6 Good Reasons to Buy a Home Now
1. Prices have nearly hit bottom.
In most areas, most of the excess has finally been wrung out of the
market. But if you’re buying a first home or looking to trade up, there’s
no need to rush. Although prices may fall some more -- blame
foreclosures still working their way through the system and tighter credit
-- they won’t fall by much. Fiserv Case-Shiller, which tracks home
prices, forecasts that the median price nationwide will ratchet down for
about six more months, then stay flat for three or four years.
In most of the cities where home values
experienced a double dip after the expiration of the home buyer’s
tax credit in mid 2010, median prices won’t fall below their 2009 or
2010 lows, says David Stiff, Fiserv’s chief economist. These cities
include San Francisco, San Jose, San Diego and Washington,
D.C. But in cities with lingering oversupply of homes for sale,
Fiserv forecasts a decline of 10% or more in the median home
price (for the year ending March 31, 2012). These cities include
Riverside–San Bernardino, Cal.; Las Vegas; and Miami.
2. Houses are affordable again.
Homes haven’t been this affordable since 1991. Economists often
define affordability as the ratio of median home price to median
family income. According to Fiserv Case-Shiller, the U.S. ratio now
stands at 2.6 -- down from a peak of 4.1 in mid 2005 and just under
the long-term average of 2.8. Of course, some areas continue to
defy affordability. In California’s coastal cities and the New York
metro area, the ratio is 5 or more. Average mortgage payments are
another way to look at affordability. Since the housing market’s
peak in 2006, the average principal-and-interest payment in the
U.S. has fallen from $1,063 to $645.
Renters considering the jump to homeownership may be encouraged by the price-rent ratio, or
the median home price divided by the median annual rent. In 2005, the national median home
price had inflated to nearly 21 times the median annual rent, according to Marcus & Millichap,
a commercial real estate brokerage company in Encino, Cal. Since the bust, the ratio has
deflated to 14, less than the historical average of 15. During the same period, the difference
between the median monthly mortgage payment and median monthly rent fell from $745
nationally to $102. Marcus & Millichap expects rental vacancy rates to hit prerecession levels
this year, allowing landlords to raise rents by an average of 3.5%.
3. Mortgage rates won't go any lower.
For the past couple of years, interest rates have hovered at levels last seen when the veterans
came home from the Korean War. According to HSH.com, which tracks mortgage rates, at the
beginning of August the national average 30-year fixed rate was 4.5%. FHA loans, which
require only a 3.5% down payment, had a 4.3% rate. Adjustable-rate mortgages are even
cheaper, and even rates for jumbo mortgages have hit lows not seen since the 1980s.
Freddie Mac forecasts a 30-year fixed rate of 5% by year-end and 6% by late 2012. Standard
& Poor’s downgrade of the U.S. credit rating won’t have an immediate effect on rates because
of the weak economy. But credit is tighter,
and you’ll need a credit score of 740 or more and a down payment of at least 25% to nab the
lowest rates. If you fall short of that, you’ll pay interest-rate risk premiums if the bank plans to
sell your loan to Fannie Mae or Freddie Mac. For example, lenders must charge an extra 0.25
point if a borrower has a 740 credit score but puts down less than 25% (but at least 20%).
4. It's a buyer's market.
Demand is low; supply is high. In early summer, the National Association of Realtors reported
that sales of existing homes (single-family houses and condos) fell by 9% from the year before.
NAR also reported 9.5 months’ supply of homes. That’s how long it would take to sell all the
homes on the market at the current pace of sales, and it strongly favors buyers. (Four to six
months’ supply is considered balanced between buyer and seller.)
With so much selection, you’ll find more properties in good school districts or near your job, or
homes that offer added value, such as a mother-in-law suite, says Thomas Popik, research
director with the Campbell surveys of real estate professionals. You’ll spend less time
shopping and competing against other bidders. And you don’t have to waste time with sellers
who set unrealistic prices (although they’re still out there).
One caveat: If you’re searching among entry-level homes, which had more extreme price
declines than upper-end houses did over the past year, you may face stiff competition from
investors. They typically pay cash, which makes them attractive to sellers who want to close
the deal fast. However, says Popik, you may find opportunities in homes that were bought and
fixed up by investors, who intended to flip them but have had difficulty making a sale.
5. You may find a distressed property.
Bank-owned foreclosures (or REOs, for “real estate owned” properties) sell for an average
discount of 35% off the per-square-foot price of conventional homes for sale, according to
RealtyTrac. In the first half of 2011, lenders owned about 870,000 REOs but listed only about
one-fifth of them for sale, concentrated in such high-foreclosure states as Arizona, California,
Florida, Michigan, Nevada and Ohio; even with the slowdown in the foreclosure pipeline due to
legal-processing issues and new supply exceeds sales. Find more on buying foreclosures.
Short sales, or homes sold with lenders’ permission for less than their owners owe on their
mortgages, have also grown in number. Lenders have become more amenable to them as
they seek to avoid the often huge losses associated with foreclosures, says Rick Sharga, of
RealtyTrac. Short sales offer buyers less of a bargain than REOs, but the homes tend to be in
better condition. Banks may still take two to six months to sign off on a short sale, so patience
is imperative.
6. Homeownership is still attractive.
A home is the biggest purchase most people ever make. But deciding whether and what to buy
isn’t purely a financial decision, says Chris Herbert, research director at Harvard’s Joint Center
for Housing Studies. When you own a home, you can control your living environment and
security, upgrade and change your home as you see fit, and create a sense of rootedness in
your community.
You can offset some of the cost of homeownership by deducting mortgage interest. But don’t
mistake a home for an investment, at least not in the short run. “If your goal is to jump in and
get a return of 6% annually, that’s a bad idea,” says Fiserv’s Stiff, given the forecast for weak price appreciation. Instead, you need to commit to owning the home for at least five to seven
years to ride out any further price declines and recoup your down payment and transaction
costs. If you think that you might need a bigger home before that time to accommodate a
growing family or that you might have to move to another area for your job, don’t buy unless
you’re willing to become a long-distance landlord.
Shop carefully, and be patient.
