Should You Buy a Home Right Now?
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(Photo by Chad Jones)
Conventional wisdom says that buying is preferable to renting. Instead of throwing money away on a home, you can invest in your future and have the sense of fulfillment that comes from owning a home. Turns out, conventional wisdom is wrong. Today, many long-term renters are in a much stronger financial position than many recent homebuyers, and the last thing these homeowners are feeling is contentment. But the combination of firesale prices on homes, the drop in mortgage rates, and government assistance in the form of the first time home buyer tax credit, may have you reconsidering the idea of buying your own home. Is now a good time?
The Good
Here are a few of the reasons why now is a better time to buy a home than it has been at any point in the past few years:
Tax Credits
In the stimulus plan signed by President Obama, there is a first-time home buyer tax credit of $8,000, provided that you stay in the home for 36 months. This isn’t a tax deduction like your mortgage interest, which reduces your taxable income – a tax credit actually reduces your total income taxes owed. In addition, some states, such as California, are offering tax credits for home buyers that will further reduce your tax liability. Keep in mind that the federal program ends on December 1st of this year, and while it could easily end up being extended, it isn’t a given.
Rates last week dipped to an all-time low when the Fed announced that it would continue buying additional mortgage backed securities. Even though they ticked back up slightly in the past few days, with full income documentation and good credit, you can easily get down to 4.5% on a conventional 30 year fixed if you have 20% down, and if you want to get into an FHA loan, you can more typically get around 5.0% with a down payment of only 3.5%. Be careful when shopping for rates online, and think twice before giving out personal information. It is far better to ask friends and family for a strong personal recommendation, and use the information that you see on sites such as bankrate.com to approximate where your rate should be. Keep in mind that everyone’s scenario is different and there are a lot of new rate adjustments for conventional loans that didn’t exist in prior years, so you can easily end up paying 1 point (or percentage of the loan amount) for a loan that might cost your friend zero points for the same rate on the same day with the same lender.
Because You Don’t Absolutely Need to Buy
The best time to shop for a home is when you don’t need to. You can be as aggressive as you want to on your offer, and time is on your side because prices aren’t going to go back up overnight. If you are patient, you can find a home that you love, and just make sure that you can comfortably afford it and have a long-term plan to keep the property.
The Bad
These are factors that should not be driving your motivation to purchase a home right now:
Timing the Market Bottom
The same advice that applies to the stock market applies to the housing market. Don’t try to time it. If you have played around with the stock market in the past year and tried to catch a falling knife in the hopes of maximizing your return, you can probably look at the scars on your financial statements and let it serve as a reminder not to time the bottom. The turnaround in prices is gradual, and you are not going to miss out on an instant, overnight spike in real estate prices, no matter how fast the bank-owned properties are selling locally.
The Illusion of the Discount
Perhaps a new development popped up three years ago and was so shiny and perfect that you would have taken a third job to afford it. Now, the model that you love has popped up for $400,000 and all of the recent sales were at $450,000. In a stable market, that is great, but if you live in a declining market, you have now become the new comparable sale that any listings in the development in the near future will be measured against. So, if you buy this place for $400,000, and your new neighbor decides to move, they now will likely be advised by their real estate agent to price their property at or below your price in order to sell quickly. The same holds true for purchasing bank-owned properties. Bank-owned sales may be somewhat less frequent and given slightly less weight in determining the next sales prices in your neighborhood. However, if you buy in a neighborhood with a relatively high level of short sales and foreclosures, that great deal you just got on the bank-owned property just set the bar lower for the whole neighborhood.
The Ugly
If you don’t know what you are doing or have enough of a cash reserve to justify the risk, this real estate market can eat you alive, especially if you are short-sighted.
Fix It and Flip It
Unless you are lightning fast, experienced at managing renovation projects and holding plenty of cash that you are comfortable risking, that late night real estate fix-and-flip infomercial that was recorded in 2003 should not be considered your ticket to financial freedom. Of course there are gurus who have been waiting for this opportunity, and you are driving around listening to Robert Kiyosaki on iTunes with your Bluetooth intact looking for the bargain of the century. Just do your research, and don’t think that any particular property is the last opportunity you will ever have to get a great deal.
