayment not more is probably more conservative as it will increase their cash reserves in the event of a temporary decline or loss of income which will help them to stave off default and foreclosure. If the home is in a volatile market in which continuing decline in values is anticipated, then why on earth would one tie up more cash just to see a 20% equity decline to zero? Alternatively, if they have invested the minimum amount to achieve an affordable debt service ratio, preserved adequate cash reserves, AND chosen a home that has durability of purpose (big enough for a growing family, satisfactory schools, for example) then they can enjoy living in the home indefinitely regardless of the ups and downs of the market and they will be fine.

The big caution with Suze Orman's advice is, in my observation, that it is intended for folks who have absolutley no self discipline, out of control credit card spending, and basically no sense at all with respect to savings and financial prudence. Anyone else would be well advised to steer clear and diversify their planning strategies to insure that they are in good financial shape for the long haul.

Leverage, when affordability and collateral quality are properly assessed, is the magic of real estate investment. Look at all the sad stories of seniors who worked a lifetime to pay off their mortgages only to postpone their retirement because instead of diversifying their investments for retirement, they focused on building equity which evaporated in the current market declines. The same risks exist of course in too great a reliance upon the strength of a 401K retirement plan as we have seen the volatility there as well. In the long haul however, a balanced diversification is the best insulation against market uncertainties and diverting money from downpayment into other investments, especially at an early age, is a strategy which most investment planners would endorse heartily.

Suze Orman and other "media experts" whose provocative, one-size-fits-all advice is designed more for media sizzle than for the quality of the advice, need to be heard with a great deal of skepticism.

 

PS: I am a real estate guy, not a financial planner. I think it is important for real state professionals and mortgage originators to have at least a rudimentary knowledge of investment concepts to recognize the suitability (or at least red flags)  of our clients' investment objectives.

In Manhattan, co-ops make up over 60% of the residential stock.  There are few that would permit less than 20% down (a few don't even allow financing!) and the vast majority of them require that you have one to two years of housing expenses in reserves after closing. 

I totally disagree with Suzi Orman.  In Brevard County, Florida you can purchase a home with your mortgage being considerably less than a rental payment.  My mortgage, including real estate taxes, is approximately $350 less per month than when I was renting.  She has absolutely no idea what she is talking about and should check her facts before opening her mouth and giving advice. 

Wanda! Great blog. I lived in Helena for ten years...glad to see Montana in the Active Rain Family! =)

WOOOOoooo hooooooooooooooo I agree with you buyer don't have that kind of cash right now but should still help themselves to a good deal and save money on a living expenses but not renting and helping America get back on its feet.  Buy Real Estate now

In the perfect world 20% down with 8 month reserve sounds really great. Not too many people have 20% down and a 8 month reserve.  Unless the person is in their mid 40's and have been living with Mom & Dad since High School.

I sell homes in the Austin Texas area and am amazed at the rental rates.  For just a few dollars more each month a person could be buying a home, building equity and investing in the future.  With interest rates below 5%, and a huge inventory of homes to choose from why would someone rent? 

 

 

Ms. Suzan is living in "la la land".... I don't understand how she can speak about real estate since that (seems) not to be her main line of investment. She gives wrong directions to general people and suggests negotiating our rates (it is already so low) creating even a messier relationship between realtors x customer... BUT SHE MAKES MONEY!!!! Just like bankers.... Regardless how bad market is their balances always brings profit...

In Florida, the market is very messy and I got the feeling this week that just a few realtors will survive this tsunami.... I don't believe ½ of the realtors will be active when this market shifts a little bit. I have seen realtors working in different field to get a regular salary and avoid a bigger financial problem and they say...: "Andrea I tried hard but I need to bring the dough... otherwise I will be the next short-sale in this market.... This is so sad..."

I work with foreign buyers (most form South America) and this is amazing market for them; maybe she should bring her speech to outside US that would make sense. Yes, I know foreign likes to pay cash... but the new generation is coming with financing options and less money out the pocket, more power to buy.

There is another way to see this. We drive our customers around for weeks and months, spending time energy and gas, all this effort doesn't bring any cash to me. Only a "possibility" to close the deal anytime.... She goes on TV, give the wrong perception to the audience (our customers) and after that they believe her. Then they go to a bookstore and buy her books... She still makes money and we only have the "possibility" to close the deal and in most cases it not happens.....

