3/2/2011 2:49 PM ET|
Are you crazy to buy a home now?
It's tempting to shop for bargains in a down market. But make sure the investment makes sense for your situation.
Home prices are falling again after a brief respite, and respected Yale economist Robert Shiller predicts values could drop up to 25% further before markets stabilize.
High unemployment plus a huge "overhang" of foreclosures and potential foreclosures don't bode well for residential real estate. Neither do higher lending standards, as banks remain tightfisted about granting mortgages. Lenders are demanding better credit scores and bigger down payments than in the past.
For example, the median down payment for home purchases in nine major markets has doubled in the past three years to 22% of the sale price, according to a Wall Street Journal analysis of Zillow.com data.
So would you be nuts to buy a home now?
Some people don't think so. Although the S&P/Case-Shiller Home Price Indices showed that home values fell 3.9% nationally in the fourth quarter of last year, home sales have actually been rising -- driven in part by investors snapping up properties and people who don't need mortgages to buy. Investors accounted for 23% of all sales in January, up from 17% a year earlier, according to the National Association of Realtors (NAR), while all-cash deals constituted 32% of sales, up from 26%.
Besides, many economists aren't as bearish as Shiller. They note that prices are rising steadily in a few markets, and some expect a nationwide recovery to begin by next year.
Should you join the optimists? Or wait safely on the sidelines until the real estate bust is clearly over?
Well, here's the thing about trying to time the real estate market: You really can't. Even if you had a crystal ball that would tell you the exact moment your particular market hit bottom, conditions may have changed significantly by then. Interest rates could very well move higher, meaning you'd have to pay more for a loan or settle for less house. Mortgage underwriting standards could change, meaning you might need to accumulate a bigger down payment than is required now or accept a riskier loan. We even might see a return of bidding wars, as other would-be homeowners, conscious of the turning tide, raced to buy.
Then again, it's no fun to buy a house that loses value. Ask the 20% (or more) of homeowners who owe more on their homes than they're worth, or the millions who have already lost their houses to foreclosure. An "underwater" home can be a horrible trap if you lose your job or need to move.
So when should you buy? My advice today is the same as it was before the boom, during the boom and ever since the bust: Buy when you're ready. That means:
- When you really want to be a homeowner.
- When you're financially ready for all the costs.
- When you're prepared to stay put for a while.
Let's drill down into each of these three situations:
When you really want to be a homeowner
The idea that home ownership is always a great investment should have died with the real estate boom, but unfortunately many people still cling to the notion that there's gold in them thar subdivisions. In reality, home price appreciation has always been something of an illusion.
Even real estate cheerleaders like the NAR concede that home prices in the past only slightly outpaced inflation. Consult Shiller, and you get an even dimmer view. He found that except for a brief period after World War II and the boom between 2000 and 2006, the inflation-adjusted return on housing has been zero. Zilch. Nada. And Shiller's analysis didn't factor in the considerable costs of maintaining, repairing and modifying a home.
A couple of things are true about homeownership, however. Homeowners do tend to be wealthier, with 10 times the net worth of renters on average. Whether this is cause or effect isn't clear. Also, there's the forced savings aspect. Pay down a mortgage over 30 years and you'll wind up owning, free and clear, a property whose nominal value is probably much higher than what you paid for it. If you don't think about all the money you shelled out for property taxes, insurance, new roofs and remodeled kitchens, you might even feel rich.
But home ownership also offers plenty of intangibles -- and to me, these intangibles make a far better case for buying than bogus arguments about tax breaks (oh, please -- you're paying far more than Uncle Sam is giving you back) or "throwing money away on rent" (you're buying freedom, honey).
I feel more rooted in my life and in my community than I did when I was a renter. Plus I like being able to have pets and to paint the walls any shade I want. (Rather than convince a reluctant landlord, I just have to get the kid and the husband on board, and they're pretty amenable.)