Until you see your local median price leveled off or even slightly increasing for a few months consecutively, you are dependent on sweat equity, which in many cases is wiped out by a few homes in the neighborhood going into foreclosure and further reducing home prices. Again, this market has become hyperlocal, down to the subdivision. In Orange County for example, prices for stronger neighborhoods may be down only 10% in the last year while properties less than a mile away have been cut in half or more in extreme cases.
Are you really ready?
How much are you paying now for rent? You should look at a good principal and interest calculator or talk to your lender to get the whole picture, including monthly amounts for taxes, insurance, any applicable homeowners association dues, and any applicable mortgage insurance. This is important even if you plan on paying taxes and insurance on your own (rather than impounding them and making monthly payments to the lender) because you will want to make sure to budget monthly to set aside for these expenses. So, if you are paying $1,500 currently for rent, and the new home will be $2,500, put your budget to the test and see how well your finances run when you put the amount of the increased housing expense (in this case $1,000) into your savings account. Take it out right when you pay your rent, and don’t touch it. This is a great test of how much you can really comfortably afford, and of course has the nice side effect of padding your savings for a few months before you start shopping for a home.
Of course, if you have a long-term plan to be in the home, the fluctuations and potential decrease in value in the near term doesn’t need to get you down, as the only price that matters is the price you are able to sell for when you need or want to move.
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25 Comments so far
leave a commentThanks for sharing the Pros & Cons of buying a home in this market. I was just talking to someone yesterday about buying a home. This article has been very helpful.
Kim Beasley
http://ProMembershipService.com
http://KimBeasley.com
The NYTimes has a good rent vs buy calculator that shows whether or not it is worth it financially to rent or buy and how long you would have to live in a home to make a profit over renting if it is a deal.
http://www.nytimes.com/2007/04/10/business/2007_BUYRENT_GRAPHIC.html
I think Jason raises some very valid concerns with regards to buying a home in today’s market and I am glad that he points out that “everyone’s scenario is different”; however, if you are in the market to buy a new home, now may be the best time in over 20 years to do so. Mortgage rates are at historic lows and housing stock is at a surplus with prices being at the lowest they have been in recent years.
I would strongly recommend, as Jason has, that each potential buyer take a look at their individual financial situation as well as talk to their banker and/or tax professional. Many first time homeowners do not accurately calculate total homeownership costs, including property taxes, increased utilities, association dues (if applicable), ongoing maintenance, etc. However, if you are able to swing it, there are definite benefits to owning a home rather than throwing your money away on rent to pay someone else’s mortgage.
Still far too early to buy unless you are buying foreclosure that is marked well of retail price. Thus far most of the downfall in prices have been due to bad mortgages. That is not the typical reason for housing price fall. Usually its a bad economy and job losses… with a lag effect. That is yet to come.
Still far, far, far too early. More details here.
http://www.fundmymutualfund.com/2009/03/home-sales-surge-51-err-drop-46-err-umm.html
Thank you Jason for the reasonably lucid round-up.
I would like to add one point:
So, if you are paying $1,500 currently for rent, and the new home will be $2,500…
I don’t think I would even consider this situation. That’s a huge price differential and it carries a big risk that people don’t like to talk about: moving.
We’re in a giant economic shift. Certain places are just dying (Detroit) and buying a home is a long-term venture. Moving is expensive, but it’s even worse when you have a home.
With this $1,500 / 2,500 comparison, the “break-even” number is somewhere around the 10-year mark. That’s a long time. With even big companies and head offices laying off large numbers of workers, how many of us know where we’re going to be in 10 years?
How many of us could afford to sell an underwater home b/c we needed to move?
I agree with Richard Dupree. I bought my first home when I was 19, back in the housing boom of 2001. I did not accurately predict the cost of lawn care, painting, shovelling snow, landscaping flower beds, gutters, water heaters, and insulation. Some of those things i left to be fixed later but cost me a lot in energy efficiency and curb appeal. I was so excited to get in and begin paying the mortgage that I didn’t realize I would need an additional 100$ a month for bills that were non-recurring things. Sure it easy to calculate your monthly utitlity bills and services but not so with the 6 months out of the year lawncare in MN. Luckly for mint users, if they continue to use mint for over a year they can get more accruate averages for costs. I would recommend people have $5000 left in the bank AFTER they close and move into there home. That way they can afford to fix most anything that could go terribly wrong month two or begin shopping for the perfect peice of furnture for that odd shaped corner in the living room.
