April is New Home Month. Is It Time To Buy?

Since 1990 in this country, buying a home has been a "no brainer," a can't-miss investment.  But things have changed. If you believe the national media, home prices across the nation continue to fall. But all real estate is local, and we need to understand what is going on in our local market area before buying.  

If you read my recent blog on BuildingCredibility.com titled "Idaho Home Values Continue to Appreciate" and, more specifically, my comments in response to one reader who questioned the data, you know that home prices in Idaho and the Boise MSA are not falling - although the rate of appreciation has slowed significantly.  

The National Association of Realtors (NAR), reports that sales of single-family homes were down by 13 percent in 2007, the biggest drop since a 17.7 plunge in 1982. Representatives of the NAR say that this makes it the best buyer's market in a long time. Prices are down, interest rates are near a 45-year low and the supply of houses is high.

There are others who argue that the real estate market is in a tailspin and it might be a very long time before prices rebound -- making it a poor market at this time.

But even those who advocate that home ownership is still one of the best long term investments for individual households, including me (‘The Top 10 Reasons You Shouldn't Wait to Buy a New Home") advise that the circumstances need to be right before you take the plunge.

The first thing that everyone needs to accept is that the market has changed and we can no longer expect home price appreciation of 32.4% over 2 years as was the case in Idaho or home price appreciation of 43.7% as was the case in the Boise MSA over 2 years (based on HPI figures for the 1^st quarter of 2005 to the 4^th quarter of 2006). Those rates of appreciation were unsustainable and home price appreciation rates have fallen back to a more normal 4% - 8% per year.

Any one shopping for a new home needs to shop intelligently.  They need to consider the probability that the actual appreciation could be less than expected and avoid taking unnecessary risk.  Many of the home owners currently facing foreclosure gambled on those unsustainably high appreciation rates and lost. Bottom line, you need to buy what you can afford.  Home buyers must not get in over their heads. You must feel comfortable with your mortgage and be confident you can handle the payments, including taxes, insurance, homeowners' association dues and all the other expenses related to home ownership.

So, who should buy a home now? I believe that renters who have stable jobs should consider buying a home now. The inventory of new homes is high and builders might be willing to offer you incentives to purchase, like an interest rate buy-down. But you need to be realistic and not expect deep price cuts.

If you are in the market for and can afford a higher end home, now might be a particularly good time to buy because of the number of months of inventory in both new and existing higher end homes.  Builders who have new higher end homes to sell may have some room to negotiate price and you could purchase a more expensive home at a lower price than you could a few years ago.

Dual-income home buyers whose jobs are secure should definitely consider buying a home now.  People with assets in reserve and a credit score of at least 680 should also consider buying

If you have a credit score below 680, you will find it a little tougher.  Not impossible as you might think if you've believe the media.  Anyone with a credit score less than 680 will have to verify their income.   But if you have some credit challenges or less than 20 percent of the purchase price for a down payment, you need to be prepared for higher interest rates due to risk-based lending.

Who should not buy now? The decision whether or not to own a home should be based on many factors. Tax advantages and the potential to build equity can make home ownership quite appealing.  But some other factors that need to be considered are the amount of debt you currently have, your employment status, life changes, how long you intend to live in the home, the size of the down payment, and the size of the mortgage and monthly payment.

Whether the real estate market is up or down, there are no hard and fast rules that apply in all cases and dictate who should or shouldn't buy.  While prices are down, interest rates are near a 45-year low, and the supply of houses is high, not everyone should be in the market.

If you have a lot of credit card debt and / or a low credit score, you must clean up your credit first.

As a general rule, people should not buy a home based on their current income if their future income is not stable. If your job is shaky, you should wait until your job situation is more secure.

If you are experiencing a life change, such as an upcoming job transfer, getting married, planning to move geographically within the next two years or if you are struggling financially, you should wait.

If you are thinking about buy a home and selling it in a year or two, you should not buy. "Housing is a long term investment, and if you're only planning to be there for a year or two, keep renting." says Walter Molony, spokesman for the National Association of Realtors.

If you are thinking about buying an existing home to renovate and flip, you probably shouldn't. With inventories of existing homes up and sales down, you may have to sit on that renovated home for awhile and the gain you thought you would realize could be eaten away by interest payments or a decline in existing home prices.

If you are a homeowner considering buying a new home and don't have 20 percent of the purchase price for the down payment on that new home you're considering, you would require private mortgage insurance (PMI) on your new home.  PMI can run anywhere from $50 to $150 per month.

If you are a homeowner considering buying a new home, you should probably not purchase another home or one on contingency unless your home sells first. Otherwise, you could end up carrying two mortgages.  But if this is the only hurdle, you might consider asking the Builder if he would be willing to take your existing home in trade.

In certain situations, it might be advisable to consult a professional financial advisor. For example, if you are retired or near retirement and thinking of selling your home to downsize.  If you get less than fair market value for you current home, you could lose more financially then what you gain by getting a good deal on a less expensive house, in which case you would be better off financially waiting until the market turns around.

No one can predict the future.  Even the economists could be wrong.  So you should consider the possibility that the real estate market could be no better or even worse a year from now, and decide if you want to wait it out and see what happens.

Why not wait until the economy turns around?  Interest rates are at historical lows. If you wait till the economy turns around, the interest rates may not be as favorable, and in all probability, inventory levels will be down reducing the downward pressure on prices.

It's hard to predict when the market will bottom out, just as you can't predict when a stock has "bottomed out" until it has started to rise again.  

When will the housing market turn around? It depends on who you ask.  The National Association of Realtors is projecting that home sales will trend up this year.

"The timing of the recovery is a bit ambiguous because there are buyers looking for a bargain, while others are looking for more signs of stability. Still others are looking for interest rates to keep lowering, with prices still bottoming out in their area," says NAR spokesman Molony.

Molony predicts that 2009 will lead back to more normal market conditions with prices rising 3.1 percent. However, he suggests the window of opportunity for buying is within the next six months.  

During the 2008 International Builders' Show in February in Orlando, FL, the National Association of Home Builders' Chief Economist David Seiders, PMI Group Chief Economist David Berson and Freddie Mac Chief Economist Frank Nothaft presented housing and economic forecasts that project no recession at all, despite numerous reports of one. However, Seiders did say one could be likely, and things could spiral downward from this point, but the stabilization process is the key to recovery in the housing sector.

"We're happy that the economic stimulus package is being signed into law, happy with what the Federal Reserve is doing, but we may need even more strenuous legislation to help the housing situation," he said. In fact, the U.S. Senate is currently considering major housing legislation.

The trio of economists indicated that 2008 will see a bottoming out of the market, with recovery ahead in 2009.

Seiders predicts the U.S. economy will see two quarters of slow growth in 2008, before getting help from tax rebates and growing more vigorously after the middle of the year. He believes "The vast bulk of the housing contraction is behind us."

Others think the market turnaround could be prolonged people as home buyers take a wait and see attitude until after the presidential election. Still others believe it will not be till the first half of 2009.

If you fall into the category of who should buy now, I will be offering additional thoughts throughout the month to further encourage and support your decision to buy.

Chuck Miller _{GMB  CGB  MIRM  CMP  MCSP  CSP}

President / Builder - Chuck Miller Construction Inc.