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I guess we were all crazy to buy houses when they were more expensive than they are now. Now we’re crazy if we buy one in a down market. And after the market turns and prices start rising again one day, we will all be crazy because we didn’t buy a home now. Face it, you can’t win. You’re going to be labeled crazy, no matter what.
I like my house. I want to own it so that I will always have a place to live. I paid off the mortgage so that I will never lose it to any thieving bank. I live in a low property tax area so that I will never lose it to the government either. I might just be the happiest lunatic nobody on the planet.
a major reason why home prices will stay down is because of the hefty taxes a homeowner has to pay if you live in metropolitan city. I live in Miami, and taxes on a $300,000 home is in excess of $8,000 annually and an addtional $7,000 for homeowners/hurricane insurance. Thats over a $1,000 a month on taxes and insurance. Soon its going to be like a phone plan. you get a free home with a 30 year contract to pay city taxes.
I'm so grateful I bought my own place. Rents in my area (Massachusetts) are going through the roof. They predict a double digit increase in price again this year, perhaps as high as 25%. If I hadn't purchased in 2008, I wouldn't be able to rent a place 1/2 the size of what I own (and that includes maintenance and property taxes). It's all relative, you will always pay someone's mortgage - whether it's your own or the landlord's.
No one can really tell a particular person when the correct time is to purchase real estate. Real Estate is very local. What may be a good place to purchase a home in a smaller town with a low unemployment rate may not be a good place to purchase a home say in Florida where the market has just dropped and keeps dropping or in a place where the unemployment rate is very high. I would much rather put my hard earned money into my own investment and have more freedom as to what I can do at my house and own yard, as to handing my rent payment over to someone else so they can become wealthy with their real estate investment! If I rent and need money, I have to use charge cards or take out a personal loan at a high rate. However, if I own my own real estate and need a little advancement on money, I can take out a small home equity loan at a low rate. There is more leverage and buying power when owning your own real estate.
Just think about it, someone has to own what you rent. At the end of the day, they will have the cash flow building up their nest egg and the renters will just keep giving and end up with no forced saving power!
Good luck finding a decent place to rent with 3 or more children, dog or cat, with a yard at an affordable price.
I have middle class friends that are exploring every foreclosure they can find, not to live in but as rental income. I don't personally have the courage to do it but it's not filthy rich people that are snapping the majority of these places up.
We rent for $1,000 a month. Found out our landlord's payment if $564 when the real estate women brought paperwork over to put a "for sale" sign in the yard due to foreclosure!
I'm not a genius but do the math.
Our question is how long has he been pocketing the $1,000 a month w/out paying his mortgage?!
After seeing all the horror stories about banks coming in to soon-to-be foreclosed homes & trashing the places I put a sign on our door "WE ARE RENTERS CONTACT THE OWNER THRU THE REAL ESTATE AGENCY!"
I tend to agree with the first post...You would be nuts unless it is absolutely necessary to purchase rather than rent- and you have plenty of CASH.
Liz your article has some good points but you left out the most important facts in the current market....First do not buy a home thinking it is an investment that will pay off in the long term. Just ask the millions of owners that had 10, 20 years of equity but lost it all in the Economic downturn. Be sure to Hire your own Inspector, Be sure you purchase title insurance to guarantee a Clear Clean Title-especially beware of buying any foreclosure property.
If you want a HOME- not an Investment-get a contractor and build a new one that will be free
of bad history and fallen values. To become educated on the current Foreclosure Crisis visit
4closurefraudorg. They explain very clearly how a Mortgage foreclosure becomes a nightmare when your HOME becomes a piece of paper for Security Traders on Wall Street
A home is a depreciating asset, PERIOD. In the past, homes have kept pace with inflation, and in desirable markets actually increased in price. Take Chicago, a market with a 7% decline in population over 10 years. Housing should be plentiful.
Also consider, that high real estate taxes and ongoing maintenance make home ownership far less desirable.
Is now the time to catch a falling dagger in real estate? I am betting NO. If record low interest rates, mortgage interest deductiblity and the 1st 500K in profits cannot generate interest, then we are not even close to the bottom yet.
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