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Consumer Watch: Mortgage or lease?

Weigh all variables before you buy a home in a tricky market

Mar. 17, 2011 - 02:32PM   |   Last Updated: Mar. 17, 2011 - 02:32PM  |  
Lt. Cmdr. Hank Warren and wife Kellie chose to buy a home in Stafford, Va., when they moved from Guam with kids Jacob, 15, Aiden, 7, and Ava Rose, 5. With lots of inventory well within their price range — and plans to stay in the area at least four years — they say it only made sense to buy.
Lt. Cmdr. Hank Warren and wife Kellie chose to buy a home in Stafford, Va., when they moved from Guam with kids Jacob, 15, Aiden, 7, and Ava Rose, 5. With lots of inventory well within their price range — and plans to stay in the area at least four years — they say it only made sense to buy. (James J. Lee / Staff)
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When Kellie Warren and her husband, Lt. Cmdr. Hank Warren, moved to northern Virginia from Guam last summer, they weren't skittish about the housing market.

"We knew we wanted to buy. Our family will be here at least four years," Kellie Warren said. "If the Navy is giving you a housing allowance, you might as well use it to buy a house."

The mortgage interest deduction on their taxes is a big financial incentive, too, she said — besides being able to decorate however she likes.

Some military families have long held this philosophy. It has often worked well — but not always, especially in the last several years.

Housing prices have dropped in many areas of the country, which means that some people who were previously priced out of the market now find it possible to buy a home.

However, housing markets haven't tanked in every military community. For example, in Killeen, Texas, home to Fort Hood, median housing prices have gone up since early 2007.

As you're making this big decision, put your financial situation and goals first.

If you're going to be at a location for less than three years, real estate agents across the board advise renting instead of buying.

But if you're thinking about retiring in a location, or you want to convert your home to a rental later, it might be time to buy.

"Housing affordability is at an all-time high, dating back to 1970," because of low interest rates and the drop in housing prices over the last several years, said Walter Molony, spokesman for the National Association of Realtors.

With Lt. Cmdr. Warren stationed at Marine Corps Base Quantico, the family chose to live in nearby Stafford, Va., primarily because of the schools.

When they were looking for a home in their price range, "there were pages and pages of houses we could afford," Warren said.

They paid $345,000 for their four-bedroom house. If they had bought the home between 2004 and 2006, they would have paid anywhere from $100,000 to $200,000 more, according to their agent, John Brady, a retired Marine with Coldwell Banker Elite in Stafford.

The Warrens benefited from the drop in housing prices. In the Stafford area, prices fell by an average of 20 percent to 40 percent between 2005 and 2008, Brady said.

Bad market has two sides

Lately, Lt. Col. Chris Meredith has seen the bad and the good sides of the housing market. In Woodbridge, Va., the housing prices also dropped — hitting him and his wife, Georgina, hard.

From the time they bought their Woodbridge home for about $400,000 in 2007 until they were transferred to MacDill Air Force Base, Fla., in 2010, the home's value declined by about $95,000. They can't afford to sell, and keeping the home is straining their finances.

Yet the Merediths chose to buy another home in Tampa because it was cheaper than renting in that area, Meredith said. The house is larger — 2,700 square feet — than what they would have been able to afford in a rental within their price range.

There's also a possibility they will retire in the area. They were able to buy a new house for $192,000 at a low interest rate, with a monthly mortgage payment of $1,250. Their basic allowance for housing is $2,500.

Where it's more affordable

Those moving to the San Diego area will also find more houses available in lower price ranges, said Bob Kevane, president of the San Diego Association of Realtors.

Overall, housing prices are down about one-third from their peak in 2006 and 2007, he said.

The median price for a single-family home in San Diego is about $375,000. But many houses are available in the $200,000 range — with two or three bedrooms and about 1,100 square feet, Kevane said.

Several years ago, it was hard to find anything in the area in the $200,000 range, unless it was a one-bedroom converted apartment sold as a condominium, he said.

It's a similar situation near Joint Base Lewis-McChord, Wash. "People are realizing it's a great opportunity to make a home purchase," said Phil Harlan, president of the Washington Association of Realtors.

The joint base is located in southern Pierce County, near the Thurston County line. With interest rates generally low and a good amount of available inventory, "it's a little in the buyers' favor, an opportunity to select what they want and negotiate a good deal," Harlan said.

Monica Balzano, a Navy reservist who is a real estate agent in the Hampton Roads, Va., area, said she is getting inquiries from people moving into the area. "There are a lot of great deals, a lot of foreclosures," she said.

Overall, the area's housing market is resilient because of the number of military installations, she said.

Housing as an investment

For most in the military, owning a house comes down to one question: What happens if I get transferred?

"I tell a lot of people that if they can't sell their houses, they should consider renting them," Balzano said.

"Many people can't qualify for loans, so they rent," she said, adding that she thinks it will become more difficult to qualify for mortgages in the future.

Military homeowners looking to rent their homes in areas with large military populations have an advantage because service members are generally good renters, she said.

But Balzano and others caution military personnel to think about what would happen to their future finances if they can't find a renter.

For those considering buying a house as an investment, "maybe you shouldn't buy your dream home, but a more modest home that you could turn into a rental," Harlan said.

He advises making sure the mortgage payment and other costs of the house are "at or below what it could rent for."

Keep the military housing allowance for that area in mind — not just for your needs in renting or buying, but for those who might rent your house in the future. Before you buy, consider whether the cost of your mortgage would be a reasonable amount of rent to pay for a broad range of people receiving that allowance.

Renting doesn't always work

But even that scenario could quickly change. An Air Force major who bought a home in Las Vegas when he was transferred to Nellis Air Force Base, Nev., in 2007 discovered that a "short sale" was his only option when he received orders to move to Minot Air Force Base, N.D.

The median home prices in Las Vegas dropped from $220,500 in 2008 to $134,200 by the end of 2010. Because the rental market in Las Vegas had also suffered — with a 20 percent vacancy rate, rents were depressed — the major's out-of-pocket expenses for the house would have been about $1,500 a month if he had kept it and rented it.

After the short sale of the Las Vegas home, the major and his wife are paying $335 a month for more than 16 years to satisfy the remaining mortgage debt that wasn't forgiven by the banks — on a home they no longer own.

Luckily, he was able to move into military housing at Minot, he said, because housing prices had increased in the local area.

"Not only did we move from one of the most devastated real estate markets in the country, but we had to move into the most inflated market in the country, Minot, N.D., a city with a booming oil business, agriculture, very low unemployment, and a lack of affordable homes due to the growth in the region," he wrote in an e-mail.

The Merediths carefully thought out their decision to buy a house in Tampa, limiting the amount they were willing to spend to no more than $200,000.

Chris Meredith advises anyone thinking about buying to look ahead to figure out whether you'd be able to afford the mortgage after you get transferred, if necessary, on top of the mortgage or rent on a place to live in at your new duty station.

Their Woodbridge tenant broke his lease, leaving the Merediths footing the entire bill for both mortgages.

"People say, ‘I'll have a renter,' " Meredith said. "But I'm never going to assume that."

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