Q: Shouldn’t I wait until home prices go even lower to buy?
No. Just as no one can accurately predict the peaks and valleys of the stock market (name one person who sold their tech portfolio in April of 2000), the same holds true for housing. If you wait for what you think is the absolute best deal, you could end up waiting for years. All the market fundamentals show that now is a good time to buy – prices are down, interest rates near historically low levels. If you buy now, you will not only be in the driver’s seat during the buying process, you will also reap the gains of price appreciation. Remember, those who purchased homes in the early 1990s during the last big economic and housing downturn came out as big winners.
Q: Doesn’t it make sense to wait out the market until can I get the same price on my home that my neighbor got when he sold a year ago?
No. It’s always better to trade up in a buyer’s market. While the value of your house has fallen, the prices of higher-end homes have also dropped. Here’s an example:
Your neighbor sold for $150,000. Let’s say values in your area have dropped 5 percent, so you could get only $142,500 for your home today. You have your eye on a move-up home that is selling for $250,000, but would be selling for $262,500 in a better market. If you sold your home today for $142,500 and purchased the larger house for $250,000, the difference in price would be $107,500. But if you waited to recoup the 5 percent value on your home and sold it at $150,000, chances are the move-up home would also increase in price 5 percent to $262,500. That’s a $112,500 price difference. So by selling today, you would actually save $5,000.
Q: Interest rates keep going down. Shouldn’t I wait until they go even lower before I buy a home?
Interest rates for 30-year, fixed-rate mortgages are currently near 6 percent and are extremely favorable for buyers. In fact, they are hovering near 30-year lows. But waiting to time the market is a dangerous game. Even those who follow the market for a living can’t figure out when interest rates will bottom out. If they could, they would all be multi-millionaires.
A $150,000 mortgage at 6% interest = $899 Principal and Interest Per Month
Home prices don’t necessarily move in unison with interest rates. So, if you decided to wait to purchase a $150,000 home that the price dropped $7,500 from where it is today and the interest rate rose to 7% during this waiting period, you would end up losing money. How? With interest rates at 6% today and were to move up by 1% , the savings on the reduced home price would be more than offset by the higher monthly payment you would be making over the life of the loan.
A $142,500 mortgage at 7% interest = $948 Principal and Interest Per Month
Waiting to save $7,500 on the purchase price could cost you an additional $49 per month or $17,640 over the life of the mortgage.
Q: I have $10,000 to invest. Should I put that money in the stock market or buy a home?
Purchasing a home is by far the best long-term investment. For example, say you use that $10,000 to purchase a $250,000 home, and the house appreciates a modest 3 percent during the first year. That means after one year, the house would be worth $257,500 – a gain of $7,500. By contrast, putting the same $10,000 in the stock market and posting a similar 5 percent gain would only net a $500 return on investment.
And don’t forget the tax incentives. In most instances, all of the mortgage interest and property taxes you pay in a given year can be fully deducted from your gross income to reduce your taxable income. These deductions can result in thousands of dollars of tax savings, especially in the early years of the mortgage when interest makes up most of the payment.
Q: I’m a first-time buyer and still can’t afford the type of home that I want. Is it best to wait, keep renting, and hope that prices will get even lower?
If you continue to wait, you may never be able to afford to get into the housing market. Even as home prices are currently moderating or falling, depending on where you live, rents continue to climb. When you buy a home, you are also purchasing price stability, knowing that you will pay the same monthly payment for the life of your 30-year, fixed-rate mortgage.
Once you become a home owner, you are able to take advantage of the tax deductions that homeownership offers, and you begin to build equity in your property.
Your best strategy may be to scale back expectations for your dream starter-home. After a few years, you can use those equity gains to sell your starter home and move into a bigger house. The sooner you make the jump from renter to home owner, the quicker you begin to create and build up wealth for your family.