My message: if you can't help do nothing...

i have to disagree with her on the 20% down part, but am very much with her on the reserves part.   who can argue with having cash in the bank and paying down debt?  that said, where a buyer can see an all-in payment to own (note, taxes, insurance, HOA) at parity or very close to a rent payment, AND they are likely to be in  the home for an extended period of time,  they should be taking a good hard look at owning regardless of the down payment they can rustle up.   even  if a home does not appreciate the equity build up has proven to be a powerful wealth building tool for many folks.

at todays rates i am advising that buyers max their note and get  the 30 year 5% fixed money...it is a giveaway rate when compared to historical averages.  their excess cash should go to a tax favored retirement account and be compounded over the greatest number of years possible starting immediately.   putting real numbers to  the discussion for every additional $10,000 used as down payment the monthly payment at a 5% note rate drops by $53.68 or $644 a year.  i'm sorry Suze...i simply cannot endorse that for anyone with dependable income

her advice is typical of a one size fits all approach  all of us here know that is simply absurd.  she may sell books with her firm and fast rules but the client who adheres to her advice may find themselves renting for life.

i advise clients that lower downs that are feasible also permit the owner to convert  the home to a rental and not have piles of equity tied up.  todays lower prices mean that  the expense profiles for the low end homes mean they are often perfect rentals for the owner who can move up and keep the first home.  ms. ormon may not like rental real estate but it has treated me VERY well, while the stock market repeatedly kicks my teeth in.

I enjoyed your post and I am in agreement.  Here in our market, VA Loans are king.  Very seldom does a buyer in our market make a downpayment and I'm sure most do not have eight months of expenses in reserve.

Sorry, but Orman is full of it and herself!! She lives in a different galaxy!!

It would be hard to give advice on a national level that can be adopted by everyone. I think she's a bit conservative, but she probably has to be since she is speaking on a national level. 

 

Having a down payment and skin in the game is a great idea, having 6-8 months reserves is a great idea too. So is being out of credit card debt and living below our means.

 

If everyone lived like this, we wouldn't be in a financial crisis and the big credit card companies wouldn't be quite so profitable......

 

Great ideals to strive for.... just not realistic for most Americans.

What she suggests doesn't work for today because we all got used to instant gratification via purchasing with credit, and interest only stated loans! That didn't work too well, so raising the next generation to work towards goals of buying a TV with saved money instead of their credit card, and saving for their first home purchase, really working towards goals like past generations did is best.

It's something to work towards, not implement now... because we as a society are simply not ready for 20% down with 8 months savings in the bank. Not to mention, rent is going up quickly with all the foreclosures and people not able to buy for a while as they work on their credit rating, and inflation... now is a great time to buy, she is just as crazy as her jacket designs!!

Shelly Whitworth
www.MorSystems.com

 

 

In a perfect world it is great advice. Unfortunately in the years past, buyers jumped on board thinking the market would get so high they wouldn't ever have a chance at buying. What she is not saying is that the hand has been actually tipped in the favor of the 1st time homebuyer now. Wish the lenders would see that.

I'm not a fan of Suze Orman.  I tend to run from people who call me "friend" when they don't even know me.  It rubs me the wrong way, but that's just me.  It would seem that most of the people here are fans.  Although deep down you know that there is either a problem with Suze Orman, or a problem with what you do for a living.

You say "she makes sense", and then say .. "but my clients will never be able to buy having to wait to save 20% and 8 months in the bank".  If people like that were your only client, you'd go hungry and fast.

Suze Orman doesn't need to sell homes, she sells Suze Orman.

Her biz model is as follows.

1-  Set a goal the average person cannot obtain, the carrot.  In this case young FTHBs who have seen what has happened over the past few years and figure that Suze must know what she's talking about.

2-  Give a few tips (helpful or not) for free, and then upsell your goods, the stick.  And Suze has plenty of goods on her website to sell you, as well as click throughs on insurance and other goodies.  I'm sure when you sign up for her emails you also get email from other companies that she said you wouldn't get. 

I mean seriously, anyone can create a budget, track every penny they spend and question the wisdom of buying a daily StarSchmucks Mocha Frocha Hottie Latte for $7.95 instead of a cup of joe from 7-11 for $1.25...  if they really wanted to.  Mortgage calculators are a dime a dozen on the internet as well.

 

The 20% down is meaningless claptrap.  People who are NOT in the know have some kind of sense of indignation that people were able to buy homes with "no skin in the game".  Yet VA loans are the best performing mortgages around, and as we all know, VA loans are 100% financing.  Suze probably can't explain that but I can.  Military personnel are taught a sense of responsibility, structure and determination that most of them retain long after leaving active duty.  So it is the person and NOT how much they put down or don't put down.

As for the reserves I agree but that has nothing to do with buying a home.  Everyone should have a cushion.  Buying a house, in a house, renting, whatever your circumstances.  No one should buy a home coming to the closing table with their last dime.

 

Suze Orman internationally acclaimed personal finance expert...   who says that?  Suze does, its on the title bar of her website.  LOL  Nothing like a little self promotion.  I'll watch her show, when I want a laugh.  I love her callers, "I make $22,000 a year, have $75,000 in credit card debt, I'm 4 months behind on my mortgage, should I buy the Winnebago or the 2 karat emeral ring?"