And what of the value of your time? I would reccomend young professionals consider Condo’s and townhomes more serioursly because yardwork is a part time job. Even on a city lot if you do not put 3-5 hours a week into your lawn it will suffer greatly. Dead or weedy grass hurts resale value. If you live on more than half an acre plan on 7 hours per week to make it pristine, any less and you will see the effects of “settling or cutting corners” years down the road. It is not just nonrecurring expenses that pile up, undone chores can really take a bite out of equity years later.
Gates VP said “With even big companies and head offices laying off large numbers of workers, how many of us know where we’re going to be in 10 years?”
I think he is implying that people may need to move to find a new job. Moving expenses can be large and disappointing. Great reason to make sure you financial balance sheet is in good position to weather drastic changes in income. Which brings me to my next point.
When Gates VP asked “How many of us could afford to sell an underwater home b/c we needed to move?” He was referring to a very common problem in the US. Recent reports indicated 1 in 5 US mortgage holders owe more than their home is worth. Another way to ask the same question, ” can you imagine paying in more than $20,000 to sell your home?” Underwater loans used to be a problem with car loans but now even homes run that risk in a market where you neighbor could foreclose next week. I suggest considering pay off acceleration techniques to put people in a position that is more flexible. Getting your home back to positive equity allows you to sell it in the event of a layoff, medical leave, divorce, and other circumstances that make the monthly payments hard to bear.
I wouldnt. Prices are still going down. Buy now and a year from now you will be upside down with negative equity.
RT
http://www.anonymity.us.tc
I’m one of those “long-term renters” who’s been waiting patiently for the right time to buy. I have great credit and I easily secured an FHA loan.
What I wasn’t prepared for was the nightmare of dealing with the banks. Warning to buyers: if you’re looking at bank-owned properties, get ready to be screwed-around with.
First of all, they take ages to respond to an offer. On several occasions I waited weeks for a reply while the house remained on the market. Also, they were reticent to deal with an FHA buyer because they wanted more money up front. In the end I had to pay all my closing costs (which isn’t how it’s supposed to work).
Once I finally had an offer accepted. My escrow was supposed to be 30 days. On the 29th day the bank that owned the second mortgage on my place said the original negotiator had quit and now they had to reassess the situation. I finally closed after nearly 60 days. Meanwhile I had to pay extra rent on my apartment (about $1,000).
My lender said this is the worst he’s seen it. Normally only a few escrows run into problems. Now he says it’s more often than not.
Be warned!
We’re in the final stages of purchasing our first house now. We were planning on purchasing next year but with the $8k tax credit we decided to just do it this year to get that extra money. We found a perfect house for us in a great area. If we’re not at the bottom(which I think we’re close) we don’t care because we plan on living there for a while.
Great analysis. There are a ton of factors beyond “will the market keep dropping?” Like: will interest rates go up? What is the risk reward ratio on buying a home?
My take: it depends on where you live and what you’re buying. Some markets have dropped 50% and some of those markets are starting to flatten out or are just so cheap right now that the benefits of buying a home are worth potential declines – Sacramento, CA, Stockton, CA, etc. We’re even seeing people competing to buy in some of those markets. Other markets, like Seattle and Portland, are still declining at a pretty quick rate.
Good story! Thanks for the analysis.
You should buy right now, houses are on sale! My wife and I just bought a new house in Cherry Hill, NJ 1/3 off of what the house is currently worth. If you try and fix up the house as mentioned above, you can make a great deal of money. A lot of people now days think times are so bad and no one can make any money. I think the opposite is occurring right now. If you can take advantage of the situation, you can Earn Money.
I’ve been waiting to buy property in Southern California since 2002. I got here just as the boom was starting to peak. Houses are now 50% off. So, I’m buying while the market is low. There are some amazing deals out there and it is a buyer’s market.
I wouldnt. Prices are still going down. Buy now and a year from now you will be upside down with negative equity.
I’m looking at buying a home next year any knowledge helps; I especially like your idea of testing out the monthly budget you’ll need when you buy a home – Great idea! Not only would that allow me to be certain I can afford a home, but it will help me increase my down payment.
I am in Philadelphia. We were late to the housing party (only 8 new condo towers built… unlike Miami, 50+ of them).
Average house prices here in the city went over $200K back in 2007 and stayed above there for a short while, but they have only gone down a smidge.
