So after only a *short* break from my new blog series, here is the second installment. I know you are all loyal readers and fans, and will forward this to anyone you know who might benefit from it. Hopefully, I have all the *math* right!
The Right Time to Buy?
While in most price ranges home prices have fallen locally over the last two years, I am seeing signs that Buyers are still afraid to buy. Mortgage rates remain at the lowest rates in decades, first-time Buyers and now qualified “move-up” Buyers can benefit from an $8000 and $6500 tax credit respectively, and yet Buyers are still leery to pull the trigger. How will they know when to buy?
The tax credit for first-time Buyers has enough media coverage and Buyer attention to get the word out on the financial benefits of homeownership: not only the potential of equity growth over time, but the ability to deduct mortgage interest and property taxes and that any gains made on sale are tax-free if you occupied the home two of the last five years.
Even with the recent value drop, the common consensus among investors is that real estate remains one of the best performing long-term investments. Yet what about the near-term? No one wants to feel like they made one of the largest purchases of their life only to wonder if they could have gotten the same home for $10,000 less in six months!
So, let’s create a scenario.
Say you are looking to buy a home for $200,000 with 3.5% down. Your loan amount would be $193,000 and your down payment $7000, your Principal and Interest Payment $1036/mo.
But you were not sure it was the right time, so you waited. Six months later the Seller reduced the price to $190,000 (a 5% price reduction). Your loan amount now is $183,350 and your down payment $6650 (saving you $350). But the rate in the mean time has gone up to 5.5%. Still incredibly low! However, your payment now is $1041/mo.
Yes, it’s only $5/mo more, and you saved $350 in down payment. But if you plan to live in the home 5 years, that is an extra $300 in payments, and while you were waiting the six months for the price to drop, you were still paying rent! If your rent is $500/mo – that’s $3000 out of your pocket that you could have used for a down payment! Or to build equity in YOUR home instead of someone else’s. And you cannot deduct ANY of that $3000, while if it was being applied to your mortgage payment, the bulk of that would be deductible on your Federal Taxes (please consult a tax advisor for information). Is it possible rates won’t rise 0.5%? Yes. But what is more likely: a Seller reduces the asking price by 5% or rates rise 0.5%?
Rent vs Buy
Consider further the chart to the right, as provided by the National Association of REALTORS®. This assumes a purchase price of $200,000 with 10% down at a rate of 5.5% vs $1000/mo in rent (a bit high for this area, but comparable to a mortgage payment in this price range). Not considering any equity gain from payments made toward the principal, in a year of no growth the annual cost of the loan is $9,673 vs $12,000 renting. That means even with no market value growth, the homeowner would still have an extra $2327 in his pocketbook vs. renting. Who couldn’t use that? Even at a 1% depreciation in value, the homeowner would be up $327 on the investment vs. renting. And obviously even better off with below trend growth.
So is it a good time to buy? Yes! Most price ranges currently have increased inventory to choose from. And if you are a first-time or “move-up” buyer, the scenario above does not even take into account the added tax credit available – which is refundable – cash in hand! And this time, it is NOT likely to be extended again.
Think you are interested in more? Call me today!