There is more and more research coming out showing that it makes great financial sense to purchase a home today . Whether it be rent vs. buy ratios, income-to-price ratios or income-to-mortgage payment ratios, purchasing a home right now is a bargain compared to historic norms. Now we want to look at the COST of a home today compared to pre-peak prices.According to the most recent S&P Case Shiller price index, residential real estate values have returned to 2003 1Q PRICEs. That, in itself, says something. However, when you factor in mortgage rates, the case for buying a home today becomes even more compelling.In 2003, 30 year mortgage rates stood at 5.88%. Today, they are 4%. How does that impact the actual COST of a home? On a home purchased for $250,000, here is the difference in monthly cost:
That means you save $285.30 a month, $3,423.60 a year and $102,708 over the life of a 30 year mortgage! You buy the home for the same PRICE but the COST is over $100,000 less.
This is why so many financial advisors are saying that this may be one of the greatest times in history to purchase a home.
Last week, Fannie Mae released their National Housing Survey for the third quarter of 2011. They survey the American public on a multitude of questions concerning today’s housing market. Each quarter, we like to pull out some of the findings we deem most interesting. Here they are for the most recent report:
Most Important Reasons to Buy a Home
The study shows that the four major reasons a person buys a home have nothing to do with money. The top four reasons, in order, are:
- It means having a good place to raise children and provide them with a good education
- You have a physical structure where you and your family feel safe
- It allows you to have more space for your family
- It gives you control of what you do with your living space (renovations and updates)
When we talk about homeownership today, it seems that the financial aspects always jump to the front of the discussion. There is no doubt that families must justify a home purchase from a financial point of view today. However, the reasons they actually buy are the same reasons our parents and grandparents purchased their home – to create a better lifestyle for their families.
The Home as an Investment
Though most people purchase a home for non-financial reasons, everyone realizes there is a money component to homeownership. Here is what they said on this issue:
- 64% of the general population (and 69% of homeowners) believe that homeownership is a ‘safe’ investment.
- 55% believe that homeownership has more potential as an investment than any other traditional asset class.
- 68% think that now is a good time to buy a home
Rent vs. Buy
We are always interested in the difference people see in renting vs. owning.
- 63% of renters have aspirations to someday own their own home
- 70% of renters think that owning is superior to renting
- 96% of homeowners see homeownership as a positive experience (4% see it as a negative experience) while 83% of renters see renting as a positive experience (15% see it as a negative experience)
- 97% of homeowners live in a single family residence while 53% of renters live in a multi-unit building
Even in these difficult times, Americans still realize the value of homeownership both from a financial and social standpoint.
From Dean Hartman of KCMBlog
Most people get it backwards. They shop for a home, THEN, they try to structure the financing for it. They make the emotional decision of buying the home of their dreams, THEN, try to apply logic in how they pay for it. Many even go “online” and play with what is affordable by underwriting standards without TRULY considering their future.
I am always fascinated by mortgage underwriting “standards” when they don’t even take into account some very large variables that affect an applicant’s cash flow, and thereby, their ability to repay the loan or maintain a lifestyle they want:
- Are you single or a family of six? Costs for food and clothing alone are very different.
- Do you live in a state that requires State Income Tax or not? Another significant part of the equation.
- How often do you like to eat out or vacation? Are you willing to sacrifice these things for a bigger or nicer home?
Falling in love with a home without considering the REAL impact on your lifestyle is a recipe for unhappiness….either in re-adjusting to a “lesser” home or disappointment over the lack of vacations or nights out.
My advice is to first work on your financing. Go the logic route. Find out what you can afford from a lender’s underwriting perspective, but then, spend some time considering the cash flow realities of your choice. Work with your loan officer to make wise choices.
Additionally, your loan officer should be advising you on ways to properly represent and transfer your assets, how to explain and document your income, as well as, assisting you in methods to get your optimal credit score. This counsel can be invaluable in smoothing out some of the bumps in the mortgage process, besides giving you the best chance to get the most aggressive pricing available.
To me, the choice is crystal clear…the mortgage before the house!
By Dean Hartman ~ KCM Blog
You all know the story…young chicken, fearful of the worst, runs around declaring that “the sky is falling, the sky is falling.”
