It’s Time to Buy That House
The residential real estate market is just right for consumers looking for a single family home, condominium, or co-op. Pro or con?
Pro: Get Out Your Wallet
At this time in the economic cycle, one might think that venturing into the choppy waters of home buying is the last thing you should think about. But there are good reasons you should consider it.
Home prices have declined to a level that’s more in line with household incomes than at any time in the past several years. Residential real estate prices were artificially inflated because of wider access to easy-to-qualify loans that had features making affordability of payments, even if only for a year or two, seem attractive. So home buyers only looked at the payment, not the loan features or the price of the property. The idea was that home prices would continue to rise, and the borrowers would at some time refinance the loan or sell the house to recoup the equity and buy a different property. Times certainly have changed.
The latest Case-Shiller Home Price Index for a 20-city composite showed that prices recorded a 1% drop in August 2008 and were down 16.6% for the past 12 months. Miami had a 1.8% monthly drop and a 28.1% tumble over the past year; in San Francisco, it was -3.5% monthly and -27.3% for the year. In September 2008, existing home sales rose 5.5% nationally. Evidence shows that home sales by units have increased slightly and the bottom on prices is nearing.
What does this mean to you? First, if you have good credit and a modest down payment, your opportunities to buy a home for shelter (tax benefits and a roof) are better now. Don’t even think about flipping the house for a while; concentrate on the basics. In Los Angeles one year ago, the median home price was $582,450, according to the California Association of Realtors. This September, it was $376,790. The National Association of Realtors report on the metropolitan area median price of single-family homes indicates that we are back to the levels of 2005 and earlier in certain markets. The steep decline is not reflected everywhere, but you get the picture.
Mortgage rates for 30-year fixed-rate products, although slightly up, are still affordable at or near the 6% to 6.5% level. Given an average sales price of $200,000 in today’s market and a $40,000 down payment, your principal and interest on a 30-year fixed-rate loan this year would result in a $1,011.31 monthly payment. That same home would have cost you $221,000 early last year, you would have needed a $44,200 down payment, and the principal and interest alone would have equaled $1,117 per month.Lower prices and access to quality mortgage products mean that this is the best time to buy.
Con: What’s the Rush?
There’s an old saying that "it’s not the fall that hurts, it’s the sudden stop." If you can see the bottom, that’s one thing. Instead, imagine falling in the dark with no idea when you will hit bottom. Such is the feeling of uncertainty in residential real estate. So is now a good time to go residential? I say no.
The August 2008 S&P Case-Shiller Index shows that house prices fell 17% over the last year with some areas declining as much as 30%. That’s a signal to buy, right? Well, there’s some risk and uncertainty that may cause house prices to fall even further. With overbuilding by more than 1.5 million units during the housing boom and a current absorption rate of about 1.6 million units per year, it is predicted that house prices will hit bottom in the last half of 2010.
Next, with about 10 million homeowners (about one in six) underwater, there is tremendous uncertainty regarding the performance of underlying mortgage loans. About $260 billion in high-interest-rate loans (mostly subprime) will have interest rate resets in both 2008 and 2009. The expectation is that the federal government will take some action to reduce the resulting foreclosures. The Treasury Dept. currently has a $40 billion plan to guarantee 3 million "at risk" mortgages. The argument is that unloading problem loans onto taxpayers will stop the decline and set a floor for prices. Some feel that any market interference creates an artificial floor and may produce a self-fulfilling prophesy of defaults. There’s also talk of bankruptcy-law changes allowing judges to rewrite mortgage terms. Lenders can already rewrite loans participating in the FHA Hope for Homeowners program.
Private institutions are also involved. To address foreclosure problems, JPMorgan Chase (JPM) and Bank of America (BAC) have instituted loan modification programs. There have been calls for a foreclosure moratorium and reductions in mortgage balances to reflect the home’s current value.
It is true that falling prices have increased affordability. The median house price for existing homes ($191,600) is the lowest since August 2004. But, with a choice, why buy now? Instead of rushing out to buy houses, I suggest that we all gather round and sing the chorus of Tom Petty’s Free Fallin’ .