Archive for April, 2012

Buy Your Dream Home This Year. Buy Your First Home Next Year.

IMHO, this is the year to buy your dream home, but not your first home.

I agree with many of the experts who predict that the average sales price of homes will continue to decline, or at best stagnate, over the next year or two.  The primary reason for this is the large number of foreclosures that will hit the market over this time period.  They will keep the average price down because they are keeping down the price of entry-level homes.

If you are looking for a first home, which is usually priced below the average price in your area, you will see a buyer’s market.  Foreclosed homes coming on the market will be priced well below their original purchase prices.  For a new homebuyer, especially one who is willing to put some work into a neglected foreclosed home, the low end of the market will offer an abundance of choices.  Because of foreclosures, supply of lower-priced homes will exceed demand until the foreclosures are off the market.  This could take a couple of years.

If you are planning to buy an above-average-priced home, you might want to start looking right now.  Without the pressure of foreclosures coming to market in your price range, there is little to cause prices to fall.

Most of the homeowners who were forced to sell have sold already.  Remaining homeowners are the ones who could afford to wait for a market recovery.  They may be willing to consider selling at today’s prices, but not at lower prices.

Homeowners who want to upscale their home may think that if their home value goes up just a little more, they can afford to sell and buy a more expensive home whose price is also discounted.  If homeowners who are only slightly under water see their home value rise to break-even, they may be willing to sell and buy a larger home.  In other words, future sellers will most likely be buyers at a higher price.

Employment is also starting to improve.  People who already have jobs are feeling more confident that their jobs are safe.  People who are re-entering the job market will be less likely to sell unless they can move up.

Mortgage interest rates are very low.  It’s hard to believe that you will get a lower rate by waiting until next year.  The problem with mortgages seems to be that it’s harder to qualify for one than it used to be.  If the Federal Reserve raises, just slightly, the rate it charges banks to borrow from the Fed, the banks will be more willing to lend money to home buyers.

Currently, banks can borrow money from the Fed at essentially zero interest.  They can then buy risk-free Treasury Bonds that pay over two percent.  Traditionally, banks are willing to lend money if they can make at least two percent over their borrowing costs.  If the loan is even slightly risky, they want to make more margin on the loan.  If the Fed requires banks to pay even 25 basis points (0.25 percent) more interest, banks can’t make enough money buying Treasury Bonds.  The next level up in risk is mortgages.  With banks more willing to lend, more people will qualify for mortgages, and home prices will rise.

So, my theory (and without supporting evidence, it’s just a theory) leads to the conclusion that if you would like to buy an average-price or above-average-price home, start looking now.  Get pre-approved for a mortgage in your price range and start talking to a realtor.

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Disclaimer

I am not a registered financial advisor. I only offer opinions, and sometimes these opinions veer off at weird angles from conventional wisdom (That's probably why you are here). My advice is, "Don't take my advice." Read my sidelong glances at economic issues and form your own conclusions.

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