1. Prices have nearly hit bottom.
In most areas, most of the excess has finally been wrung out of
the market. But if you’re buying a first home or looking to trade up,
there’s no need to rush. Although prices may fall some more -- blame
foreclosures still working their way through the system and tighter
credit -- they won’t fall by much. Fiserv Case-Shiller, which tracks
home prices, forecasts that the median price nationwide will ratchet
down for about six more months, then stay flat for three or four years.
In most of the cities where home values experienced a double dip
after the expiration of the home buyer’s tax credit in mid 2010, median
prices won’t fall below their 2009 or 2010 lows, says David Stiff,
Fiserv’s chief economist. These cities include San Francisco, San Jose,
San Diego and Washington, D.C. But in cities with lingering oversupply
of homes for sale, Fiserv forecasts a decline of 10% or more in the
median home price (for the year ending March 31, 2012). These cities
include Riverside–San Bernardino, Cal.; Las Vegas; and Miami.
2. 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.
Renters considering the jump to homeownership may be encouraged by
the price-rent ratio, or the median home price divided by the median
annual rent. In 2005, the national median home price had inflated to
nearly 21 times the median annual rent, according to Marcus &
Millichap, a commercial real estate
brokerage company
in Encino, Cal. Since the bust, the ratio has deflated to 14, less than
the historical average of 15. During the same period, the difference
between the median monthly mortgage payment and median monthly rent fell
from $745 nationally to $102. Marcus & Millichap expects rental
vacancy rates to hit prerecession levels this year, allowing landlords
to raise rents by an average of 3.5%.
3. 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%. FHA loans, which require
only a 3.5% down payment, had a 4.3% 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% by year-end and 6%
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% to nab the lowest
rates. If you fall short of that, you’ll pay interest-rate risk premiums
if the bank plans to sell your loan to Fannie Mae or Freddie Mac. For
example, lenders must charge an extra 0.25 point if a borrower has a 740
credit score but puts down less than 25% (but at least 20%).
4. 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% 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, says Thomas Popik, research director with the
Campbell surveys of real estate professionals. You’ll spend less time
shopping and competing against other bidders. And you don’t have to
waste time with sellers who set unrealistic prices (although they’re
still out there).
One caveat: 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. However, says Popik, you may find opportunities in homes that were
bought and fixed up by investors, who intended to flip them but have
had difficulty making a sale.
5. You may find a distressed property.
Bank-owned foreclosures (or REOs, for “real estate owned” properties)
sell for an average discount of 35% off the per-square-foot price of
conventional homes for sale, according to RealtyTrac. In the first half
of 2011, lenders owned about 870,000 REOs but listed only about
one-fifth of them for sale, concentrated in such high-foreclosure states
as Arizona, California, Florida, Michigan, Nevada and Ohio; even with
the slowdown in the foreclosure pipeline due to legal-processing issues
and new supply exceeds sales. Find
more on buying foreclosures.
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, says Rick Sharga, of RealtyTrac.
Short sales offer buyers less of a bargain than REOs, but the homes tend
to be in better condition. Banks may still take two to six months to
sign off on a short sale, so patience is imperative.
6. 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%
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. Exclusive buyer’s agent Michael
Crowley of Spokane, Wash., tells buyers it may take three to four months
to find the right house. “We can be in a hurry, or we can be
particular, but we can’t be both,” he says.
