People are afraid to buy a home in times like these, with the
economy tanking and home prices continuing to fall. But if you’re
brave enough to stray from the herd, you might be in for the
home-buying opportunity of a lifetime.
Reasons to buy a home this year
People are afraid to buy a home in times like these, with the economy tanking and home prices continuing to fall. But if you’re brave enough to stray from the herd, you might be in for the home-buying opportunity of a lifetime.
Ask for price reductions, improvements, closing costs – whatever – and the seller, desperately trying to get a contract, is very likely to work with you, said Jay Papasan, one of the authors of the book “Your First Home.” When the market starts improving, your negotiating power starts to diminish, he added.
“People can get a lot of what they need and almost all of what they want today,” Papasan said. “Once a few people get off the fence, there’s safety in numbers and you lose your leverage.”
If you’re qualified to buy a home now, the purchase makes sense for your situation and you’re prepared to live in that home for at least five years, there are reasons why you may be headed for a great deal:
1. Affordability is better than ever
According to the National Association of Realtors’ housing affordability index, homes were more affordable in December than at any other point since the group started the index in 1970. The affordability index is a measure of the relationship between home prices, mortgage interest rates and family income.
John and Julie Chilman, for example, recently have been able to stretch their dollars in the Las Vegas area. The listing price for the five-bedroom home they’re buying was $265,000; they offered $250,000.
“Our Realtor was like ‘Yeah, pipe dream. Like they’re going to take that,'” John Chilman said. “And all they did was counter $255,000 … and they’re paying all closing costs.” The home had lingered on the market, and was listed for $310,000 just six months ago, he said.
In Las Vegas, prices have fallen 50.7 percent from their peak and are now where they were in the second quarter of 2002, according to data from Clear Capital, a real estate valuation and data provider for banks and investment firms.
A report from Moody’s Economy.com, released this month, predicted that house prices will stabilize by the end of this year, even though the Case-Shiller house price index will fall another 11 percent from the fourth quarter of 2008. By the end of the real estate downturn, prices will have fallen by double digits, from peak to trough, in almost 62 percent of the nation’s 381 metro areas, according to the report. In 10 percent of the areas, declines will be more than 30 percent.
Not all markets have experienced huge drops, however, so it’s wise to take a look at how far prices have fallen in your area. The Office of Federal Housing Enterprise Oversight’s Web site has a house price calculator that can help at www.ofheo.gov/HPI.aspx.
2. You have a large
inventory to pick from
In many places it is taking months to sell a home, creating loads of inventory – from new homes to existing homes to foreclosures. There was a 12.9-month supply of inventory in December given that month’s sales pace, according to NAR.
A large selection gives buyers more choices and drives down prices. And home sellers have gotten the picture.
It’s fair to say that home sellers have become “increasingly desperate,” Papasan said. “People who have had for-sale signs in the yard for six months are starting to become in tune with the reality of the situation,” he said. Buyers can take advantage.
But if you put off a purchase until inventory shrinks substantially, you might not get as good a price, said Eddie Fadel, author of the book “Don’t Rent, Buy!” And be forewarned: It’s nearly impossible to time the exact bottom of the housing market and even if you do there’s no guarantee you’ll make a killing.
“You buy for quality of life … don’t buy on speculation,” said Duane Andrews, CEO of Clear Capital. “I wouldn’t buy a home expecting the housing market to rebound quickly in the next 10 years,” he said, adding that he expects moderate gains in values when the turnaround does happen.
Historically, real estate appreciates about 5 percent a year over the long term, said Nancy Flint-Budde, a Salem, N.Y.-based certified financial planner. But as the country crawls out of a recession, many markets probably won’t see huge home-price gains any time soon.
3. Builders are
offering big discounts
Homebuilders are getting even more aggressive with their pricing.
In fact, Fadel recommends looking at completed new homes first because builders are offering such steep discounts. Plus, you’d have a warranty not only on the home itself, but also on the home’s appliances, he said.
“(Builders) want to save their credit, save their brand, save their reputation and clear out inventory,” he said. “They can go buy cheap land today with that cash.”
His advice: Walk in with a preapproval for a mortgage, make an offer, then walk away without making a deal if you have to. Chances are, a builder will call back and reconsider that offer rather than let a potential buyer get away.
4. Mortgage rates are historically low
It’s not just the price of the home that will affect affordability; mortgage terms will also affect your monthly payments. These days, rates are very attractive for conforming loans, those that can be purchased by mortgage agencies Fannie Mae and Freddie Mac. (The current limit is $417,000, although that can rise as high as $625,500 in high-cost markets.)
Earlier this year, rates on the popular 30-year fixed-rate mortgage hit a level not seen in decades, and rates have stayed relatively near that low for weeks. For the week of Feb. 5, the 30-year fixed-rate mortgage averaged 5.25 percent, according to Freddie Mac’s weekly mortgage survey.
But low rates don’t mean lenders are handing out mortgages easily. You’ll need good credit, a substantial down payment and a willingness to document your income in order to qualify for those great rates, if you can qualify at all.
