Is it the right time for you to buy a home?
Prices are rising, inventory is expanding, and interest rates are low. But just because the market say it's smart to buy doesn't mean it's smart for you to buy.
After watching the housing bubble burst in 2007, leaving many homeowners underwater or in foreclosure, some people vowed they would never again own a home.
But here we are, six years later, and things have changed.
According to the Census Bureau, June sales of new homes reached the highest point in more than five years — and a 38 percent improvement from last year. After taking a serious nosedive between 2006 and 2009, prices nationally are back to the same levels they were at in mid-2003, well before the housing bubble burst.
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That sounds promising, but is the market really improving? And more importantly — does that mean you should seize the opportunity and buy?
Three ways to assess the housing market
Scanning the headlines, you'll probably see three important indicators of market health crop up again and again: home prices, inventory, and interest rates. Of course, analyzing and predicting the future of the housing market is a little more complicated than counting three numbers — in fact, it's many people's full-time jobs — but these three can give you a basic idea of what's going on.
Increasing home prices are largely considered a good sign — for one thing, it means more people have the resources to start buying again. The Case-Shiller Home Price report, the leading measure of U.S. home prices, showed prices soaring in the first quarter of this year. More specifically, according to data from the National Association of Realtors (NAR), home prices rose in 41 states and the District of Columbia in the first quarter of 2013, with the biggest gains in western states like California, Nevada, and Arizona.
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Prices and the second factor, inventory, are closely related. During the recession, construction slowed and many potential sellers kept their houses off the market, so inventory fell, hitting a 12-year low in January. Now that people are buying again, demand for homes means the available inventory is quickly being snapped up. In fact, data from Realtor.com for the month of June — the most recent data available — shows that while inventory is on the rise in cities such as Chicago, Washington D.C., and major Californian markets, inventory on a national scale (while up 6 percent since the year's start) is more limited than in recent years.
Much like your Econ 101 teacher told you: The housing market operates based on supply and demand. Right now, demand is gaining on a slow-growing supply, meaning people are paying more to secure their share … and driving up prices. If prices continue to rise, it should encourage sellers to put their homes on the market and developers to resume building, both of which will expand the available supply — in fact, construction has already picked up 60 percent in the last two years.
Then there are interest rates — the amount of interest a homebuyer or homeowner pays on his mortgage. In the past year, rates reached notable lows, hitting 2.56 percent for a 15-year fixed mortgage and 3.35 percent for a 30-year-fixed. The declining interest rates were part of an economic stimulus strategy from the Federal Reserve Board, which hoped to spur the market back into action. (As of publication, the rates for those two popular fixed-rate plans are back up to 3.43 percent and 4.37 percent, respectively.) It's predicted that as the Fed winds down its efforts while the economy improves, rates could clear 5 percent by the end of the year.
The rising interest rates have the potential to slow growth of the housing market, but despite being a top concern for would-be buyers — over half of 2,000 people surveyed in June by real estate site Trulia would be waylaid from their buying plans if rates exceeded 6 percent — it doesn't appear that their fears or the upward trend have significantly slowed buying so far.
Between the rising home prices, expanding inventory, and low interest rates, the housing market should be improving. But of course, after the financial trauma of the last few years, experts are wary to forecast too rosy a picture of the next few years in housing.
For instance, have a look at another number: The NAR has created a monthly measurement system called the Housing Affordability Index, which takes into account median price of a single-family home, median family income, and interest rates to gauge whether it's a good time to buy. Numbers over 100 indicate that the average American family should be able to afford a purchase, and in May 2013 — the most recent data available — the Index showed 172.7, about the same measurement as affordability in 2010 (not considered a particularly impressive year) and a drop from last May's 188.4. While favorable, the current market isn't exactly considered ideal.
Where do first-time buyers come in?
First-time homebuyers are in a unique position: Largely, they've delayed purchasing longer than they might have a decade ago, thanks to the recession. Fox Business reports that 15 to 20 percent of new homebuyers are over the age of 35, and the National Association of Realtors (NAR) says first-timers purchased only 29 percent of homes in June (compared to 32 percent at the same time last year).
There are two factors in particular affecting these buyers besides the delayed timeline, explains Walter Molony, economic issues media manager for the NAR. First of all, lenders are cautious after the past two years and availability of credit is limited, which makes it difficult to compete with cash investors, who currently make about 20 percent of home purchases.
The other thing that's limited, he says, is inventory on the lower end of the home-price spectrum, to which first-time buyers are traditionally drawn. A profile of homes sold in 2012 by the NAR found first-timers bought homes that were not only smaller than repeat buyers (typically about 255 square feet less) but also a median of eight years older — two things that lower the price of a home.
Is it the right time to buy?
The average American family has little say in the patterns of the market. What we can control, however, is our own readiness to buy. So the question, in fact, isn't "Does the market say it's the right time to buy?" but "Is it the right time for me to buy?"
Readiness to buy a home can serve as a sort of barometer for how you feel about your overall financial picture — for instance, a May survey from the American Institute of CPAs found that 29 percent of student loan borrowers have delayed buying a home due to their debt.
And that's understandable, considering that the down payment alone should be 20 percent of the home's price, according to LearnVest Planning Services certified financial planner Ellen Derrick. Although it's sometimes possible to buy a home for as little as 3.5 percent down with an FHA-certified loan, she recommends paying the entire 20 percent for two reasons: first of all, because it will exempt you from having to buy Private Mortgage Insurance (PMI) that will cover your lender in case you default, and secondly because she has found that, typically, people try to put as little down as possible when they really don't have other resources. "Time and time again, I've seen people rush to buy a house with the smallest down payment possible, then find themselves with a major home repair and no funds to pay for it," she cautions.
On top of the down payment, you should expect to pay about 1.5 to 4 percent of the home's original cost on maintenance each year, according to Coldwell Banker's estimates, and you'll want to remember that you're also responsible for paying property taxes, homeowner's insurance, homeowner association fees, and mortgage insurance, if a bank requires it as part of your loan.
Plus, you should be ready to stay in your home for at least two years — and usually more than that. "Two years is the time frame that you would need to own and occupy a primary residence in order to be exempt from paying most capital gains on the sale," explains Derrick, "but unless you had minimal closing costs and the market for your specific area has increased substantially, you probably need to stay for about five years just to break even."
Derrick emphasizes the need for financial stability — an emergency fund, no high-interest consumer debt, and a plan to fully fund your retirement — before taking the home-buying plunge. "Buying a home is a big investment," she says, "and one that isn't easy to walk away from if you find that you've made a mistake."
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