Just pick up any newspaper or tune into a news channel, and you’ll be bombarded with negative headlines announcing the fall of the economy, the housing market and the stock market. But look closer and you’ll also find articles on why buying now, rather than waiting for the dust to settle, might be the best course of action for some home buyers.
Investors aren’t scared away. In fact they’re taking advantage of a great buyers’ market. Homebuyers with stable income might want to consider following their lead. In fact, according to the Mortgage Banking Association’s most recent report, mortgage application volume rose by 10.6 percent for new purchases in the week ending March 21, indicating that buyers are indeed re-entering the housing market.
A February 14 article in Time magazine, called “Ignore the Headlines,” was a refreshing breath of common sense in a real estate climate of fear and sitting on the fence. In the article, authored by Dan Kadlec, scenarios were laid out where buying now could be a sound financial decision. He weighed the risks of buying now before the housing market bottoms out with savings in interest rates, tax benefits and pleasure of ownership.
His argument stated that if you wait until home prices start going up, you’ll more than likely have to pay higher interest rates. He noted that your payment would be the same if you bought now at a lower interest rate or waited and bought at 10 percent lower but at one percentage point higher in interest rates.
What the article didn’t address, though, is that many markets aren’t seeing the 6 percent to 20 percent depreciation so publicized in California and Florida. In fact, in our area, we’ve seen an overall 5.8 percent appreciation in 2007. So the advantages of locking in an obscenely low interest rate are even more financially sound.
There are other factors that should be considered. Tax benefits are one. You’ll miss out on great deductions if you chose to rent.
The second factor is ease and availability of mortgage money. If your credit is anywhere from good to excellent, you may want to buy now. All economic indications are pointing to continuing tightening mortgage qualifications – that as the year progresses, it will become more and more difficult for buyers to jump through the hoops that lenders will put in place.
In today’s market, it’s still possible to get 100 percent financing, although a lot more difficult. These nothing-down loans may disappear altogether as private mortgage insurance (PMI) companies (who’ve taken a huge hit recently paying out on foreclosure losses) decline to insure 100 percent financing. In fact, more and more lenders are finding that even though Fannie Mae or Freddie Mac might approve a loan, it might be impossible to find a PMI company that will insure it.
According to Steve Heaney of American Brokerage (and vice president of the Washington Association of Mortgage Brokers), most lenders have put into place risk-based scores: “We’re seeing borrowers with credit scores of less than 680 being penalized with higher interest rates, and 100 percent financing has all but gone away. But you have to realize, we’re still at incredibly low interest rates still in the 5s.”
Once we start moving out of this current slump, don’t expect an easing of qualification requirements any time soon. Mortgage companies are very aware that lax lending standards have precipitated much of this crisis, and will probably continue to hold buyers to much higher levels than in the past for quite a few years to come.
What if you have to sell in order to buy? What if you just want to move up and buy a bigger home here in the Seattle area? Many sellers are focusing on their paper “losses,” comparing current sales data with that of a year ago. But if you are buying and selling in this market and are moving up in price, you actually will benefit from the housing drop. Elementary math should show you that if your home sells for 10 percent less than it would have done a year ago and you buy a more expensive home for 10 percent less than you would have paid a year ago, you will experience savings. Plus, in many cases, it is a paper loss. Just take a look at the latest Housing Price Index report issued by the Office of Federal Housing Enterprise Oversight (www.ofheo.gov), and you’ll see that the Seattle area has experienced 66.1 percent home price appreciation in the last five years, even taking into consideration fourth-quarter depreciation.
So if you’re in the market for a new place to live, consider buying. Choose wisely from homes well within your means in stable areas with good school districts. Consider bank-owned homes that have been through foreclosures (this is where a Realtor can help determine which are good buys). Avoid mega-subdivisions where existing homes are in competition with a glut of new homes. Use due diligence in researching history and condition of homes.
And most of all, enjoy being a homeowner.
Michelle Young, who lives in the Black Diamond area, and Michelle Boulot are real estate professionals with Federal Homes and Real Estate (www.michellesellsseattle.com). Annie Brunson is vice president of Buyers USA Relocation (www.buyersusarelocation.com).