8 Powerful Reasons Why NOW is a GREAT Time to BUY a Home
Obviously I’ve written a great deal about how our housing markets today aren’t performing all that well… and that the way we as a nation have been handling things since the meltdown of 2008, they won’t be for a very long time.
I’m right about that today, just as I was back in 2008 when I wrote the exact same things. I’m not bragging about that… it wasn’t a difficult thing to predict. In fact, it’s straight out of any economics textbook, just look up “deflation,” and you’ll find it described perfectly. The one I have even shows it happening as a result of a credit crisis, which is exactly how our current mess got started too.
I write these things for two reasons: 1. Because I think if people know what’s happening and what’s ahead, they won’t become satisfied with what our government has done to-date to address the still worsening situation. 2. So I can say, “I told you so,” later. No, I’m kidding about that… sort of… I do it because no one else does it, which I find annoying, ridiculous… and dangerous, actually.
I certainly don’t do it because I like doing it… because I don’t. It’s about as gratifying as standing in a closet with the door closed and screaming your head off.
Many times what I write about the housing market upsets Realtors and mortgage loan originators, and recently some have even accused me of telling people that now is not a good time to buy a home.
“Wait a minute,” I replied. “That’s not true. I have never said anything about whether now is… or is not… a good time to buy a home. In fact, I can think of lots of reasons why now is a great time to buy a home. Maybe you have me confused with someone else?” But, I was assured that they didn’t.
In addition, I often notice my friends over at The National Real Estate Post, you know them as, “I’m Frank Garay… and I’m Brian Stevens…” delivering some sort of silver lining to the massive cloud cover that remains in place over both the housing and mortgage markets, and I think about how I’d like to be writing something more obviously constructive and helpful.
Now, once in a while, the “silver lining” Frank and Brian talk about is actually lead, and in the past when they’ve said something that makes me spit out my coffee, I’ve made fun of them somewhat mercilessly in an article on Mandelman Matters, which always seems to make my phone ring before noon… and I answer, “Hello?”
“Dude, seriously? So, you ripped us apart on your blog again, I hear. Well, I’m just calling to say it’s cool… we don’t mind… we think it’s funny.” It’s Brian and he’s laughing along as I’m laughing my butt off, and reply: “What would you have me do? Did you really think I was going to leave it alone? You had to know that I was going to have to say something?”
Today’s video post was a particular favorite of mine… it seems that the fellas stumbled over a report that showed them that purchase mortgage volume was WAY down, and that relatively high credit scores are being declined, and that refinancing is also fallen off the proverbial cliff. So, they have proclaimed that the lending landscape has officially changed! Ta da!
Personally, I was positively aghast at the news… the mortgage market has changed? Really? Do tell. You don’t mean to say that Demand for Mortgages Has Plummeted, But It’s Not a Storm, It’s a Permanent Change, do you? Or that, Your Kids Will Be Living With You For a Long Time?
They wanted the industry to know of this breaking news, so people in the industry could adapt and adjust. So, since they have now warned the mortgage industry of the change in the landscape, I thought I’d go ahead and issue my own warning to anyone that night be planning a trip to Beijing two weeks ago…
DO NOT TAKE MALAYSIA AIRLINES FLIGHT 370!
So, Brian should be calling soon… we’ll laugh… talk about various things… and then we’ll return to our respective lives, which means the two of them will head off to conduct a seminar in Toledo on how to generate leads, sell homes and fund mortgages using your iPhone, while I sit alone in my study wondering if noon is too early to switch from Bloody Marys to straight vodka on the rocks.
Well, a couple months ago, The National Real Estate Post’s daily video featured a story covering Harvard professor, Eric Belsky’s “Five Reasons to Buy a Home Today,” which I found to be entirely devoid of thought. I honestly couldn’t decide whether Professor Belsky’s reasons were more stupid or sad. And, imagine my surprise when, after watching Frank and Brian’s coverage of the professor’s reasons to buy today, I looked him up and found that he’s the Managing Director of the Joint Center for Housing Studies at Harvard University.
Lest you think I’m being to hard on the erudite Bostonian educator, the first reason on his list of five reasons to buy now is stated as follows…
A Hedge Against Inflation – Rents are going to go up with inflation. Your fixed rate mortgage will not. “Housing costs and rents have tended over most time periods to go up at or higher than the rate of inflation, making owning an attractive proposition.”
