Real Estate Finance Alerts

Recent events in the real estate and financial markets are causing buyers to delay home purchases.  Buyer confidence is waning in the face of weaker economic data, declining home values, and higher lending requirements.  However, low interest rates and declining home prices make right now a great time to buy.  You can buy now and not worry about timing the bottom of the market if you are not speculating, plan to be in the home for several years, and have sufficient assets for a down payment with reserve savings.  The financial benefits of home ownership will be greater than timing the market correctly.

Many real estate speculators who made money in recent years were unknowingly in the right place at the right time.  In fact, it was hard to not make money in many markets; think stocks in 1999.  Now, many real estate markets look just the opposite; think stocks in 2000.  It is difficult to set realistic expectations when you know someone who has experienced significant appreciation or depreciation.  Unless you are an experienced real estate investor, the correct approach for the current market is to assume you will have no appreciation or depreciation in your home over the next three to five years.  Any appreciation will be a pleasant surprise while the chances of depreciation over this longer period are very low.

I normally recommend buyers plan to be in a home more than two years for the financial benefits of home ownership to exceed the transaction costs.  Conservatively. you need about two years of appreciation, tax deductions, and principle accrual to break even.  However, considering current market conditions, you should plan to own a home three to five years or more.  Doing so will significantly reduce the chances of depreciation, and provide more time for the benefits of home ownership to exceed transaction costs.  The result is that you do not have to time your purchase with the bottom of the market to walk away with more than your down payment when you sell your home.
 
Finally, if you have sufficient assets to make a down payment and still have money in the bank for unplanned expenses, you do not have to time the market and rely on your home appreciating immediately.  A down payment of ten percent or more on a home makes it is less likely that the home value will fall below the loan amount.  While there are situations where no down payment is appropriate, a sizeable down payment will put you in a much better position for life’s little surprises; I woke up the Friday before Christmas this year to find my water heater leaking all over the basement!

Second home purchases warrant some additional emphasis in the current market.  The value you gain from the home must result from spending time in the home assuming no appreciation.  Again, any appreciation is bonus.  If you do not plan to spend several months a year in a second home or own the home for more than five years, then rent a home for vacation.  Since it is a second home, you should either put down more than ten percent or have more assets in reserves.  After all, you now have another water heater.

So why should you buy a home now?  You should buy a home now because you can get a great price on a house, you do not need to worry about timing the market, and if you follow my guidelines above and have good credit, you will be able to qualify for a loan at great rates.  So get off the fence and enjoy the benefits of owning a home before all the good deals are gone.

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