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 Marketwatch had an interesting series looking at the pros and cons of buying a house this year. Given I have commenced my own home buying process, it was a very timely piece, as I am sure it was for many others who are thinking of buying (or even selling) a home in year ahead. However before pulling the trigger on your purchase you need to consider the case for buying now versus waiting for conditions to improve. In current market conditions there is a strong case for either side of the argument. Here's why you should buy a house this year:
- 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. Housing prices are down and mortgage rates remain low, but home buyers should be aware that they're in it for the long haul because prices are unlikely to rise anytime soon. Moody's predicted that house prices will stabilize by the end of this year, while the Case-Shiller house price index predicted home prices will fall another 11% from the fourth quarter of 2008. However always talk to local agents and recent buyers (as opposed to national indicators) to really determine housing and price trends in your area.
- You have a large inventory to choose from: In many places it is taking months to sell a home, creating loads of quality inventory - from new homes to existing homes to short sales and foreclosures. A large selection gives buyers more choices and drives down prices (basic supply and demand in play). And home sellers have gotten the picture by offering great incentives like paying closing costs or throwing in new appliances to close the deal.
- Builders are offering big discounts: Home builders are getting even more aggressive with their pricing and it is worth looking at completed new homes first because builders are offering such steep discounts. Plus with a new house, you'd have a warranty not only on the home itself, but also on the home's appliances.
- 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 went below 5%, a rate not seen in decades, and rates have stayed relatively near that low for weeks.
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.
- You can get the new home buyer tax credit: The recently approved $787 billion economic stimulus plan has a home buyer tax credit of up to $8,000 for home buyers who haven't owned a home in at least three years and meet income qualifications. The credit does not need to be paid back. That extra cash will come in handy since the average first-time home buyer spends about $6,000 in the first six months of owning a home.
The above presents a pretty strong case for buying a home in the year ahead, and the $8000 homebuyer tax credit (assuming you qualify) is a real bonus. However, given the current adverse economic conditions and the gloomy outlook for the economy in general, and because this will probably be your biggest investment in life, you need to look at the other side of the buy argument and consider why it may not be such a good idea. Here are some reasons that could stall your decision to become a homeowner:
- 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. According to PMI Group's most recent U.S. Market Risk Index, 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. According to the widely reported and used Case-Shiller home price index, values in 20 major U.S. cities fell 18.2% in November, compared with November 2007. Prices are down 25% from their peak in 2006, according to the index.
- This sale will be on for a while: 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 flat line, 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.
- Negative Equity: 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. 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. 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.
- 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 be 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. The last thing you want to do is end up in a neighborhood fill of struggling homeowners facing foreclosure.
- 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 and Emergency fund made up of five or six months of living expenses, because you never know what lies ahead.
Overall, I don't know when the "right" time to buy will be. No one does. In reality buying a house is a very personal decision for every family based on many factors. For me, I need more place for an expanding family, am planning to stay in my current location for a while and most importantly have sufficient funds to put down a healthy deposit while still having
emergency funds
set aside. But I am not rushing into anything and will only buy when I find the right house at the right price.
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