After reading that for the first time, it occurred to me that the professor had managed to identify the only factor I could think of that had never driven anyone to buy a home… to have a hedge against inflation. If you’re looking for a hedge against inflation, there are many investments you might consider… but a primary residence is not one of them.
To see why I say that, one need only consider the last five years, during which inflation has been running around eight percent annually (were it still measured as it used to be before the Fed changed their policy to, “No Bad News Ever”), but no one’s home in this country has gone up eight percent annually over the last five years.
If you want an investment that provides a hedge against inflation, the perennial favorites would have to be gold and oil, but perhaps the most obvious way to go would be TIPS… Treasury Inflation Protected Securities.
The principal portion of an investment in TIPS goes up with inflation and down with deflation, based on movement in the Consumer Price Index (“CPI”). When your investment matures in five years (based on Treasury’s last offering), you receive either the adjusted principal or original principal… whichever is higher.
And, if that seems a bit too technical, and you’d prefer something that you understand as well as you understand a house, just remember this line: Inflation goes better with Coke.
That’s right, I’m talking about buying shares in Coca-Cola. (KO) Why? It’s simple. Inflation means the value of the dollar has fallen, but that in turn makes our exports more attractive to other countries. As a result, to hedge against the risk of inflation, you want to own shares in companies that earn most of their revenues overseas… and Coca-Cola earns about 75 percent of their revenues that way.
The home you live in, on the other hand, is very unlikely to earn any revenues overseas, nor will it go up in value because of anything that happened outside your neighborhood or home state.
The professor’s next ridiculous reason for now being the time to buy is…
“The Tax Benefit of Homeownership.”
That’s a reason for buying “now?” Hasn’t the mortgage interest deduction been there for many, many years? Isn’t that almost like saying that “now” is a good time to buy because the sun is coming up tomorrow morning?
But, more importantly, while the mortgage interest deduction is a benefit of owning a home, it is not a reason to do so. For one thing, the mortgage interest deduction declines in value each year, because monthly mortgage payments at the beginning of a loan are almost entirely interest, but as the years go by, more and more of your monthly payment goes towards the principal.
It’s also important to understand that the tax benefits associated with home ownership are “deductions.” Deductions reduce the amount of your taxable income, but a deduction’s actual dollar value is equal to the amount of the deduction… minus the standard deduction… multiplied by your marginal tax rate.
So, let’s say you are married filing jointly, and you fall into the 25% marginal tax bracket… and you have a tax deduction of $15,000. To figure out how much the deduction saves you, take $15,000 and subtract $12,400 (amount of standard deduction in 2013) and then multiply by 25% (your marginal tax rate). The answer is $640.
And no one should ever buy a home to get a $640 tax benefit, or a $1280 tax benefit, or even twice that amount again, because the costs of homeownership can quickly make those sorts of “benefits” look like tip money.
The professor also points out that…
On top of all this, capital gains up to $250,000 are excluded from income for single filers and up to $500,000 for married couples if they sell their homes for a gain.”
Oh, so what and who cares? That’s not a reason to buy a house either… and it’s sure as heck not a reason to buy now… it’s just quoting a provision of the tax code.
Number three on Professor Belsky’s list of reasons to buy now he titles: “Forced Savings in a Society that has a hard time saving.” And he explains…
“Since many people have trouble saving and have to make a housing payment one way or the other, owning a home can overcome people’s tendency to defer savings to another day.”
Okay, so again… while this could be a benefit of owning a home, it is not a reason to buy one. You can save money without signing a 30-year mortgage for hundreds of thousands of dollars or more in debt that you will carry most of your lifetime.
Number four on the professor’s list reads as follows…
Hey, you’re paying for the place where you’re going to rest your head at night, why not own it? “Homeowners pay debt service to pay down their own principal while households that rent pay down the principal of a landlord.”
I just don’t think I’m going to respond to that sentence. I would… but I’d have to lower my IQ about 80 points, or maybe more… and I’m afraid I might get stuck down there. Just remember this… buying a home is not purely a numeric equation, and because it’s a long-term sort of thing for most people, you don’t know what will happen to its value over ten or twenty years.
