Our latest home buying report in Utah is that home purchases are up in Utah compared to this time last year. If you think you might be able to move, why wait?
Foreclosures remain a major weight dragging down on the national housing market, and then there’s the massive shadow inventory of distressed homes that will create more supply overflow as they are brought onto the market. Add up all of that, and suggesting now is a good time to buy a home is probably less popular than Rupert Murdoch. But along with all the bad news are in fact some compelling reasons for getting serious about buying right now. For example, home prices have come down so far in many markets it now makes the cost of buying a better financial deal than renting.
Crazy or Crazy Smart to sit on the fence?
Many individuals and families have sat on the fence for a few years patiently waiting to see how the markets unfold. This has seemed like a smart strategy up until now. But while you’re laser focused on the idea that home prices will be lower in the coming months, NOW is that time. In some areas and markets, especially in Utah, we have hit bottom and it’s time to start to get off the fence or you will miss the low rates along with good prices. Some areas, some neighborhoods and some parts of the country we might experience some lower prices than now, but not much more.
Below are key reasons why anyone who is pondering a home purchase or to refinance into lower rates or debt consolidation might want to consider making a move sooner than later. Potential first-timers certainly have far easier logistics than current homeowners who need to sell to make a move. If you’re underwater on your loan, trading up might not be feasible, but you could be able to refinance into a new lower interest rate loan. To determine your eligibility, you need to speak with a licensed mortgage broker that knows the guidelines, ins and outs of multiple lenders and can help you determine what loan options are available for your particular situation. But there are indeed plenty of current homeowners sitting on ample equity. For them, and for potential first timers, here are a few key reasons why now just might be a smart time to make your move to either purchase a home or to refinance.
1. Renting isn’t such a great deal. This is all about Econ 101: Demand for rentals the past few years has increased — a function of foreclosures and fewer existing renters making the decision to buy — and supply hasn’t kept up as there has been little new construction since the financial crisis hit. That’s pushing up rental prices. Mark Zandi, Moody’s Analytics chief economist expects rents to rise an average of about 5 percent over the next year. Real estate firm Reis Inc. forecast 2011 rental hikes of more than 5 percent in markets including Fort Lauderdale, Fl., Fort Worth, TX, Washington, D.C., and Seattle.
That’s likely going to exacerbate an already interesting trend playing out in many markets. In a recent analysis by Trulia.com, the ratio of sales prices to rental prices means buying a home today makes more financial sense than renting in about 80 percent of regional markets included in the study. No surprise, Las Vegas and Phoenix, where home prices have cratered, offer the best buy-vs.-rent tradeoff. But even in more stable housing markets such as Dallas, Philadelphia and Atlanta, buying offers strong relative value compared to renting. The needle will likely tilt even more toward home ownership in the coming year given the expectation that rental rates are heading higher in many areas, while home prices aren’t.
2. The worst of the price declines is likely over. From the market peak in 2006, the S&P/Case-Shiller index of 20 housing markets is down 32 percent. Ugly indeed. But what’s important is what comes next, not what we’ve just come through. And no one is suggesting we have another 30 percent to go. Zandi recently said that another 5 percent slide in home prices might be on tap. To be clear, no one is suggesting roaring price gains are on the horizon either. The takeaway is that we’re potentially at an important pivot point where we’re moving from steeply falling home prices to an extended period of stabilizing prices.
3. Mortgage rates are at historic lows now, only to rise. Right now the 3.85 percent interest rate on a 30-year fixed rate mortgage is beyond fire-sale cheap, as is the 3.25 to 3.5 percent interest rate for a 15-year mortgage. Assuming rates will stay where they are at, or even fall some more, seems a risky bet. Fannie Mae expects the 30-year fixed rate will hover around 4.75.0 to 5.5 percent in 12 months from now. To be able to get a very low interest rate right now and to be able to save tens and hundreds of thousands of dollars of interest over the years is a huge savings by making a wise financial decision today / this year.
If you take out a $300,000 30-year fixed rate loan today at 4.00 percent, the savings at the lower rate for many years to come is much greater than by having a loan at 4.75 or 5.5%. The small difference in interest rate can save not only tens of thousands, but on a loan this size, hundreds of thousands of dollars in interest. Who would you rather have that money, the banks or you and your family?
If during your wait the 30-year fixed rate rises to 5.5% percent you would need home prices to fall nearly 12 percent to come in at the same monthly mortgage cost as what you can get now. That’s more than double the price decline most market watchers are expecting.
4. Mortgages for pricey homes are heading higher. Even if mortgage rates don’t budge between now and next summer, mortgages for expensive homes are still going to cost more. Right now lenders that write mortgages use to write them for as much as $729,750 in certain high-cost areas and still have that mortgage qualify as a “conforming” Fannie Mae or Freddie Mac loan. This has dropped to $625,500 & in some high cost areas down to $600,300. That’s a big difference. That’s a big deal to lenders who are typically eager to sell off their loans into the secondary market — and right now Fannie and Freddie are the secondary market. If you intend to borrow more than that you will be shut out of the conforming loan market, and will have to opt for a jumbo loan. Jumbos typically carry higher down payments and the mortgage rate can be 0.50 percent higher than the conforming loan rate.