You don't need frosted hair and big collars to say "What are you thinking, Girlfriend!!!"

I'm sorry if I seem hard on Suze Orman but I feel the public is putting too much credibility towards what falls out of her mouth.  She's right on the simple stuff but I've found her to be horribly wrong as well.  Here is another place she's wrong.

 

Suzie Orman gives great advice to the consumer trying  to get the fundamental basics of savings down.  Unfortunately, Suzie's advice needs to be conservative enough to work for many people in different areas and differing cultural backgrounds.  And the reality is that her advice would work for the majority of those situations. 

Suzie's advice does not take into account that while many of us were younger, we would take higher risks in hope of benifiting from rewards.  Obviously, these are historic times for real estate values and some buyers may want to and may be better suited to take some additional risks.

As a Realtor, I like to walk them through there options and empower them to make their own decisions!

She's out of her mind if she thinks folks in California can come up with 20% for a down payment. Tha FHA program that allows 3.5% down is terrific for first time buyers, and oh yeah rates are at 4.5% today..what would you reccommend Suzie..wait for 5 more years to save and rates are at 8%..they did rise to 19.5% in 1982 so why would they not rise to 8%. She is way too conservative!

Her advice will prevent short sales should buyers with less skin in the game decide to sell before the market rises enough to cover the costs of closing.

I do not ever listen to Suze, I am never that bored. Everyone get back to work, we have to fix this country one house at a time. Suze can't do that.

I'm sure most first time home buyers would love to be in such a secure place before looking into home ownership. But like #125 just pointed out, they may not have all that in place right now, and now might be the right time to start looking for a home! In this market, waiting until you've meet all these requirements may end up costing first time buyers in the long run.

Honestly, I think she is nuts! And I have been surprised that Oprah hasn't pulled her off the stage by her frosted tips a long time ago! Some of her advise is looney! It is pure entertainment ... Like Just for Laugh Gags ( best belly laughs per 1/2 hour show out there...& we can all use some laughs!). No basis of reality for the vast majority of folks!!

Thanks for sharing.

Not really a fan of Suzee, but with 20% downcomes no PMI (monthly or the upfront fee) which would make up for a higher interest rate over time.  FHA 3.5% loans are fine to help sell homes and allow us to earn commissions, but are they really in the best interest of the home purchaser. 

As Torgie @128 says most buyers, not only first time buyers would love to be in the position Suzie suggests. It is my experience that first time buyers that have a steady job and income have always doen very well by pushing the financial envelope as they say. Of course the first time buyers that purchased between 2005 to 2008 have lost all their equity in areas that have had drops in prices of 20% to 30%. In a sad way, the lucky first time buyers are the ones that purchased with no money down or 3% downpayment. Now that they are upside down they can walk away with a lot less stress.

This is a great post. We all need to view all these "gurus" with a large grain of salt. Everyone's situation is of course different.

I agree with all who have said that to have 20% for a down payment while ideal, for best financing rates and no PMI, it can be difficult to come buy for the first time buyer.  I like the idea of a piggy back mortgage and save the cash for emergencies.

I'm scared of Suze Orman.  Sometimes... when I listen to her... I get a RASH.

Suzie gives highly generalized advice that is never appropriate in all situations...she has been saying that same thing about home buying for at least 5 years so it was not generated by the current state of affairs of teh real estate market. She also tends to be sensationalistic to get attention...

It wasn't all that long ago she was singing the praises of PMI and low downpayments when she was a paid spokesperson for a huge PMI company.

Here in Middle Tennessee rent is more expensive then the payments on a modest home. I completely agree that if someone has a good job, decent credit and plans to stay in the house for a couple of years why would you continue to rent?

Here in Middle Tennessee rent is more expensive then the payments on a modest home. I completely agree that if someone has a good job, decent credit and plans to stay in the house for a couple of years why would you continue to rent?

20% & 8 month's savings are great goals, but most unrealistic for first timers.  The best guide should be buyer's job security, estimated time for living there , and attitude.  Had Suze to added that sidebar to her spiel, she would have come across as much more credible, and less a scare mongering promoter of her books, appearances, and businesses.  Perky & Jody

I wholeheartedly agree with you. 20% down payment and 8 months of expenses is nearly impossible for all first time buyers. Buying within reason and with the stability factors you mention are all good reasons for considering a home purchase. Thank you so much for sharing this thoughtful post.

If a Buyer came to me with enough for 20% down I would reccomend they do 3.5% down on an FHA then buy a Homepath with 10% down as a rental.  They would have better cash flow and probably a little bit of reserve left in the bank.

I agree with the 20 % down. Not so easy for people to have 8 months living expenses in the bank here in California. If one can buy now and has a good job then good for them.