Yes, homes are investments. But they are long-term investments from which we get the added utility of living in them until we sell them. They’re not like stocks that we buy and sell in any amount of time. When we buy a home and that home’s value rises by $100,000, we don’t rush to put it on the market, and when its value falls, we don’t panic and sell at a loss.
And number five on Belsky’s list contains the idea that you should buy a house because it’s a leveraged investment. It’s stated as follows…
“Buying is a leveraged investment. For example, you put five percent down on a home… you paid $100,000 for it. Home goes up by 5%. That’s not a 5% return on your money, it’s a 100% return on your money because you only invested $5,000 in your down payment.”
Yeah, well… sort of, but not really. On a cash basis I may have only invested $5,000, but I owe the amount of the mortgage plus interest, and depending on my state, I could end up with a deficiency judgment in the event that I lose the home to foreclosure, and it doesn’t sell for enough to cover my total indebtedness.
Leverage is dangerous… period. It’s one of the primary factors that made our economic downturn and financial crisis as deep and serious as it was and still is. So, all I can say about this subject is… if you’re going to gamble with your home, be prepared to lose it if your gamble doesn’t pay off.
And if you don’t want to put your home at risk, you don’t take it with you into the casino, got it?
The last comment Professor Belsky makes states…
“Now, this might seem obvious to you. But your potential clients aren’t thinking this way, so consider this a friendly reminder of what you need to be messaging because it just might help you combat the 32% drop in mortgage volume in 2014.”
No, professor… first of all, it’s not obvious to anyone, because most of what you have said is no one’s reason to buy a home… not now… not ever.
And, Professor Belsky was not the only one to publish such an article…
DUMB, MEET DUMBER…
Yet another, “5 Reasons to But a Home Now,” just came out on March 17th, 2014, published by KCM Crew, an organization that describes its value proposition as follows: “Each month the KCM crew pores over reports from the most important sources of real estate news. We don’t just explain it. We help YOU explain it – to your clients.”
Here’s KCM Crews 5 Reasons to Buy a Home Now…
1. Competition is about to Increase
Every spring a surge of prospective purchasers enter the housing market. Like you, they will want the best home available in the best location at the best price. They will be competing with you for the ‘steals’ in the market. Don’t miss the opportunity to get that ‘once-in-a-lifetime’ buy available today that no longer be available as the market heats up.
Well, for one thing, there’s no chance the market is about to heat up. Thinking that is entirely delusional. But more importantly, don’t ever let a Realtor pressure you into doing anything in a hurry because you’ll lose the house to another buyer. There are lots of dream homes out there, and if you don’t get one, you’ll get another.
2. Price Increases Are on the Horizon
Nationally, home prices are projected to appreciate by 4.5% in 2014 and by over 19% from now until 2018. First homebuyers will probably pay more both in price and interest rate if they wait until the spring. Even if you are a move-up buyer, it will wind-up costing you more in net dollars as the home you will buy will appreciate at approximately the same rate as the house you are in now.
The price increases that are behind this “reason to buy” are absolutely no reason to buy anything, and in fact are much more a reason not to buy now. Here are the increases that are forecasted by the participants in the survey…
- Home values will appreciate by 4.5% in 2014.
- The average annual appreciation will be 3.94% over the next 5 years
- The cumulative appreciation will be 19.7% by 2018.
- Even the experts making up the most bearish quartile of the survey still are projecting a cumulative appreciation of almost 11% by 2018.
What those numbers are saying is that home price appreciation may keep up with inflation, but it may not. That’s not a very uplifting survey result, considering it was designed to be good news, and is at best a total guess, based on nothing but opinion provided on a questionnaire.
3. Owning a Home Helps Create Family Wealth
Whether you rent or you own the home you are living in, you are paying a mortgage. Either you are paying your mortgage or your landlord’s. The Federal Reserve, in a recent study, revealed that the net worth of the average homeowner is 30 times greater than that of a renter.
Okay, so what? Let’s say that’s 100 percent true… it’s always been true, too. And it will still be true tomorrow. What does that have to do with why you should buy now? Answer: NOTHING.
4. Interest Rates Are Projected to Rise
The Mortgage Bankers Association, the National Association of Realtors, Freddie Mac and Fannie Mae have all projected that the 30-year mortgage interest rate will be over 5% by the spring of 2015. That is an increase of almost 3/4 of a point over current rates.
