Is Now the Best Time To Buy Your First Home?
You finally stashed away enough for a down payment on a first home. But all the talk about a housing bubble makes you nervous.
Is now really the time to buy?
It's a natural question, especially for young buyers who might consider relocating to pursue their careers in the near future.
After several record-setting years for housing, many economists believe the fast appreciation in many housing markets will soon peter out, particularly if mortgage rates rise substantially in the next few years. Rates have been near 40-year lows in recent times, and many experts believe they now have nowhere to go but up. If that happens, some expensive markets may see price declines or at least slower increases.
This all means that anyone buying a home right now shouldn't count on seeing a home purchase shoot up in value right away. It still could happen, of course, but the chances aren't as good.
"It's more risky than it's been in the past," says Karl Case, an economics professor at Wellesley College. "Prices are at record highs and have been going up, in some cases at alarming rates." Mr. Case says houses in some areas are lingering on the market longer than a year ago and prices in some hot markets have cooled.
Here's what to consider before jumping into the market.
Time Horizon
Common wisdom says that if you plan on keeping your home for five to seven years, you'll be able to ride out any significant price drop, recoup money spent on transaction fees and resell the house at a profit because it will have risen in value. Unfortunately, those are tricky assumptions for those who can't predict how long they'll stay in any one place.
But asking yourself some questions can help make the decision more clear-cut. What's the likelihood you or a significant other's job will change locations in the next few years? Will staying in one place that long, if need be, possibly hinder your job choices? Will you be happy with the size of the home and not need more space for at least several years?
Also, make sure that your expected income will comfortably keep up with your house payments so you're not constantly strapped for cash, or, worse yet, in danger of defaulting on your loan.
A good resource to check out is the "Rent vs. Buy" calculator at www.dinkytown.net, a finance site based in Minneapolis. From the home page, you can find the calculator on the left side, under the heading "Mortgage Calculators." This lets you enter various assumptions about buying a home (expected appreciation rate in your market, mortgage rate, closing fees, local property-tax rate, etc.) and compares that to how much you'll spend to rent.
If you assume your home will increase an average 3% in sales value each year, it may take several years to beat out renting -- especially if you've locked in a decent rent in your area. When home prices surge 10% or more a year, you can recoup your costs and start accruing equity sometimes in less than a year. But when prices creep up slowly -- or not at all -- it can take years before buying makes more sense than renting.
Location Matters
Where you're looking to buy is just as important as your time frame, since some markets carry more risk than others.
Many areas in the Northeast and California saw price increases of more than 70% in the past five years. These high-priced markets such as Los Angeles, Boston, Washington, D.C., and San Francisco are particularly vulnerable to price declines, because house appreciation has trounced income growth in those areas, says Chris Mayer, director of the Milstein Center for Real Estate at Columbia University. In these "growth" markets, he says, home buyers need to carefully consider how long they will be willing to stay put.
But most other regions are much less vulnerable to price drops. Many parts of the Midwest, Texas and Southwest experienced only modest price run-ups in recent years. Mr. Mayer calls these places "income" markets, since the growth has been modest but consistent.
Prices may not rise in these areas nearly as quickly as they did in the past five years. But the risk that prices will actually decline or stop rising altogether is much less. Therefore, your time horizon probably needn't be quite as long.
If your local market has seen single-digit appreciation per year, it's less likely t
hat prices will fall. Markets that have seen double-digit annual appreciation, however, are bigger risks because prices shot up so far so fast.
Keep in mind: The primary trigger of slowing appreciation in most markets would probably be mortgage-rate increases, not a faltering economy. So even if prices fall, a buyer could end up with roughly the same monthly payment -- or more -- for a house by having to pay a higher mortgage rate on a lower-priced home.
But it's still a gamble. Your options are to buy today at a lower interest rate for a possibly higher-priced house, or to bet that prices will fall far enough to make a higher rate worthwhile.
"It's not clear which [option] somebody is going to be better off with," Mr. Mayer says. "Even if house prices went down 5%, you might be better off having a mortgage rate that's 1½ [percentage points] less."
Risk Tolerance
For many, the investment return on a home takes a back seat to the personal benefits of ownership. You can fix it up according to your tastes, dig a garden in the backyard and often get more space for the same monthly payment as a rental. A huge portion of home value comes from "imputed rent" -- what you save by living in the home and not paying rent.
But, that said, investment value shouldn't be overlooked altogether.
Consider this unfortunate scenario: You put a $40,000 down payment on a $200,000 home. Months later, you have to sell at $170,000 and your equity is used to cover the loss in value and broker's commissions and fees. If you don't have enough cash saved up, you may find yourself without enough for a down payment on your next home.
Particularly in markets where the largest price declines are most possible, it makes sense to keep that risk in mind before buying.
In the end, if you're still nervous, you should probably rent for a while longer, until you're comfortable with making a long-term financial commitment.
