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2011-10-12 14:24:46
Is it wise to buy now even if prices drop more?

'Is it wise to buy now even with the risk that prices may drop further?'


A few days ago there was an article published titled 'Where to Find Housing Demand,' that explored the topic of buying a home in this semi-unsteady market.

With record low interest rates and low home prices from decades ago, the housing market is not experiencing the boom that many predicted or expected such conditions to produce. The reason being, according to the article, is that consumer confidence is lower than ever due to the slim but real possibility of a double (or triple or quadruple or whatever amount we are at) recession resulting in home prices continuing to slightly drop. 


Mortgage rates October 2011


This article basically stated that in such a market, 'Housing Demand', or confident home buyers, could be found among investors. The reason being that investors demand and confidence are not as affected by the possibility of another recession for several reasons:

1) Investors generally put more down and have better credit so it is easier for them to get financing

2) Investors purchase real estate as long term investments (usually 10+ years) so they are not as concerned with housing prices over the next 5 years as long as rental demand and rates are strong and increasing.

3) Rental demand and rates tend to grow during a recession as more home owners are displaced from their homes (foreclosure/short sale/bankruptcy) and need to rent; less new construction due to difficulty obtaining loans and hence creating a housing shortage; and less buyers overall can qualify for financing and therefore need to rent for extended amounts of time.  


Although I completely agree that it is a great time to purchase real estate as an investor (especially in college towns where rental demand is extremely high and rates are soaring), I also believe it is a great time to purchase real estate as an owner-occupant, especially a first-home or an upgrade, for the very same reasons:

1) Sure it is more difficult now to get approved for a loan. But everyone I know who can't qualify right away, is able to qualify within two years of meeting with one of my loan officers, and usually within 6-12 months, by following the tips and advice by the loan officer to get approved. The majority of my home buyers are able to qualify right out of the gate if they have decent credit and taxable income and there are numerous low down payment or down payment assistance programs available. There are even a few government loans available that allow lower credit scores. You can't get approved if you don't try and you will be surprised about the options available to you. 

2) If you are planning to occupy your home for over 10, or even 5 years, then you are in the same position as investors. Even if home prices drop another 2-4% (which I know they won't in certain markets and probably won't in most), if rental rates continue to increase, or interest rates jump back up a percentage or two, or you can't qualify in the future due to a change of circumstances (change of employment, going back to school, etc), then it would be much wiser economically to buy now. The amount of your loan you could pay off in 5-10 years at a lower interest rate would more than make up for a slight drop in home prices or the money you were wasting on inflated rental prices. Saving $5k on a home by purchasing it in 3 years at 5% interest would save you absolutely NO money compared with buying that home for $5k more now at 3.75% interest and paying off $10k of principle during the three years and having a much lower interest rate for the remainder of the loan. Even if you have to move out in 3-5 years, you could easily cover your mortgage payments with renters and then turn the property into an investment property (but with the interest rate of an owner-occupied loan). 

3) If you are able to buy now, your monthly mortgage payment will basically stay the same for the remainder of your loan, while rental rates will continue to rise. On average nationwide, rental rates increase 3-4% annually. In addition, even if you were paying the exact same amount in rent as you would be paying on a mortgage payment, a large portion of your mortgage payment gets applied to principle, and your interest on the mortgage is tax deductable, saving you thousands per year. 


So if you are an investor, or looking to upgrade from your current home, or thinking about buying your first home, you really don't need to be too concerned about home prices dropping a little bit more. You should be more concerned with throwing away your money and inflated rental prices and risking a jump in interest rates. 


To discuss your options, please contact me and I will connect you with an amazing loan officer/mortgage broker who can pre-qualify you or advise you on how to prepare for a future home mortgage. 


To view the article visit here: 'Where to Find Housing Demand'

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