Love all the interest in this one.  Most first time homebuyers probably can't pull this one off.  Having said that, I agree being conservative makes sense.  Although, understanding how you handle things and being prepared that much for the first time home buyer are actually pretty tough.  

Interesting discussion.  I am lucky to see mostly folks with phenominal credit.  However, have more first time buyers coming up, so will see. 

All the best, Michelle

Suze lives in the perfect world, the rest of us live in the real world where coming up with 20% and having 8 month reserves can amount to $50k plus. The saavy individuals would rather make their money working for them while paying out about 4.75% in today's market.

Not to mention the tax advantages that come along with home ownership. When calculating in the tax write off, the actual interest rate paid can be as low 2% depending on the individual's tax bracket. All in all, pretty cheap money.  

 

I'm not a fan of Suze Orman, but having a sensible personal balance sheet after purchasing a home is appropriate.  The 6 - 8 months rule is not something that should be scoffed at - once you own a home, you have greater obligations and less fiscal flexibility.  It makes sense that you need more in reserve to protect yourself.  In addition, owning a home is costly - repairs and maintenance are necessary to maintain the value of your investment.  One simply cannot go into a home purchase without a reserve to take care of these things.

The 20% down rule may be necessary for those with anything less than stellar credit, if only to get a good rate on your loan.  But, in general, the down payment is less critical than the debt to income ratio of the buyer - ensuring that the buyer is not overtaxing their household budget to get a property is most important.  Homeowners need to be able to save for major repairs on the home, in addition to retirement and children's education (the home will be used in financial aid calculations!).  So, make room for these costs after paying the expenses of the home. 

What may be most helpful to the real estate market would be agents who promote these philosophies - appropriate savings and debt levels.  They are most likely to increase the pool of buyers in the future and create a healthy market.  In addition, increased savings will result in lower levels of national debt which would lead to lower interest rates (even when the economy picks up!) and increased home buyer affordability.  Borrowing as much as you can and not planning for unexpected changes in your financial position do nothing to strengthen the market or the overall economy.

Most first time buyers (and even repeat buyers) don't have what she is recommending.  Yes, it would be nice, but then a lot of people would never attain the goal of home ownership. 

Seriously how many genration X & Y watch Suzi? I don't think we have much to worry about.

Hi Wanda!  Way to spark a conversation!  Congrats on the feature!

Great comments here.  We had more people in our area do cash out refi's on their homes and get upsidedown than new purchases.

 

Wanda,

I read probably 24 of the responses earlier, and then had an appointment. It may have already been said...A Realtor friend recommended 'The Courage to be Rich' quite a few years back. I skimmed the book, got some good pointers. But IMHO, in a lot of respects, Suze is like a couple college professors I had in college: No practical experience, a lot o good ideas, but certainly not a complete source of info.

Wanda,

I read probably 24 of the responses earlier, and then had an appointment. It may have already been said...A Realtor friend recommended 'The Courage to be Rich' quite a few years back. I skimmed the book, got some good pointers. But IMHO, in a lot of respects, Suze is like a couple college professors I had in college: No practical experience, a lot o good ideas, but certainly not a complete source of info.

When I was a renter, my landlord could give me a 30 day notice because he is selling his property or wanting to raise the rent on the unit and I would be forced to come up with some cash quickly for first last and security deposit within a months time, along with the costs of a moving truck, ect.., and perhaps extra money communting to and from my new place on the outskirts of town. I can't have a pet because the landlord says so, and I am constantly needing to wait on the landlord for repairs on the unit which he is reluctant to do. I have to live with a dingy old carpet until I move out...There are plenty of reasons to own outside of a financial one, I am a happy homeowner and landlord of rental properties. I wonder if Suzi has done her homework on the financial advantages of owning rental property versus being a renter. What about owning a duplex that you live in one and rent the other while it pays most of the mortgage payment for you? As long as a property pencils, it can be a good investment. There are lots of ways to make real estate work as a financial tool. I threw away close to $100,000 in only 10 years of rent that I will never recover. Home ownership is truly a hedge against inflation, and rental rates. Rent will go up but my mortgage stays the same.

Suzy seems to ignore the fact that unless housing/construction picks up, and stays flat home prices will fall further.  Trying to encourage a bit more investing when the market is at an all time low, along with interest rates may not be as risky as it was 2-3 years ago.  Bill in Phoenix brings up a good point,..but alot of homes in Arizona are being bought by Canadians...  That is why the market is shifting.

He is right about timing, and having regrets when the prices and interest rates rise.  Saving for an 8 month program could cost you down the road, because you would have lost the "savings" from the lower house payments from buying at a lower interest rate and at a lower price.  You may never see those benefits again.  And the money you make from your mortgage interest deduction you can put into that 8 month reserve.

.....now Bill, what you going to do when our Arizona State legislators enact the new "flat tax" income law, the dis-allows mortgage interest, and doubles the income tax, and  cuts the business taxes by 50%!  It could be law this year.

