Monday, March 7, 2011

Is Now the TIme to Buy a House?

Housing prices have gone down across the United States in the last 5 years.  In some areas, prices are down by 50% or more.  Of course, other areas have seen smaller declines and there might even be a few areas that haven't seen declines.  But where will housing prices, in general, go from here?

This analysis is a generalization as housing prices can vary and do different things from region to region.  For example, I wouldn't recommend buying a house in Detroit, regardless of what the overall housing market does in the U.S.

There are a lot of pros and cons for buying a house today.  There was a huge bubble in real estate and we have seen the bubble pop.  The question remains if the bubble has completely deflated yet.  It is hard to say because the government has worked hard in trying to prop up prices or at least decreasing the rate of decline.

There are a lot of people underwater in their homes now.  They owe more for their mortgage than what their house is worth.  There a lot of short sales and foreclosures.  A good portion of these need to be cleared before housing prices will go up again.  In addition, it is hard to say how many people would like to sell but aren't even trying right now because of the depressed market.

There are certainly a lot reasons to be bearish on housing right now.  With that said, there may be one very good reason to be bullish.  That reason is the Federal Reserve's monetary policy.  While it is the Fed's policies that caused the original bubble in the first place, the Fed is creating new money like never before and it will continue at least through June, unless they cancel QE2.

If you are looking to buy a house as your primary residence, I don't think you should be too concerned about the short-term outlook on housing prices.  Instead, you should be asking yourself other questions.  Can I afford the payments each month?  Do I have money for a down payment?  Can I afford all of the other expenses with home ownership?  Do I plan to stay in the house for several years?

If you are answering yes to all of these questions, then perhaps you should buy a house for your primary residence, as opposed to renting.  Interest rates are not quite as low as 6 months ago, but they are still very low by historical standards.  If you can lock in a 30-year fixed rate mortgage, then you will pay it back in depreciated dollars.

If you are looking to buy an investment property, then the most important thing to look at is your payments vs. the rent.  When you consider your payments, you have to factor in the mortgage, the property taxes, association fees, homeowners insurance, repairs, and possibly a management company.  If you add up all of these things and average them on a per month basis and you can collect rent that is higher than this amount, then it is probably a good investment property if it is in a decent area.

The biggest indicator of a bubble five years ago was rents vs. prices.  You could rent a place for far less than your monthly mortgage payments on a similar place.  It meant that prices either needed to come down or rents had to go up.  In a situation where rents are higher (as we are beginning to see in some areas), then either rents will go down or housing prices will go up.

I think we will see some more in the way of price decreases in the near future.  But interest rates are a wild card right now and there are more signs of price inflation.  Even if housing prices don't go up in real terms, they may go up in nominal terms due to the falling dollar.  This will be good for people with a fixed rate mortgage.  You can pay off your lender in money that is worth less and less each passing day.

8 comments:

Anonymous said...

My comment is unrelated to this post, but I wanted to reply to the newest post on your blog since I noticed that few, if any, of your blog posts seem to get replies. I came across your blog when doing a recent search for "libertarian investing" or some such thing and found myself reading many of your older posts. Just wanted to give you a word of encouragement because I think your blog is excellent, and I'm surprised that you don't get more activity in terms of replies to your posts. I'd love to exchange emails offline. One thing I'm wondering about is whether there's a way to replicate Harry Browne's "Permanent Portfolio" via a 401k. My wife and I both have 401k's, but have not ventured into investing beyond that yet (we still have some debt to pay off), and I'd like to choose the smartest mix in our 401k's, so if you can create a blog post about that, that would be great. And, again, if you have any way to contact you more directly, I would love to do so.

Mrs. Bob said...

I am trying to read your advice in this blog correctly. I told my sister that I would look out for her in the housing market and let her know when to buy. They are in the process of paying off their insurance business and hope to have it paid off by the end of the year. After that they will be in a great position financially to afford a home. Right now as it is they are pre-qualified for a decent sized loan. Also they have money saved up for a down payment. I specifically want to know what you think will happen with interest rates and I have heard that the months of housing supply are an indicator of whether prices will continue to go down. Should I tell her to buy quickly or wait until their business is paid off. I want her to get the best deal. You can reply to this comment or email me a reply using my google account ID.

Shane Adams said...

Well, you can buy a home anytime. But the point here is the preparation. You can say that there's a perfect time to in invest in a house. But what if you really need to get one? That's why you should map a strategy on how to buy a good and affordable house. You should also think about your main needs and ask yourself if buying a house is suitable for your current lifestyle.

Birmingham investment realty said...

The first best day of the year to buy a home is Christmas Day.People are more inclined to be generous, even if it means coming down on the price.

Randy Robinson said...

It is difficult to determine whether to buy a house or not these days. Make sure you can afford to pay the monthly mortgages because you might suddenly find yourself in debt if you're not prepared. Think the matter over for a year or two before considering whether to buy a house or not. ;)

Abdul said...

I agree with everyone in here. Preparation is the key to great living and resource management. After all, buying the home you want is never a problem - the only concern is how you’re gonna pay for it.

[Abdul Jackson]

Tiago said...

Uncertainty complicates every investments decision in every industry, real states included. Then, every variation in prices is getting slower than before, a lot of customers decide to wait until the market gets more clarified. We have been in this situation for almost 5 years now, many Real estate Agents lost his jobs and I think that it is going to pass 5 more years to recover these industry traditional dynamics.

Nobanno said...

Really there are so many pros and cons of buying a house today but still this housing market is increasing. I think this is the time to buy something.
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