Finally, Time to Buy a House

By
Real Estate Agent with Equity Fifty Five Realty, LLC

Very Good Article found on Smartmoney.com

Finally, Time to Buy a House

Hough: The conditions are now right for homebuyers looking long-term.

By JACK HOUGH

 

U.S. house prices have plunged by nearly one-third in five years and the nation's homeownership rate is falling at the fastest pace since the Great Depression.

Two key measures now suggest it's an excellent time to buy a house as a long-term residence or an income property (but not for a quick flip). First, the nation's ratio of house prices to yearly rents is nearly restored to its pre-bubble average, suggesting the financial advantages of homeownership once again await buyers. Second, when ultra-low mortgage rates are taken into consideration, houses are the most affordable they've been in four decades of data.

Two of the silliest mantras prevalent during the real estate bubble were that a house is the best investment you'll ever make and that a renter "throws money down the drain." Whether buying is a better financial deal than renting isn't a stagnant fact but a changing condition that depends on the relationship between prices and rents and the cost of financing, among other factors.

But the math is shifting in favor of buyers. Stock-oriented folks can think of a house's price-to-rent ratio as akin to a stock's price-to-earnings ratio, in that it compares the cost of an asset with the money it's capable of generating. For investors, a lower ratio suggests more income for the price. For prospective homeowners, a lower ratio makes owning more attractive than renting, all else held equal.

Home Sweet Deal

Many markets have price-to-rent ratios in single digits, suggesting bargains abound.

 

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Nationwide, the ratio of median home prices to rents on average-size apartments is 11.3, down from 18.5 at the height of the housing bubble, according to Moody's Analytics. The average price-to-rent ratio between 1989 and 2003 was about 10, according to Moody's. So valuations appear almost back to normal, on average.

But for most house buyers, mortgage rates are a key determinant of their total costs. Rates are so low right now that houses in many markets look like bargains, even if price-to-rent ratios aren't hitting new lows. The 30-year mortgage rate rose to 4.12% this week from a record low of 3.94% last week, Freddie Mac said Thursday. (The rates assume 0.8% in prepaid interest, or "points".) The latest rate is still less than half the average since 1971.

As a result, house payments are more affordable than they've been in at least four decades of data. The National Association of Realtors Housing Affordability Index hit 183.7 in August, near a record high in data going back to 1970. A reading of 100 would mean that a median-income family with a 20% down-payment can afford a mortgage on a median-price home. The index's historic average reading is 120. So today's buyers can afford handsome houses--but prudent ones might opt instead for moderate houses with skimpy payments.

For example, a median house in Phoenix costs $121,700, according to Zillow.com. With a 20% down-payment and a 4.12% mortgage rate, a buyer's monthly payment would be about $470. Rent for a comparable house would be more than $1,100 a month, according to data provided by Zillow.com. That suggests buyers are much better off, even after adjusting for their additional expenses.

Of course, all of this assumes mortgages are available -- no given now that lending standards have tightened. But long-term data on down-payments and credit scores suggest conditions are more normal than many buyers think, according to Stan Humphries, chief economist at Zillow.com. "If you have good credit, a job and a down-payment, you can get a mortgage," says Mr. Humphries. "There's more paperwork and scrutiny than five years ago, but things are pretty much like they were in the '80s and '90s."

Not all housing markets are cheap, of course. Mr. Humphries says Zillow has developed a new price-to-rent ratio that uses price and rent estimates for each individual property rather than city medians, to better reflect the choices facing typical buyers. A fresh look at the numbers suggests Detroit and Miami are plenty cheap for buyers, with price-to-rent ratios of 5.6 and 7.7, respectively. New York and San Francisco might favor renters, with ratios of 17.6 and 17.2, respectively. The median ratio for 169 markets is 10.7.