Well, Warren Buffett, said to be the third richest human, says if is time to jump into the housing market. I would guess the truth is closer to his take than Susie's is. Following her advice will likely mean that prospective buyers will be trailing the market as it rises, since for every increase in the selling prices, the gross amount of the 20% downpayment will also rise. So will the monthly payment for two reasons: the loan amount will be larger, and the interest rate will be higher.

I think Susie is being too conservative on this call.

I can't listen to her because she talks too darn loud. I think she's on par with that freakonomic moron who was on Diane sawyer saying all realtors should work for a flat $500.00 fee. There are much more qualified peopel out there to take advice from.

I wish Suzie coudl read this she gives such bad advice... I heard her tell people to just leave their keys in the mailbox and walk away from their homes if they thought they were in over their head WTF... she is just talking to get attention and her advice is not good... I just wish she had some practical sense... and would learn the facts before spouting off... GREAT POST

Ha!!  She sounds REAL good.......but UNrealistic!

Suzie might be a little behind the curve...look back to 2005 2006 to see what  she was saying about real estate investing.  Maybe she could have been saying this THEN, and now be saying....this is absolutely the greatest opportunity we have seen in decades.

pundits and book sellers.   Its not that I disagree with suzies financially conservatism, its wise and changing from the mindset of the hey deys is important.  But we are simply going back to the 80;s standards.

20% and reserves was  the standard.... 

first time buyers need good advice and opportunity to begin their accumulation of equity over time, in a conservative manner.  thats why we have first time home buyer programs.    Who besides me was , talking about caution in 2006...

 

Over time, real estate is wise and you have to live somewhere.   we will have a recovery of some kind, inflation is around the corner and interest rates are historically, at extraordinary lows.  The banks are tough enough now to weed out the marginal buyers.

 

 

 

It's a rare commodity in these trying times to have 20% down, even for the not-so-young and then to have 8 mos of savings on top of that....with that attitude and Suzi Ormon's wealth, you could get by with it....but most ... just don't have it.  

It's a rare commodity in these trying times to have 20% down, even for the not-so-young and then to have 8 mos of savings on top of that....with that attitude and Suzi Ormon's wealth, you could get by with it....but most ... just don't have it.  

Suze is very good at getting her face on TV.  She is not so good at imparting good information, IMHO. When I see her on the TV screen, I switch channels.

I agree with you Wanda!  It is a great time to buy even though the first time home buyers don't have 20% to put down.  Great post!!!

I ABSOLUTELY DISAGREE WITH EVERYTHING SHE'S SAYING!    I was screaming at the TV!  Let's talk real world.  $100,000 house 20% down.  Let's say the market goes up 10%.  You made $10,000!  Congratulations!  But wait!--Your initial investment was $20,000 so your return on your investment is 50%.  Let's say the market goes down 10%.  How much did you lose?  $10,000!

Now let's put only 3.5% down.  I made the same $10,000.  The return on my investment is 350%!  Or, my house is now only worth $90,000.  How much did I lose?  Only $3,500!  Plus I would stop making payments on my home and apply for a short sale.  Could probably live without making a payment for at least a year, maybe two.  (I recently closed a short sale that took 26 months for the mortgage company to finally make a decision).  I would recoup my lost money by not having any mortgage payments.

A home is an investment.  When the investment goes bad, get rid of it.  Period! 

She's telling people how to be poor!  Eight months of reserves in savings paying .01% when inflation is 5%.  You're losing money every second of every day. 

Some of her advice I agree with but when it comes to real estate, she's from Mars or Venus but definately not Earth.   

Wanda, great post.  Although I did not take time to read all the comments (you got quite a few), I can say that I'm sure that I am responding in like to most of them.  Suze is great with a lot of her financial information, but REALLY, does anyone out here in California think that our first time homebuyers can have a reserve of 8 months when our FTBs are paying in excess of $350k for a home!!!!????

Wanda, thanks for posting the article as I did not watch the show and I will now be able to respond intelligently to my FTBs.  They have to look at the different markets around the US and realize that this makes good sense for just some areas at this time.

Dear Wanda,

You can save 8 months of living expenses a lot faster, when you are paying $300 per month less for the home you are buying than you did for the one you were renting. In addition to the direct savings, you also get more back on your taxes and build equity for the future. Of course, it would be prudent not to go crazy and furnish and upgrade everything at once, but a few cans of paint and some new carpet may be a reasonable splurge, if you brownbag your lunch for a few months after buying.

