Wednesday, October 19, 2011

The Time to Buy is NOW!

I challenge everyone reading this entry to remember a time in your life when purchasing a home was more attractive.  Forget the articles about foreclosures, negative equity, etc. - I am talking about this static point and time and how you will be affected moving forward.

Last I heard, prices were at 2003 levels, on average. Prices in most local real estate markets are 15%-30% lower than their highs of 2006. As the tax code now stands, there is a significant tax advantage to owning a home as opposed to renting.

A few years back, when rates hit approximately 5%-5.5%, they were at a 30-year low and it was the opinion of most experts that rates could not go much lower. Since that time, however, the housing crisis has continued to spiral out of control and has done so for far longer than most had imagined possible. As a result, the government has done everything possible to depress interest rates as one means of spurring a housing recovery. To its dismay, this policy has not had its desired effect and housing prices have declined slightly further or, at best, leveled off in most local markets.

Sounds awful, but that was then and this is now...

Assuming you can find a 30-year fixed loan for which you qualify, the rate should be approximately 4% today! If you lock into this rate, you are doing better than your parents and likely their parents before them, and really, what could be the downside? Rates could go slightly lower and if they get to a point where it makes sense, you simply refinance at the lower rate. However, once these interest rates begin to increase, it will be the result of a policy shift, or the fact that the government is out of tools with which to depress rates. Either way, they will only continue to increase for the foreseeable future, and you will have missed the boat.

While the government is keeping interest rates low, it is simultaneously trying to stabilize prices so as to save any equity current homeowners may have and to spur an economic recovery. That makes the likelihood of further significant price declines unlikely. Also keep in mind that the longer you intend to own the home, the less important price is in relation to the interest rate.

Finally, buying a home and locking into a fixed rate gives you price stability over time, as well as flexibility. Many markets are seeing increases in rents given the difficulty of qualifying for loans and the general misconception that owning a home is a bad idea at this time. If you look at historic inflation rates and tie them to rent increases assuming 30 years of renting versus ownership, then it is a no-brainer to own a home. Roughly speaking, given a rent of $1,800 - $2,000 per month today, you would pay roughly twice as much in rent over 30 years as you would if you owned a home and were paying on a thirty-year fixed mortgage of the same amount. (These numbers are approximate. Speak with a tax lawyer, accountant, or mortgage lender to fully vet the savings.)

One more thing to think about. Assume the market bottoms, and interest rates (or prices and interest rates) begin to rise and you do not yet own a home. Maybe we even go into a period of inflation where interest rates rise unexpectedly and drastically as mentioned above. Without home ownership, you may be priced out of the market indefinitely. In the alternative, if you own a home under any of these circumstances, you at least have options.

If prices increase, you gain instant equity. You can sell your current home and use that equity to put down on a new home. Depending on interest rates and rents, you may alternatively want to keep your current home as a rental to offset some of the cost associated with a new purchase at a higher rate. Worst case scenario: if we do hit a period of rapid inflation, can you imagine how expensive it would become to rent a property or to buy a home? Just as no one predicted interest rates of 4% five years ago, no one predicted rates 0f 15-20% in the early 80's - until it happened, that is.

Just a few things to think about as you read all the negative articles bashing home ownership.

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