Is now the time to buy a home?

Is now the time to buy a home? It depends on...

A simple question -- Is now the time to buy a home? -- generated heated debate at a recent dinner party, an argument that made attacks by political candidates appear tame.

"You'd be a ... fool to buy now!" one woman said, noting that resale prices are soft and falling, foreclosures and short sales are still emerging, and the national economy is on less than stable ground.

"You'd be a ... fool NOT to buy now!" another speaker growled, stating that prices are already at their lowest in decades, the selection of homes for sale is stunning, it's best to act while others are still waiting, and, despite popular belief, home loans, especially for first-time buyers, are available at low interest rates, albeit for individuals with a modest down payment and a solid credit history.

Eventually, a consensus emerged: Both positions were correct, because the answer boiled down to two words: "It depends."

It depends on: Where you want to buy? How long will you stay in the house? What is your annual income? Is your job stable? Is a work-related move likely anytime soon? Do you have a decent FICO credit score and a good credit history? How big a loan can you obtain? What is the interest rate? What is the list price of the house? Is the sale the result of a foreclosure? How much of a down payment do you have? What are you currently paying per month in rent? Do you believe home prices will rise or fall over the coming years and by what percentage rate up or down? What's happening in the local market? Are there many foreclosed properties on the market, like in areas of the Inland Empire, or relatively few by comparison, such as here in the San Fernando and Santa Clarita Valleys?

And, perhaps most importantly, what are your genuine housing needs -- are you a single renter with no imperative to move, does your family of five require room to grow, or is the nest empty and you’d like to downsize to a smaller house?

The list of questions went on and on with each raising valid points on both sides of the debate. Eventually, there was agreement on several additional points:
For example, all markets recover; Southern California will continue to lure new residents; and, there are not enough existing houses to satisfy burgeoning demand. That weighed the argument more in favor of buying, but then the debate shifted to timing, and prices, and home loans, and interest rates.

Renters currently paying a low monthly rent and of the belief that home resale prices will fall farther for months to come saw little advantage in buying now. But other renters who pay a high monthly rent and were optimistic about the market, argued in favor of capturing today's low prices, decent interest rates, and wide selection of homes listed for sale.

They wanted to get into the market before the herd returned and prices started marching up again. Plus, efforts to revive the national economy and stabilize the housing market already are yielding programs and once-in-a-lifetime opportunities that may vanish once recovery is underway.

If a renter today captured a home at a favorable price of say $300,000 with appreciation of a modest 3 percent annually, within three to four years the benefits of buying would totally outweigh any perceived benefit of renting. The sooner that houses start appreciating and the higher the rate of appreciation, the sooner that buying would make sense.

Unlike other investments, any return on a home purchase requires a relatively small initial investment. Few buyers plop down cash to pay the full cost of a $200,000 house, while most make a down payment of as little as 3.5 percent on up to 20%, again depending on individual circumstances. A 3.5% down payment of $7,100 on a $200,000 condominium would require a 5% loan of $192,900 with good credit. Principal and interest payments would equal $1,031.00 taxes (and home owners dues if a condo) would average about $400.00 per month. After tax benefits ownership is less than rent and you can upgrade and improve your own home.

If the home increased in value by 5 percent during the first year -- either due to true appreciation or simply because the purchase price was significantly below market -- that means the buyer earned $10,000 on an investment of $7,100. In that instance, the annual "return on investment" would be a whopping 141 percent.

Of course, owners must make mortgage payments and must pay property taxes, along with other costs of home ownership. However, since the interest on a mortgage and property taxes are both tax deductible, the government is essentially subsidizing a portion of the home purchase.

Is it likely that renters could find a safer, better investment elsewhere? It depends, although real estate has always fared well over the years. And in the long haul real estate has out performed nearly all other investment vehicles.

If a renter today captured a home at an extremely favorable price of say $300,000 with only 3.5% or $10,500 down, and appreciation of a modest 3 percent annually, within three to four years the benefits of buying would totally outweigh any perceived benefit of renting. The sooner that houses start appreciating and the higher the rate of appreciation, the sooner that buying would make sense.

But it always came back to the particulars of each prospective buyer's situation. It always came back to "It depends" and for the real answer each individual needs to seek expert advice from me your local Realtor and your accountant.

[Thanks, David!]