Great po2st and a good debate. I like Suze, but she is off here.  Twenty percent down would be great, but it just simply isn't realistic

Wanda, I'm a big fan of Suze Orman...even though I don't personally agree with 100% of what she says. Everyone has their comfort level and Suze leans towards the conservative side (which I think is good for someone like her giving public advice on TV) when it comes to finances and if a buyer is more risky than her, that's fine for them. Suze's just trying to prevent most home buyers from getting into trouble, should things not go as they planned! :)

Suzi's advice is generic and doesn't always fit every situation.  I know most financial advisors don't like her advice because it is too generic.  People should consider their own situation and talk with their own advisors (financial, real estate, mortgage) rather than taking advice from a TV show.

Suzi's latest comments about revesre mortgages had a lot of misinformation in them.  One can't be an expert in all areas... it's frustrating when one as prominent as she is doesn't do a better job with her advice.

Thanks for the post.

Wanda, Suzie Orman is very conservative. Its hard to save 20% down. I think 3.5% should be OK if your income is solid and you can qualify for a loan.

wow, you had me at values decreasing from 3%-10%.  i am in the phoenix area and it is common to see homes losing 50%-70% in value in some areas!  some areas of course a little more than that and some less.  in our market you can rent for half of what you can buy for in a lot of areas.  the buyers investing now, even with only their 3 1/2% down, which isn't all that much here should do really well in the long run.  i think suzie is great, i like to listen to her.  however, there are exceptions for sure!

If first time home buyers can qualify at local banks they should look for a home!  Suzie is what she is and cannot be for all the markets that are working through a recession.

Great blog. Talking heads are all about one solution fits all which is never the case in real estate. She could have advised first time home buyers to make their profit going in just as an investor would do, (very achievable in this buyers market) and hence cover worst case senario that they can sell and move on without becoming a SS or Foreclosure statistic if circumstances dictate. If they happen to stay for the long haul then the long term appreciation factor of real estate will keep them in a healthy position.

Wanda.  Great blog which generated tons of comments!  Those of us living in Minot, ND are facing unusual circumstances.  We have a housing shortage in many areas due to the oil surge.  We are finding rent prices increasing tremendously (supply/demand).  Our home values are increasing, as well.  Many potential homebuyers are struggling to find ways to purchase a home rather than having to pay out inflated rent prices.  For our buyers, the maintainable 3.5% is a goal and then many are asking for seller's assistance in closing costs.  They all seem very responsible with good jobs, but I know that they don't have 8 months of reserve!  Not happening for the majority!

I, too, will have to take exception with what she says.  NOW is the perfect time to buy (or invest!) in a house!  Why?  1)  Supply is high (here in the Indianapolis/Carmel area); 2) Prices are low and 3) Money is cheap to borrow! That is a triple play winner for anyone buying, whether a first time buyer or a move-up buyer!

I've been in businessy over 20 years, and I've never seen a better time to invest in your future by buying a home.  Savvy investors are also making profits through passive income (extra money from rent payments, after the debt load is paid) or fixing and reselling!  A number of investors in my marketplace are also doing well with contract and lease/option sales.   

I'm usually a fan ofSuzi's, but she is way off base on this issue!

From a Realtor's standpoint, of course I want to disagree, but I actually do agree with her.  Maybe not on those specific numbers, but a homebuyer should have a decent down payment, at least 10%, and some reserve in the bank for emergencies, at least 3-6 months of living expenses.  That way, they can hedge their bets against another real estate market downturn (of up to 10%), as well as be prepared for an emergency job loss, illness, or other crisis.

Being in the mortgage brokerage business and living the fallout of the housing collapse I would not agree perhaps 100% with Suze.

 I do feel buyers these days really do need to have a down payment  because in many markets the home values are continuing to decline. I have disagreed for several years now that the zero down programs should still be offered even through grant programs. A  home owner needs incentive to stay in a  home to avoid a future repeat of what we have experienced.

Are there buyers who can do 100%. Yes! Absolutely. Not all buyers are created equally. The 100% loans were done based on the premise home values would only go up. We no longer live in that world. We cannot add to housing woes by putting everyone into a home who will fit on paper.

I agree with #175 post.

 

Wanda,

For many first time buyers in the San Diego market, Suze's 20% down with 8 months reserves is an impossibility.  For many 3.5% plus closing costs is a near impossibility.

I have been just "itching" to do this... so now I will.  What do you expect from a woman who can't even spell her first name correctly ?  LOL.  I guess she is so frugal she couldn't afford to get spell-check.

I bought my first house when I had 20% down some 25 years ago.  I never thought about it any other way.  My parents told me not to buy until I had that much to put down.  It seems like Suze is pretty old school on this.

I saw Suzie on the early morning show back in 2009  she said the worst is over the time to buy is now, I don't think she has a clue to what is really going on in real estate but she does a great job selling her book.