Yeah, someday rates will rise, but not anytime soon. And five percent interest rates are nothing to fear. My parents had a four percent rate on their mortgage… and they bought in 1964. I had a seven and one-eighth rate in 2006 and I was thrilled with that. If an increase in rates from 4% to 5% knocks you out of the game, there’s something wrong.
5. Buy Low, Sell High
Most would all agree that, when investing, we want to buy at the lowest price possible and hope to sell at the highest price. Housing can create family wealth as long as we follow this simple principle. Today, real estate is selling ‘low’ compared to where it will be next year. It’s time to buy.
This is just another huckster trying to scare you into buying now because everything will cost more in the future. If my Realtor talked to me this way, I’d walk away. Even used car salespeople today know better than to use these sort of sleazy sales tactics on consumers.
The fact is that, as a national average, home prices are more likely to go down this year than up… if that even matters. Demand is down compared with last year, mortgages are harder to get than they were last year, and fewer investors are buying this year compared with last. Reduced demand doesn’t raise prices.
Okay, so enough UTTER NONSENSE and SLEAZY SALES CRAP. None of those 10 reasons to buy now… were even reasons to BUY NOW. Does that mean that you shouldn’t buy a home now or this coming year? NO. In fact, there are many solid reasons to buy a home now? NO.
So, here’s my list of the
8 POWERFUL REASONS WHY NOW IS A GREAT TIME TO BUY A HOME
1. Home Prices Are Still Low
And if you like the idea of living in one of these areas, it’s a very good time to buy. Forget about trying to pick the bottom, you’ll never do it… it’s not even worth trying. Just look things like market prices relative to the costs of new construction, whether there’s more upside or downside potential going forward, how long you plan to live in the home… and most of all… whether you can truly afford it.
Assuming you’re making a long-term purchase decision, you don’t need to worry about what will happen in two years or three years… you only care about the potential for longer-term price appreciation… and the amount of downside risk. Any market can see process fall further than where they are today, but if you’re in a market that has already seen process reduced by 30-50 percent, it’s very unlikely that any further decline will be dramatic.
2. Interest Rates are Still Really Low
Interest rates are still near the bottom. Based on historic norms, even 6 percent interest rates are considered incredible, so now is a great time to lock in a fixed rate with a payment you know you can afford.
I know, we’ve all got three and four percent rates imprinted on our brains, just like I now think car loans should be at 0%… but we all have to remember that rates have to rise a little, and that if a mortgage at five or six percent means you can’t afford the payment… the only answer isn’t to get an adjustable rate loan in order to lower the payments… it’s also possible that you should be buying a less expensive home.
3. Credit is Tighter than We Remember It, and Demand is Down
And what does that mean to a prospective buyer. Well, on the positive side, it means that mortgage brokers and Realtors are hungry and will be more willing to concentrate on you and your needs, than when things were booming and they didn’t have to go the extra mile for anyone. This year, borrowers can ask for more… and very likely get it.
It also means that qualifying for a loan will be more difficult than it has been in past years, but by no means should you think of it as being impossible. The key is to check with a mortgage loan originator in advance to see how your specific facts match up with today’s lending requirements, and that way if there are things you need to do in order to qualify, you can get them handled before you start shopping.
4. Special Deals Can Be Found by Looking
As an example, when the market was hot, it wasn’t easy to find a home that you could get for substantially less because it needed work. Today, if you’re were willing to put your own sweat equity in as a homeowner, in order to save money on the purchase price, it may be the best time to buy ever. With foreclosures still making up a significant percentage of homes on the market, there are likely to be more “AS IS” properties for sale and in virtually any neighborhood. So, if you’re someone who can fix things, you may be able to save even more than others by purchasing a home that needs work.
5. Expand Your Horizons
Now is not the time to be set in your ways, because a little flexibility may just lead to changing your life for the better. I actually know someone who moved from La Jolla, California… to living on a lake outside Nashville, Tennessee… and absolutely loves everything about it… including the fact that instead of a million dollar mortgage… he’s got one for $440,000… and the house is twice the size of his California home.
The point is that this is not the time to be inflexible, because there are dream homes all over the country… maybe not where you are now, but maybe somewhere else that you would actually love but never considered before… and you’ll find all sorts of possibilities if you allow yourself to be open to new ideas.