From RealEstateJournal.com
By Kelly Spors
From The Wall Street Journal Online
Is now really the time to buy?
It's a natural question, especially for young buyers who might consider relocating to pursue their careers in the near future.
After several record-setting years for housing, many economists believe the fast appreciation in many housing markets will soon peter out, particularly if mortgage rates rise substantially in the next few years. Rates have been near 40-year lows in recent times, and many experts believe they now have nowhere to go but up. If that happens, some expensive markets may see price declines or at least slower increases.
This all means that anyone buying a home right now shouldn't count on seeing a home purchase shoot up in value right away. It still could happen, of course, but the chances aren't as good.
"It's more risky than it's been in the past," says Karl Case, an economics professor at Wellesley College. "Prices are at record highs and have been going up, in some cases at alarming rates." Mr. Case says houses in some areas are lingering on the market longer than a year ago and prices in some hot markets have cooled.
Here's what to consider before jumping into the market.
Time Horizon
Common wisdom says that if you plan on keeping your home for five to seven years, you'll be able to ride out any significant price drop, recoup money spent on transaction fees and resell the house at a profit because it will have risen in value. Unfortunately, those are tricky assumptions for those who can't predict how long they'll stay in any one place.
But asking yourself some questions can help make the decision more clear-cut. What's the likelihood you or a significant other's job will change locations in the next few years? Will staying in one place that long, if need be, possibly hinder your job choices? Will you be happy with the size of the home and not need more space for at least several years?
Also, make sure that your expected income will comfortably keep up with your house payments so you're not constantly strapped for cash, or, worse yet, in danger of defaulting on your loan.
A good resource to check out is the "Rent vs. Buy" calculator at www.dinkytown.net, a finance site based in Minneapolis. From the home page, you can find the calculator on the left side, under the heading "Mortgage Calculators." This lets you enter various assumptions about buying a home (expected appreciation rate in your market, mortgage rate, closing fees, local property-tax rate, etc.) and compares that to how much you'll spend to rent.
If you assume your home will increase an average 3% in sales value each year, it may take several years to beat out renting -- especially if you've locked in a decent rent in your area. When home prices surge 10% or more a year, you can recoup your costs and start accruing equity sometimes in less than a year. But when prices creep up slowly -- or not at all -- it can take years before buying makes more sense than renting.
Location Matters
Where you're looking to buy is just as important as your time frame, since some markets carry more risk than others.
Many areas in the Northeast and California saw price increases of more than 70% in the past five years. These high-priced markets such as Los Angeles, Boston, Washington, D.C., and San Francisco are particularly vulnerable to price declines, because house appreciation has trounced income growth in those areas, says Chris Mayer, director of the Milstein Center for Real Estate at Columbia University. In these "growth" markets, he says, home buyers need to carefully consider how long they will be willing to stay put.
But most other regions are much less vulnerable to price drops. Many parts of the Midwest, Texas and Southwest experienced only modest price run-ups in recent years. Mr. Mayer calls these places "income" markets, since the growth has been modest but consistent.
Prices may not rise in these areas nearly as quickly as they did in the past five years. But the risk that prices will actually decline or stop rising altogether is much less. Therefore, your time horizon probably needn't be quite as long.
If your local market has seen single-digit appreciation per year, it's less likely t
hat prices will fall. Markets that have seen double-digit annual appreciation, however, are bigger risks because prices shot up so far so fast.
Keep in mind: The primary trigger of slowing appreciation in most markets would probably be mortgage-rate increases, not a faltering economy. So even if prices fall, a buyer could end up with roughly the same monthly payment -- or more -- for a house by having to pay a higher mortgage rate on a lower-priced home.
But it's still a gamble. Your options are to buy today at a lower interest rate for a possibly higher-priced house, or to bet that prices will fall far enough to make a higher rate worthwhile.
"It's not clear which [option] somebody is going to be better off with," Mr. Mayer says. "Even if house prices went down 5%, you might be better off having a mortgage rate that's 1½ [percentage points] less."
Risk Tolerance
For many, the investment return on a home takes a back seat to the personal benefits of ownership. You can fix it up according to your tastes, dig a garden in the backyard and often get more space for the same monthly payment as a rental. A huge portion of home value comes from "imputed rent" -- what you save by living in the home and not paying rent.
But, that said, investment value shouldn't be overlooked altogether.
Consider this unfortunate scenario: You put a $40,000 down payment on a $200,000 home. Months later, you have to sell at $170,000 and your equity is used to cover the loss in value and broker's commissions and fees. If you don't have enough cash saved up, you may find yourself without enough for a down payment on your next home.
Particularly in markets where the largest price declines are most possible, it makes sense to keep that risk in mind before buying.
In the end, if you're still nervous, you should probably rent for a while longer, until you're comfortable with making a long-term financial commitment.
From RealEstateJournal.com
By Kelly Spors
From The Wall Street Journal Online
posted by Russell T. Nolting at
10:07 AM
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