Instead of following all the economic mumbo jumbo, I’ve been focused only on one driver: our local job market. It seems I will have to wait a bit longer than the other first time homebuyers. The mass layoffs have only now started to impact the City as there are a lot of folks in the City who either have a municipal, state or Federal job, a healthcare job, or an education job… all of which are strong sectors even in this downturn.
But the bright spot on the horizon is that one of our other industries, legal (we have a LOT of lawyers in Philly) is being hit very hard. The city’s oldest and one of its largest lawfirms dissolved two weeks ago and 15 other law firms in the city have all had layoffs.
About half the legal workforce in Philadelphia lives in the city, so I’d recon it would take about a year for those layoffs to show up in the housing market as those people leave Philadelphia and need to sell off their high-end properties.
Once those houses are up for sale and the Option-ARM resets kick in next year, we should be getting some nice deals.
If interest rates go back up to 5.5% I will still have lower payments by waiting to buy a 4-story rowhome for $180K versus buying the same house now at 4.9% for $265K.
This article also doesn’t include property taxes, and in Philadelphia those are increasing by a whopping 16-20%! It would be much more advantageous for me to wait and let existing homeowners get socked with the property tax hikes which would convince more people to move out of the city and lower property values.
Yes, it is impossible to time a market bottom. But, with low int. rates and the new Obama $8K credit, activity is increasing in Texas.
Socal still isn’t cheap. Any place you would want to live, is still pretty expensive. If your looking for something cheap and looking Inland you will be living with Gang Bangers everywhere and guns going off every ten minutes.
If you look towards the beach, your still paying 500k plus, for a 1500 sq ft home that front the street and backs a brick wall out your kitchen window. Not to mention the HOA’s and Mello Roos. In Irvine’s Woodbury you can buy a two story 1035 sq ft condo for 550k, with a $300 per month HOA where everything is cloned to look the same.
Reality is, the banks are on to the repo’s and short sales. Say they have a home in an area that ranges around 500k. They put it up for sale at 250k and then begin a bidding war with all the crazed buyers. They say it’s a closed bid but every time an offer is submitted, they tell you on the sly, if you want it you will have to go higher. Then there is the “highest and best” gig, that they give you five times until the price is up to 550k and some sucker thinks they have just bought the Trump Plaza out from everyone.
If you really want a good deal, get your real estate license and sit at the front desk of some sap real estate company. When a desperate buyer comes in, tell them you have an investor to buy it asap. Then buy it before anyone finds out, then quit.
Reality Real estate in 2009.
PS the low rates are what got us into this mess. What happens to the housing prices when the rates jump to a normal 7-8% range. You got it, the prices go down….
I agree if you live in an expensive neighborhood, you may be better off by renting. Not only that, instead of using the money for down payment, mortgage, property tax, and maintenance of a house in expensive area (eg: West Hollywood or San Francisco), you can invest that money to buy residential rental in different area, or maybe out of state, and pocket cash 6%-10% every year. Especially right now, you can find many houses that are 70% off from the peak and houses that cost less than their construction cost (you get the land for free).
This article will open your mind: http://wealthaspiration.blogspot.com/2009/05/when-renting-is-smart-financial.html
That article rocked. Especially the illusion of a deal. It is true, comparitively speaking prices are way down, but they are also probably right around where they should have been in the first place years ago during the bust.
Buying a Home – Many factors going into that decision. Lifestyle, money, income taxes, cash flow, 1 year plan, 5 year plan, etc. plus lots of EMOTION…. The first thing is you have to live somewhere. Then is to look at the R.I.C.E….Reserves, Income, Credit, and Equity (downpayment)….Is this the right time – It may be for YOU!
A great article! All the main themes about good and bad are outlined but ther remains one key factor.
Most of us want a home to raise a family and though times are tough the time to buy is now. Already there are great values in home price declines and interest rates are low. Even though there is great debete over the current status of the economy and unemployment, the time to buy is now!
The key is how you pre-qualify for a mortgage and what your current credit status is. Get this done first before you check out homes. The emotional rollercoaster begins if you start looking for homes and fall in love with something you can’t afford or could not qualify to purchase inthe first place.
The biggest factors in getting a mortgage now is your awareness of problems within your credit report, proving income, having assets and being able to make the payments. Even though everyone talks interest rates, you don’t know what you qualify for until these items are put together in an application.
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