The news media have been buzzing with mostly bad news about the housing market for the past couple of years; and from the looks of things they will not be stopping anytime soon.
As a result, many prospective home buyers in my Atlanta market ask one basic question: is it better to buy a home now, or wait for home prices to decrease even further – assuming they will do so – and get an even better deal? Let’s explore the factors to consider whether to buy now or hold off.
But first, did you know that a California home buyer who bought at the top of the market – just before the Savings & Loan Crisis – saw their home value drop an average of 15%, before climbing to a 10% increase within 10 years?
More than just price, the Affordibility of a home is the most important aspect to take into account when considering buying a home for your family. And housing ‘affordability’ is made up of:
- Current interest rates that you qualify for
- Current home prices
- Sustainable income
That will not last. You see, the rates are artificially low, pushed down by a massive Federal program of buying Mortgage Backed Securities (MBS) which are the bonds that determine long-term mortgage rates. And currently Fed Chairman Ben Bernanke has repeatedly said that they will cease this MBS buying program at the end of March, 2010.
There is speculation that the Fed may determine at the last minute that they need to continue buying MBS into the foreseeable future in order to continue to help the housing market. So far, that is simply speculation. Others say that when the Fed does stop buying MBS, then rates will need to increase to attract more buyers to take their place. I agree with the latter position.
Secondly, home prices are down. Moreso in some areas than others. Certainly Florida, Nevada and California are quite depressed from their bubble highs. But even around metro Atlanta, there are pockets where prices are 20% or more off their highs.
And when prices come down, that means things are on sale. Recently I was on a conference call with a leading economist, Harry Dent. He quipped that he just bought a Maserati, at $50,000 less than he would have had to pay 2 years ago. Wow, a Maserati on sale!
And houses are on sale now as well. Will the prices go down further? Possibly. But again, that is not the only factor to consider. “Affordability” is the main factor, and if mortgage rates rise, then home prices have to drop by the same margin to keep prices as affordable as now. That seems unlikely, simply due to demand of a growing population.
Take a look at the following graphs, which track housing affordability:
And this graph that shows, considering the three ingredients in housing affordability, we are now at an all time high, since these stats were tracked:
Finally, the third aspect of housing affordability is income. The graphs above track median household income.
And here’s where your decision-making needs to come into play the most. What is your income? And, what is the likelihood that your income will continue, with stability?
A lot of folks are in companies right now where they can see the writing on the wall – things are not stable. And therefore they may be downsized, or they may need to transfer to another area of the country. If that is you, then wait. Affordable or no, the third aspect in your life to determine if now is the right time to buy a home is simply not there.
On the other hand, if you have no reason to suspect that your income will not remain stable, then you are in the catbird seat.
The next thing to do is to consult with a mortgage professional to determine the amount your are comfortably approved for, and the right loan for your circumstance. Then, you are ready to take advantage of an unprecedented time in the housing market.