5. Qualifying for a mortgage is likely to get harder, not easier. The goal of Washington in the coming years is to shift more of the mortgage market out of the hands of Fannie Mae and Freddie Mac and into the hands of the private market. It is admittedly too early to know when and what that transition might look like. But whether the government backing is scaled down or disappears all together, that means higher borrowing costs. Moreover, there’s already a new regulation being considered that would require banks that want to keep selling 100 percent of their mortgages to Fannie and Freddie to hold borrowers to tougher lending standards.
6. Scary national statistics are especially deceptive right now. RealtyTrac reported that 28 percent of home sales in the first quarter of 2011 were foreclosures, and the average foreclosure sale price was 27 percent less than what a non-distressed home went for. But peel back from that ominous headline statistic and there is a more nuanced story playing out that goes to the heart of the old maxim: All real estate is local.
While foreclosures dominate the hardest hit states of Nevada (53 percent of first quarter sales), Arizona (45 percent) and California (45 percent) at the other end of the seesaw are the likes of New York (7 percent), Texas (12 percent) and Pennsylvania (14 percent). If you live in a state (or neighborhood) teeming with foreclosures, I would be the last to tell you that this is the perfect time to buy. There’s likely a long slog ahead as your market works through its backlog in inventory. But if you’re in a market that is in fact a lot healthier, don’t let the broad national story scare you off right now. Foreclosures in Nevada are irrelevant if you’re thinking of buying in Texas.
7. Less competition. There may be plenty of lookers at open houses these days, but the snale sales pace is proof that there are fewer serious buyers looking to make a deal. That makes it less likely you’ll find yourself in a bidding war today. It also means you can negotiate more effectively with eager sellers if you are ready to prove that you are a buyer that is qualified and able to purchase right now rather than only showing interest. If you wait to dive in and you could find yourself in a more crowded pool of buyers. It’s just common sense that once there are clear signals of recovery, demand will pick up. Being a little early/ahead of the curve gives buyers more elbow room.
8. Mortgage Payments are Cheaper than rent. There are many people that are paying higher housing costs by renting than if they were to be in a house with a mortgage payment. If they only knew they could qualify or soon qualify to buy a home.
Interest rates teeter totter every time the country has a strong economic time period and then after so much contracting from the Federal Reserve & Central Banks. In the near future, rates will increase again. Then they will steady off for a time and a few years later they will decrease, but not as much as they have now. It will be many years again before this country sees rates as low as we are living in and experiencing right now. Our children and their children will probably not see interest rates as low as we have them right now.
If you doubt this, just look up the historical charts on bond pricing going back to 1920. History will show where we are today and how to compare it. You will then see the motivating factor that time is now, not in the future to make wise financial decisions that will last for decades.
The national deficit is so enormous that the inevitable day is going to come that interest owed on our national debt will need to be paid. How will this happen? First, Treasuries will have higher interest rates. As treasuries go, so do long term bonds. The 10 Year yield & the 30 year yield are at record lows never seen since the end of WW II. Wow, is this true. Yes it is. Here is some hard data for historical interest rates. The historical interest rate history that I was able to research that goes back to WWII era is the Prime Rate Index, http://mortgage-x.com/general/indexes/prime.asp Where prime rate is, the 15 year mortgage rates are about 3.5% higher, 30 year rates are about 4 4% higher. So you can see approximately where mortgage rates are historically based on this historical data. You will see that we are living in an era of very low historical interest rates.
To worry about interest rates not being low enough to buy is the most stupid and ridiculous excuse for any home buyer. It should be a reason to jump for joy. When the time comes that interest rates start to rise, they will jump between 1/2 to 1% in a very short period of time. This jump in rate over a short period is going to be the end of an era and start of a very long rise that will last for years if not at least another decade of rates being higher for generations to pay down the national debt that is confronting many generations before us.
9. Tax Deductions. The benefits of home ownership typically outweigh renting. The first tax deduction to be an owner of a home is the mortgage tax deduction,(check with your CPA or a licensed CPA for details), (most American’s qualify for this tax deduction that have a mortgage).
How about the tax deduction when you sale, assuming you have been fortunate enough and still are to have a profit, after 24 months of living in a home as your primary residence, if there is a profit, those profits are tax free. The first $250,000 of profit are tax free if you are single. If you are married, the first $500,000 of profits are tax free. Wow, that’s a large increase in profits in today’s market. But still, any increase in profits is good, especially when it is tax free income.
There isn’t another investment for the middle class or the average American that will give you annual tax deductions and also the benefit of selling an asset with as many tax advantages as owning your own home. Again, check with your CPA for accuracy and details.
Ben Gerritsen is a loan officer for Altius Mortgage Group in Sandy, Utah. He helps people in Utah mortgage loans. he resides in North Ogden, Utah. He helps both people purchasing homes & refinancing their mortgages.
You can reach Ben Gerritsen at: