Tuesday, November 8, 2011

Why I believe now is the best time ever to buy!

My ten years as a financial adviser, leads me to feel that this is perhaps the best time to buy in the past 50 years. 

Your buying power is the strongest it has ever been, right now!  This is mainly because of ridiculously low interest rates, the lack of buyers currently, and the number of increasing equity sales on a percentage basis.

Let's compare today, with two years ago when the biggest drops in home value occurred in most areas, and the stock market had just crashed. 

There are about 50% fewer homes available now than there were then, keeping prices more stable.  It was largely the volume of homes, combined with the percentage of bank owned homes on the market in 2009 that caused the dramatic price drops we saw then. The vast majority of homes for sale were REO's, some short sales and a very few equity homes (regular sales).

Things are VERY different now.  As an example, if you do a search of Oakland, you will see that there are 1282 homes available for sale today with no accepted purchase contract.   Last month there were 1315.  in january of 2010, there were 2300!  I am not sure what the bottom will be for number of available homes. But this is a very low number for Oakland, and it is the same all over the Bay Area.  I didn't record the exact numbers of  REOs back then but it was about 60%-70% as I recall, with 10-15% regular sales.  The rest were short sales.

We went through a period a year or so ago, where about 50% of the homes on the market were short sales.  That has dropped to about 25% today.  REO's are down to about 20%.  Regular sales are up to about 55% of all sales now!

Where are all these equity owners coming from?

Long time owners have come to realize, things are not going to get better immediately.  Short term owners may have lost a little, and may want to sell to get into a better loan situation on a new property, knowing the net will save them money.  (Loans were still at 7 percent just 3 years ago for many.)  Newest owners may be profit taking after doing enough work to increase value beyond cost of selling.  And then there are those in the business of flipping. 

As the number of homes has decreased, so have the number of buyers!  As we approach the holidays, there are fewer daylight hours to shop, and people are focused on nesting rather than moving. More generally, many first time buyers have already bought and are now mildly underwater, but not enough to consider a short sale.  A lot have already bought hot deals and are equity ahead, and happy where they are.  Many just don't qualify in this tighter lending climate.

Additionally,  there are no government incentives to buy.  

All it will take to have prices start to climb again, is for the government to re-incentivize the public to buy, or for lending to loosen a bit.  With the number of homes available continuing to decrease, my personal belief is that we will not see another significant drop in prices. demand is still high enough to have multiple offer situations in many bay area communities.  Unless things really fall apart in europe, far more than they already have, our leading indicators suggest economic improvement here in the usa. But if things do deteriorate in europe, it will make it even harder to get a loan here, which may impact prices, by making it impossible for many more to buy.

In the meantime, if you are renting...

You don't have the benefit of being in your desired home, nor the tax benefits of same. On a home with a 200K loan, your loan payment at 4% is $954, 42% of which is deductible, as are the taxes of about $165 a month.  Just to use round numbers, your deduction is about 6,600 a year.  If you are in a marginal tax bracket of only 15% that is about $85 in federal tax savings.  If you are at 25%, that is getting closer to $200 a month, because you will also have state tax savings in most states. This brings your net payment down to about 1,015 a month in the short term. (Your net payment will increase as your principle decreases. Over 30 years you will probably pay on average around $13,500 a year for your home.) 

Let's compare that with waiting for prices to drop another 10%.  Maybe a year or two from now.  Let's say that mortgage rates do not go up.

Today, rent costs more than a mortgage for the same house. rent for most 250k homes would average about $1,800 a month, (and rental rates are on the rise).  That is $21,600, and if you look at the first years of the mortgage, which offer the most tax benefit, you are talking around $9,000 more in additional cost.  It will take only two year and a half years to make up the savings IF your house purchased today drops another 10%.  What you gain by buying now is enjoyment of your own home, the opportunity to build equity through improvements to offset a possible drop.  Plus you can stop worrying about interest rate risk, rental increase risk, and credit availability risk.  To me, that would be priceless. And if prices stay the same, you have saved around $9,000 a year, plus the lost opportunity of that money's growth over time.  (Using the rule of 72's, at 5% that would be $36k for each year waited.)

I am not a financial adviser any longer.  I am not a tax expert, but this is all simple math.  You should consult your CPA or CFP and calculate the true cost of ownership now vs. waiting. I think you will find the majority of Financial Professionals would agree that this is a perfect time to buy.

No comments:

Post a Comment