Hi hddana,

While you are (on the surface) asking a question related to the time-value of money, savings progressions versus appreciation rates, and other considerations.... I would sincerely propose that your dilemma is actually far more family-dynamic oriented.

A) If DS is a full grown adult, and behaves in any way that you would otherwise kick-out as a tenant if he were not a relative, you are doing him no favors (really... I know this doesn't emotionally gibe, but its true) by "being only fair" and putting up with his crap.

B) If DS isn't saving his cash revenues at a pace faster than the costs of interest and the rates of local appreciation, he's in no financial strength to become a home owner.

There are certainly different opinions & arguments about matching treatments of children... but mine is that there are no two people identically alike (and that includes not just kids, but parents,) so attempting to treat people the same is simply unnatural. INSTEAD, treating children with equal love but CUSTOMIZED life factors is far more natural and healthy.

Your post is short, so I won't read too much more between the lines... HOWEVER, it does seem like your DS may benefit from a bit of a waking up to reality, and a "casting off to fend for oneself" to a greater extent.

ALL kids are NOT equal. I have a younger brother who was MUCH more responsible, MUCH earlier than me. My folks helped him (either a gift or loan, I don't even know) with the down payment on his 1st home... and then I later found out my folks had actually felt GUILTY that they hadn't done the same for me. THAT WAS LUDICROUS... I am writing you here & now to say at that point in my life I DIDN'T DESERVE that kind of support, and would have almost certainly just let it trickle right through my fingers.

Here we are now, decades later, and now *I* am the family financial cornerstone... so don't let past performance appear to be a forecast of future results (in a twisted restatement of that stockbroker's disclaimer.)

Luck!
Dave Donhoff
Leverage Planner

Gee, Dave, I was excited to see you had answered my query, but disappointed that took off on a tangent. I guess I opened myself up for that, but I was still disappointed.

Home ownership will be a challenge for the DS because he works in education and therefore doesn't make much. But it is something he very much needs and wants to do, and we will assist as much as we are able, fairness aside.

If you have any thoughts about modest putting aside of money versus rising interest, I am still hoping to hear them.

Hi hddana,

Well... as I implied, I may have read too much between the lines (or not...)

I believe we are nearing, if not already, at the bottoming of home prices, and credit inavailability... but I expect we'll "dwell" along that flattened out bottom for a while.

SO... your DS has time, I believe, to accumulate liquidity & reserves, build credit, and prepare for a home purchase. time is on the buyer's side these days.

Have a nice weekend!
Dave Donhoff
Leverage Planner

Sorry - But I think Dave's post was very much on target. At least, from your post, it sounds like it may be. You wrote:

"He has done some work to clean up his credit, paid off his car and credit card, and is working to match an inherited gift of 5k for purchasing his first home as well as paying on his school loan. "

This makes it sound like he has had some past financial struggles. That's hugely common in young adults who are now living with their parents. Certainly the rule, rather than the exception. And most often, those types of struggles originate from a difficulty in delaying gratification -- "Buy it now" syndrome. And if that's the case, helping your son to "Buy it now" -- even if it's the best financial move, may not be the best parenting or teaching move. The best way for him to learn to make wise financial decisions is by working hard and sacrificing to earn his own money to invest. By achieving it himself at his own pace.

However, if I misread your intentions --
That your DS is just starting out, and is starting out responsibly --
-- building credit rather than repairing it,
-- paying off student loans that are current and manageable,
-- and that his car and credit card are current and in good shape

Then, the purely financial question becomes more relevant.
However, the answer to that question will vary from locale to locale...

Dave, I'm curious. What do you see that leads you to believe we are, "...at the bottoming of home prices..."?

A leveling off of foreclosures? Strinking inventory? Stabilizing month-over-month sales prices? What indicators are you using?

/tricia

Uh, that should be, "shrinking" inventory!

/t

Hi Tricia,

Well, I should really say "depending on the local area." Some areas still have room to go to reach normalcy (many of California's coastal-boom areas, as an example.)

I believe that the "par" price/value for home-ownership can be expected to be what a little bit of a premium payment over the local market rents would acquire as a home.

In other words, of you could rent a home at $1,000 a month, that home's "par" price in the market would be what it could be bought for with payments at some "ownership lifestyle preimum" above that $1,000... perhaps $1,200 to $1,300-ish.

In some markets the ownership payments are just about equal to the local rental payments for the same size/style homes.

In San Diego however, despite a 30-50% reduction in home prices from the top so far, payments to own are still a good 25-50% higher than local market rents. The two have to get closer... and since vacancies and desperately-trapped sellers are flooding the rental markets with supply, forcing rents DOWN, the only way for the values to converge to "par" is for home prices to drop significantly further (at least until/unless the rental prices firm up & start climbing again.)

Cheers,
Dave Donhoff
Leverage Planner

DS is living with us since he got a new job nearby. He has done some work to clean up his credit, paid off his car and credit card, and is working to match an inherited gift of 5k for purchasing his first home as well as paying on his school loan.

My $0.02:

Your son has done a lot to become a homeowner. Without a car payment or credit card debt, he can now start seriously saving money, not just for a down payment but also an emergency fund and retirement. You are very generous to let him live at home during this time. He's well on his way! Let him build up the various nest eggs and settle into his new job, and figure out his own time-table for his life (e.g., buying a house, etc.) - it's all part of the fun of being a grown-up! :)

Should we remain patient, encourage him to build slowly on the down payment fund, and hope there are even more deals to choose from in 4-5 months, or get to work finding his new home before interest rates get worse?

The second part of the question is a bit worrisome. It's great that you're patient and encouraging but what do you mean "get to work finding his new home"? Shouldn't your son be the one doing this - for that matter, making the decision to look now or in 5 months, or maybe in 3 years?

I don't know how old your son is, but there really isn't a rush to become a homeowner. Owning a home is great but it's not everything. Again, making these types of decisions is all part of the fun of being a grown-up.

As for interest rates rising - seriously how high can it go? (I know, stupid question - my old roommate bought in the 80s when interest rates were in the double-digits, but assume it won't be that bad). It's probably more important to have a bigger down payment and steady job growth as well as lower house prices (and it sounds like housing prices may still be decreasing in his target neighborhood).

I am in the process of getting a mortgage. Although our credit is ok, I am going FHA-why? The conventional mortgage sector is in trouble. You just don't know what will happen. I have heard horror stories of people going to the closing table only to find there is no money. FHA is government backed and is quite stable. It is also the only kind of loan people with poor credit can get right now. Subprime doesn't appear to exist at the moment. You need scores of at least 580 and will have explain past credit problems in some kind of a letter. You need to put down 3%. Have your son talk to a mortgage broker and find out what he needs to do. He will certainly need to get credit report. Believe me there will be errors on the credit report. You can't imagine the mistakes we found on ours. However, with a little work and perseverance, I bet your son will be able to buy a house.

Oooh, Dave vs. Tricia.

Clash of the Titans!

..where's my popcorn...

FWIW, I *really* hope rates stay low for a while...

Thanks for everyone's take on this. Lots to think about.

Usually what happens is when rates go up prices go down. I do think in most area's prices will still fall for a little while longer.