Part 1: Stars aligned for first-time buyers
Part 1: Stars aligned for first-time buyers
Editor's note: This is Part 1 of a two-part series.
If you are a first-time buyer who has been trying to decide whether to buy your first home, this could be the right time for you. There is a window of opportunity that may be closing soon for some buyers, and here are just a few indications of how the market may be properly aligned for you right now:
1. The lowest interest rates since the 1950s
Interest rates are close to all-time lows, hovering in the mid-5 percent range. When I started in the real estate business in 1978, interest rates were 9.75 percent and soon hit 10 percent. During the 1980s downturn they jumped as high as 21 percent. In the early 1990s they reached 12 percent.
If you're waiting just because you think prices may drop more, you may want to think twice. With the government running huge deficits, it will have to sell Treasury bills to cover the debt. Investors are feeling skittish about purchasing these securities. This means the government will have to increase the interest rate they charge in order to convince more investors to purchase. When the government increases these rates, the cost of home mortgages increases along with them.
2. But prices may go down!
One of the concerns almost all first-time buyers have is: "Will the price go down even further?" To put this in perspective, an interest-rate increase of 1 percent on a $200,000 loan will cost you approximately $50,000 more in interest over the life of the loan. A 2 percent interest-rate increase, which some experts believe is possible in the next 12-24 months, will cost you approximately $100,000 in additional interest over the life of a 30-year loan. That's a whopping 50 percent of the loan amount.
If you believe prices will go down, the issue is by how much. If you believe there is another 25-50 percent depreciation in your marketplace, then you can run the risk of waiting. What you need to know, however, is that virtually all real estate experts are saying that we are at or near the bottom.
Proof that prices are bottoming is coming from a wide variety of places. Many of the hardest-hit areas are experiencing a comeback in sales -- in some cases largely driven by depressed prices and an abundanced of distressed properties. And while the hot pockets of sales activity may not represent a complete turnaround, they do offer concrete signs that the market is bottoming or may be starting to improve.
In terms of how market cycles work, the excess inventory must be sold off prior to the market stabilizing in terms of price. This appears to be what is happening in many areas. Once the excess inventory disappears, there will be more competition for a limited amount of supply.
This is how the next upturn in the market will begin. In fact, many first-time buyers in Orange County (California) are bumping into multiple offers on the homes they want. Multiple offers on first-time-buyer properties are a very positive sign for market improvement.
3. It's cheaper for me to rent!
The challenge with renting is that you are paying off your landlord's mortgage, not your own. Even if your house doesn't increase in value, each month you make a payment you accumulate wealth by paying down the principal. This is the equivalent of putting money in the bank each month. In contrast, renters lose additional wealth as their rental payments increase over time.
A homeowner with a fixed-rate loan has locked in his or her mortgage amount for the next 30 years. If there is inflation, the homeowner pays off the loan with inflated dollars. Rents, in contrast, keep pace with inflation.
Thus, if you elect to wait to purchase, you may be leaving money on the table in two different ways. First, if interest rates increase, you will end up paying more over the term of their loan. Second, by waiting to take action, you will accumulate less wealth and experience less appreciation. Furthermore, the longer you wait to start paying down a mortgage, the later the date will be that you retire that debt.
There's one other key issue to consider when it comes to getting off the fence and buying that first home -- the $8,000 tax credit. The challenge is that if you don't act right away, you may miss this great opportunity. See Part 2 next week to learn more.
Bernice Ross, CEO of RealEstateCoach.com, is a national speaker, trainer and author of "Real Estate Dough: Your Recipe for Real Estate Success" and other books. You can reach her at Bernice@RealEstateCoach.com and find her on Twitter: @bross.
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