6. You’re a Little More Nervous Now… Good. You’ll Be More Careful.
Remember the whole atmosphere that was described as “irrational exuberance?” Well, that’s over, which is a positive thing, because we weren’t being very careful back then. It’s almost like we thought we were invincible… like nothing could harm us or take us down.
Many of us took out loans and bought homes that in retrospect, we shouldn’t have. It wasn’t uncommon to see multiple buyers bidding up the price of a home… even paying above the asking price out of fear that we’d be shut out of the market when prices continued to rise.
It’s no wonder so many people got wiped out this time around. Oh, I’m not saying that it was homeowners who caused the meltdown, I’m just saying we weren’t being very careful about what we were doing… and many of us were okay with literally living on the edge.
Not today, however. Now we’re more like children of the depression… watching almost every dime, or darn close. Well, good… if that’s the case now’s a great time to make changes… while you’re in the being careful mode.
7. Take Baby Steps and Watch It Pay Off
Pay no attention to what you’ve been hearing in the news about how the housing market has recovered… even partially… because it hasn’t… not even partially. All that happened was that last year 60 percent of sales were investors and that created a very strange, and even anomalous market dynamic.
Picture the Las Vegas housing market where at the low point, homes were closing in on being 70 percent underwater. So, a home there that was $300,000 at its peak, went all the way down to $90,000. Then last year two investors, bidding against each other in a market where inventory is extremely limited because so many are underwater, managed to get the price up to $120,000… and the headlines read: “Las Vegas Home Prices Up by more than 20 percent.”
So, don’t fall into any high pressure tactics that try to tell you that you have to pay more or act quicker than you’re comfortable acting. The housing market, in general, is fundamentally the same for some time now. There are relatively few sellers and relatively few buyers.
Private equity firm, Blackstone has reduced its buying of homes by 70 percent from their record highs last year. Many local investors are reporting that they have not purchased homes in Southern California since early 2013. So, the investor-led boom is long-since over.
Take your time, baby steps… find what you want or keep looking, get qualified for a loan in advance, and don’t be pressured into doing anything because someone tells you anything is about to change dramatically one way or the other anytime soon.
8. FHA, Fannie Mae, Freddie Mac, VA & USDA
There are no privately funded loans to speak of in this country anymore. We have essentially nationalized mortgage lending, but of course no one wants to call it that. FHA, Fannie Mae, Freddie Mac, VA & USDA… if you need a mortgage, those are the sources of mortgages from which you can choose more than 90 percent of the time.
(There are also a few jumbos available that generally require 25 percent down if you want t fixed rate loan, and fairly high credit scores.)
As this year began, the volume of mortgage purchase applications dropped precipitously, and when demand falls like it has, it’s only a matter of time before something gets a little easier. So, the good news this year is that credit standards that have already been slightly loosened are likely to be loosened a bit more as we go forward. (I believe I recently saw Wells Fargo talking about FICO scores of 600, which I assume is an FHA loan, but I’m not really sure.)
And if you want to check out the foreclosures and other listings in Los Angeles and Orange County, click the link below. It’s been set up by a good friend of mine, Barbara Gilbert, who I can’t recommend highly enough should you decide it’s the right time for you to buy.
Okay, so there you have it…
8 POWERFUL REASONS WHY NOW IS A GREAT TIME TO BUY A HOME
(That is… assuming you want or need a home, of course.)
You see… I’m not trying to tell anyone that wants or needs a home not to buy one. All I’ve been trying to say in my past articles on the housing markets is that compared with any other time in our recent history, there are very few people in this country who will be able to buy a home… and very few that will be able to sell one too.
Demand is unquestionably down… the nonsense that you read saying otherwise is part of some fruit loopy P.R. campaign that I suppose some think helps to stimulate the marketplace for residential real estate… and maybe it does… a little bit. But, as to any sort of recovery the answer is no… it’s impossible and it will remain impossible for a long, long time…
… and that’s no matter what RealtyTrac, or Data Quick, or Zillow, Diana Olick, Mark Zandi, or the ubiquitous Derwood Blomquist have to say next week or next month… or even next year.
BECAUSE THERE’S LOT’S MORE WHERE THIS CAME FROM
AND YOU DON’T WANT TO MISS IT.