In today’s real estate market, there are many people (professionals and amateurs alike) with opinions that make buying real estate sound like throwing money away.
One thing I have learned in life is that opinions are like belly buttons, everyone has one. I certainly have my opinions which are not always universally shared. But, I wanted to share mine today by asking those of you Chicken Littles some questions:
- If we all agree that homeownership has been the American Dream, what do you propose will replace it? Video games? iPads? A better social media vehicle? Without a dream, civilizations perish.
- If people stop investing in real estate and values crumble much further, how do you propose stopping our economy from a complete and utter collapse? Moreover, how will it ever recover?
Let’s face it: The real estate frenzy got us into this mess, in the same way that the dot.com bubble overinflated the stock market and eventually popped. But, dot.com companies were only a part of the stock market; therefore, the market could take a hit and limp around for a while yet still fall back on the other industries to regain its footing. It has taken years, but the stock market is credible again.
Real estate is different. When it slides, there is no other sector of the economy that can bail it out. You could try and argue that commercial real estate or even real estate investors who buy and hold for rent can ease the pain. However, they can’t devour all the inventory. Real estate has to be salvaged and supported by the government or the whole economy slides into the ocean.
The government has tried many things from restructuring Fannie Mae and Freddie Mac to appraisal reform to tighter underwriting guideline to artificial manipulation of interest rates to licensing of loan officers and more. They understand the importance of real estate values to our nation’s net worth. They are committed to real estate.
My point, dear Chicken Little, is that if you believe that the United States of America is going to continue to lead the world, you know our economy has to lead the way. In order to do that, we need housing to recover its position of strength. That makes buying a home a safe, long term smart move. If you don’t believe it…..might be time to look for real estate in another country.
The problem with Chicken Little is nothing more than he doesn’t ever propose a solution. He just wants to predict and point out problems. Our faith in the American Dream is being tested. I believe in the Dream. And I think you should too. It may look like a leap of faith more than logic to some but there are few Chicken Littles who ever become wealthy until they change their perspective.
Just my opinion…from my belly button.
From KCM Blog
We have written several blogs recently quoting numerous sources saying now is the time to buy a home. We agree that now is definitely the time to buy. This is NOT because we are calling the bottom for real estate PRICES. What we have said is that the COST of purchasing a home is probably near a bottom or has hit the bottom.
The difference is that COST is determined by two components: the price of the home and the expenses associated with mortgaging that home. As we have put forth in several posts, we believe that the expense of obtaining a mortgage will increase as the year goes on.
We also believe strongly that, in most parts of the country, prices will continue to soften. Here are the reasons why:
Existing Months’ Supply of Inventory Is Still Too High
A balanced market (where prices are stable) can handle 5-6 months worth of active inventory. Anything less than 5 months constitutes a seller’s market as there are not enough houses to meet buyer demand. This usually results in price appreciation. Anything more than 6 months constitutes a buyer’s market as there are not enough buyers for the number of houses on the market. This usually results in price depreciation.
Currently, as per the National Association of Realtors (NAR), there is a 9.2 month supply of inventory. This alone would put downward pressure on prices.
Distressed Property Inventory Is About to Enter Market
There are over over 4 million homes that have the potential to become a distressed property sale (foreclosure or short sale) over the next few years. A percentage of these properties are set to enter the market before year’s end. No one knows exactly how many will come to market in each region but the common belief is that the number will be substantial.
These properties will sell at a discount thereby attracting a portion of buyers in the market. After they close, they can also be used in an appraisal to help establish values of other homes which sell in the area. A short sale sells for approximately 90% of it’s non-distressed value. A foreclosure sells for approximately 65% of full value.
The inventory of homes currently for sale added to the inventory of distressed properties about to come to market will far exceed demand for the next twelve months. When there is less demand for any item then there is supply of that item, prices fall. Check with a local real estate professional to see how this may impact the value of your home over the next year.
A good Realtor® can help alleviate some of these stressors. Be sure to contact your Realtor today, or search for one here.
Mortgage questions? Begin here. We have some well-trained, well-informed, helpful home mortgage consultants who can get you on the right track.