Suzie Orman reminds me somewhat of my former stockbroker.  One day, as I was sitting in his office ready to write a check to purchase stock, I asked Ol' Dave if he knew of anyone interested in buying or selling a home.  "Oh, no,' he said, "Real estate is a bad investment.  I rent myself."  I explained to him how that sounded to me like a flawed perspective and removed my money from his stewardship.   Financial folks are cool toward real estate because THEY CAN'T GET PAID FOR SELLING IT AND IT REMOVES MONEY FROM THEIR POTENTIAL INVESTMENT POOL!  What else would you expect Suze Orman to say? 

Dave Ramsey is a little different.  He's promoting a system designed to keep a person debt-free and, frankly, it works.  I've had young people (30 years old) in my office with 100K they'd saved over the past 5 years after being with Ramsey's program.  No debt.  Great clients. 

Congratulations on your Featured Post!

If the banks continue to lender $ to buyers that have little or no money down we will never get out of the recession we're currently in. Suze Orman and Dave Ramsey are right on!! Get your financial house in order! 8-12mos of your current salary in a savings account and 20% down.

 

Thanks for the article.

LOL Karen Anne!

There is a risk/reward to buying a home. If you don't want to risk anything, follow Suze. If you can stomach a little risk, follow John Paulson, Warren Buffet and Donald Trump who say now is definitely the time to buy a home. Low prices, low interest rates = rewards if you plan to stay in the home.

Sharon

Hi Wanda

Its not that I dislike that Advice,but  the alternative is continue to rent and I see no advantage in that for any one so I guess when we pick the wost of two evils. my advice is buy............Brad

She is not right for Las Vegas, Here the market price dropped about 50%, The rents, due to the foreclosure's rate are higher than mortgage payment, even with 10%down. The unemployment rate is 13%. Do if you are qulify just buy. It is not a better chanse, than right now, especially in Vegas.

Suze's advice may be good for the move up buyer but definitely not for the first time buyer. We all need to start somewhere and if you make the right choice guided by a knowledgeable agent and lender you could one day be that move up buyer. In a perfect world we all would have 8 months of savings in the bank!

I had posted once before at #93 and just wanted to add as others have stated that her advice is general and should be used as a guideline - each person's situation is different and their goals in life are different.  I had suggested that a customer should watch her show for awhile  before purchasing to understand that buying a home should be part of the whole picture - it's not just a matter of what is a good guideline to purchase a home.  Some people have explained some different suggestions on calculating the variables, and I think that the customer should be making the decision after they have all the suggestions.  Maybe someone is comfortable with 3.5% down and they have more reserves, or any other combination. 

I want to be someone's Realtor for life, so I often think when a customer buys a home with little down and low reserves, what happens if they have their pay cut (like loose overtime), one person loses their job (it can happen even if it appears they have a stable situation), someone gets sick in the family, etc. etc. , and they have to sell soon again.  Anything can happen.  We should ask them when they purchase - what is plan B?  If you have to sell and you don't have enough equity to cover the selling costs and the prices go down, what are you going to do?  They may have put 20% down and not received much back if they have to sell again, but what's the alternative - they do a short sale and ruin their life for many years, all because they qualified to buy originally with lower down and reserves?  What did they gain from that?  

The 20% down and 8 months reserves aren't really the point here - the point is we should help them to make a good decision - we can educate them, and it is their choice if they go ahead, but then it is an educated choice and they are aware of what the consequences are.  I think her show is good to watch for someone that has not considered a full plan of savings, investments, retirement, etc.  A lot of people may bash her, but it can also set some people on the right track to make a plan - the saying is that purchasing a home is the biggest investment you will ever make, it should be considered as that as part of the whole plan.

 

 

Very funny Karen Anne!  Lots of emotion here in the comments.  I think we all want everyone to have more money saved, and we want people to have 20% down, but for a first time home buyer, the market in many areas does not require that kind of cash.  I just think home ownership is a good thing.  If I had waited until I had that kind of down and saving with my first home, I wouldn't be in a 70% equity position right now.

 

That would knock out almost all of the first time home buyers in my experience and would have knocked me out when I was a first time home buyer too. It's ideal, but not really practical and there are so many reasons to get into home ownership in this market!

 

Suzie Orman doesn't just offer conservative advice - it is so conservative that it is often wrong-headed and does more harm than good.  There are two major risks - the risk of losing your money and the risk that your wealth will be eroded due to inflation.  There has to be a balence.  Suzie lacks that and it prevents people from taking advantage of an ideal market.

Wanda, I so agree with you.  It would be great to have this conservative advice pan out but reality makes a difference.  I don't want things to go back to everyone getting everything but there does have to be some give for those who have stability and the ability to buy.

Hi Wanda, Great post, got a lot of people talking.

