Comments Off | Tuesday, October 4, 2011
Image via Wikipedia
Houses are affordable again.
Homes haven’t been this affordable since 1991. Economists often define affordability as the ratio of median home price to median family income. According to Fiserv Case-Shiller, the U.S. ratio now stands at 2.6 — down from a peak of 4.1 in mid-2005 and just under the long-term average of 2.8. Of course, some areas continue to defy affordability. In California’s coastal cities and the New York metro area, the ratio is 5 or more. Average mortgage payments are another way to look at affordability. Since the housing market’s peak in 2006, the average principal-and-interest payment in the U.S. has fallen from $1,063 to $645.
Mortgage rates won’t go any lower.
For the past couple of years, interest rates have hovered at levels last seen when the veterans came home from the Korean War. According to HSH.com, which tracks mortgage rates, at the beginning of August the national average 30-year fixed rate was 4.5 percent. FHA loans, which require only a 3.5 percent down payment, had a 4.3 percent rate. Adjustable-rate mortgages are even cheaper, and even rates for jumbo mortgages have hit lows not seen since the 1980s.
Freddie Mac forecasts a 30-year fixed rate of 5 percent by year’s end and 6 percent by late 2012. Standard & Poor’s downgrade of the U.S. credit rating won’t have an immediate effect on rates because of the weak economy (see Ripple Effects of the U.S. Debt Downgrade). But credit is tighter, and you’ll need a credit score of 740 or more and a down payment of at least 25 percent to nab the lowest rates.
It’s a buyer’s market.
Demand is low; supply is high. In early summer, the National Association of Realtors reported that sales of existing homes (single-family houses and condos) fell by 9 percent from the year before. NAR also reported 9.5 months’ supply of homes. That’s how long it would take to sell all the homes on the market at the current pace of sales, and it strongly favors buyers. (Four to six months’ supply is considered balanced between buyer and seller.)
With so much selection, you’ll find more properties in good school districts or near your job, or homes that offer added value, such as a mother-in-law suite. You’ll spend less time shopping and competing against other bidders.
New home buyers: If you’re searching among entry-level homes, which had more extreme price declines than upper-end houses did over the past year, you may face stiff competition from investors. They typically pay cash, which makes them attractive to sellers who want to close the deal fast.
You may find a distressed property.
Bank-owned foreclosures (or REOs, for “real estate owned” properties) sell for an average discount of 35 percent off the per-square-foot price of conventional homes for sale, according to RealtyTrac.
Short sales, or homes sold with lenders’ permission for less than their owners owe on their mortgages, have also grown in number. Lenders have become more amenable to them as they seek to avoid the often huge losses associated with foreclosures.
Banks may still take two to six months to sign off on a short sale, so patience is imperative.
Homeownership is still attractive.
A home is the biggest purchase most people ever make. But deciding whether and what to buy isn’t purely a financial decision, says Chris Herbert, research director at Harvard’s Joint Center for Housing Studies. When you own a home, you can control your living environment and security, upgrade and change your home as you see fit, and create a sense of rootedness in your community.
You can offset some of the cost of homeownership by deducting mortgage interest. But don’t mistake a home for an investment, at least not in the short run. “If your goal is to jump in and get a return of 6 percent annually, that’s a bad idea,” says Fiserv’s Stiff, given the forecast for weak price appreciation. Instead, you need to commit to owning the home for at least five to seven years to ride out any further price declines and recoup your down payment and transaction costs. If you think that you might need a bigger home before that time to accommodate a growing family or that you might have to move to another area for your job, don’t buy unless you’re willing to become a long-distance landlord.
Shop carefully, and be patient. It may take three to four months to find the right house.