5. You can get a federal tax credit
There’s currently a federal credit of up to $7,500 for home buyers who haven’t owned a home in at least three years. That extra cash will come in handy: The average first-time home buyer spends about $6,000 in the first six months of owning a home, said Flint-Budde.
Reasons not to buy a home this year
The unemployment rate is creeping up and home prices keep falling: Two great reasons why it might be best to put your home buying plans on hold. After all, your own job could be the next on the chopping block. Plus, why not wait until home prices have reached their bottom and you can safely buy knowing your new house won’t depreciate like a car coasting out of the dealership?
“It may be 2010 or 2011 before the general public believes it’s safe to go back into housing,” said Steve Fifield, president of Chicago-based Fifield Companies, a firm that builds condominium, apartment, and office buildings. “You don’t want to be the first guy to go back in.”
Keep in mind, for some Americans buying won’t even be an option due to stricter mortgage underwriting standards that require bigger down payments and higher credit scores.
But if you think you might qualify and you’re tempted to test the market, consider these reasons for staying on the sidelines instead:
1. Prices are still dropping
Data shows that prices are still dropping in many markets. If you buy today, your home could be worth less in a year or even two.
“People don’t like to buy depreciating assets,” said David Berson, chief economist for The PMI Group. According to PMI’s most recent U.S. Market Risk Index, reported last month, the risk of lower prices two years from now has increased across the country. Half of the country’s 50 largest cities had an elevated or high probability of seeing lower house prices by the end of the third quarter of 2010, compared with the third quarter of 2008.
Other home price measures haven’t painted a rosy picture either. According to the Case-Shiller home price index, values in 20 major U.S. cities fell 18.2 percent in November, compared with November 2007. Prices are down 25 percent from their peak in 2006, according to the index.
Steep discounts in some of the hardest-hit housing markets have some people wondering if prices could be starting to bottom. But some markets saw price drops later on than others – and it could take longer for those latecomers to improve, Fifield said.
2. This sale will be on for a while
From a pure investment standpoint, you’d probably be better off investing in stocks, said Nancy Flint-Budde, a Salem, N.Y.-based certified financial planner. In a normal market, real estate appreciates about 5 percent a year, she said. But even if prices stop falling this year, as Moody’s Economy.com is predicting, price appreciation could be weak for a while.
In fact, while some recoveries resemble a “V”-shaped pattern, this housing recovery could look like an “L” – once a bottom hits, prices will flatline, said Jay Papasan, one of the authors of the book “Your First Home.” Prices likely won’t rocket to housing-boom levels soon, as conditions are exacerbated by rising unemployment and foreclosure inventory.
The lesson: This housing sale could go on for a while, so there is no need to rush.
“Even if in December of 2009 the first stories appear that sellers aren’t lowering prices any more… you need that uptick and information showing that not only are sales increasing, but prices have stabilized and are starting to go up,” Fifield said.
3. You may not stay put
If prices continue to drop, you might have to be in that home for longer than you thought in order for the investment to make financial sense.
In any market, it’s best to buy a home with the intention of staying there five to 10 years, said Flint-Budde. This guideline is even more important today, when you might have to absorb more price drops and weather a couple years of slow price growth.
First-time buyers must be listening to that rule of thumb: According to research from the National Association of Realtors, the typical first-time home buyer in 2008 planned to stay in their new for 10 years, up from seven years in 2007.
Brian Rayhack, for example, is renting an apartment in Chicago because he’s just not sure how long he’d be living in the city. “If I was going to be here more than five years I definitely would have bought,” he said. For the flexibility that comes with renting, it’s was worth it for him to wait.
4. Your job could be the next to go
Maybe you’re spooked by the headlines of job cuts. Perhaps you have friends who have recently been laid off. If you think your own job might is in danger, stop right there – and stay put.
But even if you’re comfortable with your own job security, investigate how your future neighbors are faring.
Your real estate agent will tell you to pay attention to local market conditions instead of national trends. But don’t stop by only looking at neighborhood home prices; the health of the local job market is also important to consider.
Have there been many layoffs in the area recently? What are the largest employers, and are they in industries that are suffering severely? Is the local economy diversified?
“What is the state of the job market in my area, and my metro area in general? That’s going to impact overall demand,” said Richard Moody, chief economist with Mission Residential. At the very least, get a sense of what the local inventory situation is like, relative to demand, to anticipate the pressures on prices over the coming months or years, he added.
It’s best to get a broad picture of the housing market, rather than simply asking yourself “can I afford it or not?” Moody said.
5. Your cash reserves
will be eaten up
Given the recession and the fragile economy today, even if you feel confident about your job, it’s wise to have a cushion to land on in the event you get hit with a financial broadside, a divorce or a major health bill, for instance. If your down payment would deplete your rainy day fund, keep saving for a while before house hunting.
“Even if you feel like you’re secure in your job, it’s much smarter to have five or six months of expenses to have aside. A reserve is a wise thing in this economy today,” Papasan said.