I think Suze is just a bit disconnected from the reality of most Americans. FHA was designed to make home ownership a reality for the middle class. Couple that with the down payment assistance programs, and it touches the upper lower class.  I have the same thoughts towards Suze as I do the Congressman/Representitive from Texas who recently submitted a bill to do away Freddie & Fannie altogether and go back to 20% down across the board. Ivory Towers have a way of skewing ones perspective. More thought should be put into the comments and actions of these people who have the public eye , based more upon who will be taking that advice, not on who is giving it. Both of them are very priviledged and disconnected from the real world, and I think there "advice" is more detrimental than beneficial.

Just my two cents.

Suzy is on the air all the time in the NJ/NY area. She does tend to be conservative. As far as the first time homebuyers go, that is not realistic for 95%! WE have a loan specialist in our office that will help those who have bad credit, or not working temporarily, get on track to be able to afford down the road.

That is the best advice we can give them. Fortunately, we have a mixed buyer's market here, with buyers looking to downsize from up north.

Suzy is on the air all the time in the NJ/NY area. She does tend to be conservative. As far as the first time homebuyers go, that is not realistic for 95%! WE have a loan specialist in our office that will help those who have bad credit, or not working temporarily, get on track to be able to afford down the road.

That is the best advice we can give them. Fortunately, we have a mixed buyer's market here, with buyers looking to downsize from up north.

I made some calculations based on what Suzi said.On average, it will take 10 years for a buyer in my area to save for downpayment and closing costs. Here is the difference between renting for 10 years and buying now. My assumption is that the inflation will stay at 2.1% (wishful thinking) and the home will have zero appreciation for the next 10 years.

• If the inflation remains at 2.1%, the net cost of renting for 10 years is $148,073.23; the net cost of buying is $80,708.30
• If the inflation gets to 5%, the net cost of renting for 10 years is $168,902.53; the net cost of buying is $93,620.03

It doesn't seem that the buyer will be better off renting.

Here is my Rent Vs. Buy blog post

 

Jana,

Excellent analysis.   Suzie is wrong once again.

Run your numbers with 12% inflation because we can easily be headed there.  The current inflation figures do not take into account the cost of fuel and food (as if those are things are luxuries - your government accounting at work).  

Second point is maintence.  The cost of non-maintence is more expensive than the cost of maintence.  By that I mean that a landlord will not upgrade to the most energy efficient appliances.  A homeowner could very well do that to reduce the cost of heating / cooling and providing hot water, which would significantly lower monthly bills.

If you're not the type of person who relocates every 3 years then buying a house should be a serious consideration.  Fixing your housing payment (outside of insurance and taxes) for 30 yrs can't possibly be a bad thing. 

As for the down payment.  I'd much rather see someone get into a $120,000 house with 3.5% down ($4200) even if they had the 20% ($24,000) and put the difference of $19,800 in the bank as retirement, emergency, college, investment, etc...

I don't know how Orman can argue with that.

Great point Jana, glad you could pull these numbers together. 

Michael I have encouraged some of my new homebuyers to do this exact same thing.

I actually agree with Suze Orman (and Dave Ramsey who uses 6 months expenses instead of 8), and if more homeowners would have been conservative during the boom years...we wouldn't be in the big mess we are today.  Of course it makes sense that Realtors, who profit from 1st time buyer sales, would want buyers to leverage themselves to the hilt, get 100% financing, and just buy as soon as they can scrape together the money for an appraisal, but it's just another recipe for disaster.  1st time buyers may have to wait a little longer to buy, but there's nothing wrong with that.  Our instant gratification society likes to buy things before we can truly afford them, and you can see where that has gotten us...a country thats 14 trillion in debt, and a population that is just as much over their head.

Well, first, I'd like a definition of "Conservative". If by that it's meant 20% down payment, then it's correct in saying we wouldn't be in the big mess we are today. Instead, we'd be in a different big mess. The vast majority of home sales in the past 10 years just wouldn't have occurred at all. Why?

Well, you'd probably say that lots of people would have had the required 20% from the sales of their homes that had equity in them. Really? Who did they sell these homes to? Buyers who had 20% from the sales of THEIR homes? Really? And who bought their homes? Rinse, lather, rinse, repeat. This doesn't hold up.

Do you know the figure estimated as to the percenage of the population that currently has 20% of their home purchase currently in savings?

Better yet, how long will it take to save the 20% down if a potential home buyer started saving today. Take a look at this estimate from the Center for Responsible Lending. From that organization's name, you'd think they would agree with your statements, wouldn't you? HEY! IT WILL ONLY TAKE 14 YEARS TO SAVE THE DOWNPAYMENT! That's reasonable! And how about all those who had that in savings until they lost it in the big securities crash and pension and 401(k) wipeout?

I won't even address the statements regarding "Realtors" and their motivations in helping those 1st time home buyers. It's malignant.

Call it "Trickle Down Reaganomics" if you like, but what happens when maybe 80% of the home sales in the last 10 years didn't happen?

We'd all be looking for a different line of work. But what job would there be in that economy?