For investors seeking income, one back-of-the-envelope way of seeing how these numbers stack up against yields for other assets is to divide 1 by the price-to-rent ratio, resulting in a rent yield. The median market's rent yield is 9.3% and Detroit's is 17.9%. From those yields, a real estate investor would have to subtract for taxes, insurance, upkeep and other expenses, and costs vary widely by market and case. But suppose total expenses are 4% of the purchase price. With the 10-year Treasury yield sitting at 2.2% and the S&P 500 index carrying a dividend yield of 2.1%, rents for residential housing in many markets look attractive, even after expenses.

It's little wonder that, as The Wall Street Journal reported in August, even investment funds are dabbling in single-family houses (see "Big Money Gets Into the Landlord Game").

A few caveats: First, not all transactions are average ones. Even in attractively priced markets, buyers should shop carefully. Second, prices may well fall further. Celia Chen, a senior director at Moody's Analytics, expects that prices will fall another 3% before bottoming early next year and rising slowly thereafter. "If the economy slips back into recession, however, we could easily see a 10% drop," says Ms. Chen.

Fourth, property "flipping" can be dangerous even when prices are rising. That's because absent a real-estate boom, house price gains simply aren't that exciting. Research by Yale economist Robert Shiller suggests houses more or less track the rate of inflation over long time periods.

That's what we'd expect from something made from sticks and stones and other ordinary materials. Houses aren't the magic wealth creators they were made out to be during the bubble. But when prices are low, loans are cheap and attractive investment yields are scarce, as now, buyers should jump.

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It is a very good time to purchase a home if your will be staying in your general area (not moving) over the next 6-8 years, and you feel as though you have a stable job. If you are considering purchasing a home in the Scott AFB - Metro East Illinois area, please feel free to contact me and visit my websites.

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Local Homes For Sale. Scott AFB - Metro East - St. Clair County, Illinois real estate website to search for all homes for sale surrounding Scott Air Force Base and military family housing. So if you are considering selling your home or buying a new home, please use this website to find all homes for sale and the information you need, and if you don't find it here, please contact me. You will find homes for sale listed in OFallon, Belleville, Collinsville, Freeburg, Mascoutah, New Baden, Smithton, Swansea, Shiloh, Trenton, Troy, Maryville, Edwardsville, Millstadt, Columbia, Waterloo, Scott AFB Area Homes for Sale in St. Clair, Madison, Monroe and Clinton County, IL. Full Time Realtor since 1997.
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Our local real estate guide is designed to make your home search as quick and easy as possible — whether you're just down the street, or in another country altogether. Listings are updated daily, so you know you're always seeing the latest properties to hit the market.

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To make the most of your time, be sure to register for free with our site. You'll receive instant email updates as soon as new homes that meet your requirements enter the market. See something you like? Registered members can save valuable time by saving their searches and bookmarking favorite properties for quick viewing later.

Too busy to pore over property listings? Use the Home Finder to tell us what you're looking for, and we'll get back to you with the listings you want to see.

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Because house hunting involves more than just property listings, we'll be happy to provide you with information about local communities, including nearby schools and amenities, as well as transportation and recreation options. We'll also be your consultants about current market conditions, and perform a comparable market analysis to make sure you get the best deal possible. After all, we're here to help you find more than just a house — we're here to help you find a home.

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Finding the right agent for your home search is very important. A great agent will not only show you properties, but will also make the whole process more successful and painless. You are in luck - you already found the right agent - me!

Here are some of the many services you can expect from me as your agent:

  • Accessing every home on the market (and some that aren't yet!)
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Have you selected an agent to assist you yet?
Remember, using an agent in the buying process is very much to your benefit, and it doesn't even cost you anything! So let's get moving to help you find a great new home and get the expert support you need and deserve.
I look forward to helping you find your dream home!

We help anyone, from first time buyers to retirees, to find the home that's right for them. See our Buyer's Guide for tools that will help you in your home search, such as our mortgage calculator. Ready to start looking? Search for homes now in the local market, or see our office's Featured Listings.

Are you ready to sell? Check out our Seller's Guide, and get a Free Home Evaluation to find out how much your home is worth on today's market.

To learn more about our services and expertise, please see our About Us page.

Contact us today to start working with a real estate professional. We'll be happy to answer any questions you may have about buying or selling property.

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