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Greater Bay Area Market Report: Great Reasons to Buy a Home Now |
The nature of market “bottoms” is that it’s hard to tell one’s occurred until prices and sales volume start to rise again. That’s why the best time to buy is when market conditions appear to be calling a bottom. To take advantage of near-record low mortgage interest rates and home prices as low as a decade ago, homebuyers may have to take some risks, such as riding out another short-term dip in property values. But the rewards may be well worth it. A number of factors point to a small window of opportunity to buy “at the bottom” before the market turns more favorable.
More jobs are available
The Federal Reserve says the economy is growing, modestly, and the Labor Department announced in mid-March that applications for unemployment insurance fell for the third week to the lowest level since July 2008. By April 1, 2011, private-sector job gains surpassed 200,000 for two straight months, for the first time in five years. The unemployment rate dropped to 8.8%, well below the 9.7% rate of a year ago. More jobs mean higher consumer confidence, and that translates into more spending, more household formation, and more homebuyers able to qualify to buy a home. Houses hedge against inflation The Consumer price index rose 0.5% between January 2011 and February 2011, which excludes volatile food and fuel. For the year, gas is up 19.2%, fuel oil is up 27.1%, and food is higher by 2.8%. Inflation rates are based on consumer prices, as suggested by the urban index, now up 2.1% for the year. You may notice that interest rates are higher than they were six weeks ago, possibly making it more expensive to buy a home soon. That’s why inflation is good for homeowners. When prices rise, a major asset such as a home, purchased at a fixed cost, becomes more valuable. Housing prices are still declining The National Association of REALTORS® reported that the median home price fell 5% between February 2010 and February 2011. Prices are now where they were in 2002.
PMI Mortgage Insurance Co. announced mid-March 2011 that its housing market risk index shows that home prices relative to income are below market fundamentals in more than half of U.S. states. In other words, prices have overcorrected.
Freddie Mac’s chief economist Frank Nothaft believes prices will bottom by spring 2011, and rise in 2012.
Mortgage interest rates are near record lows
Between October 2010 and March 15, 2011, benchmark 30-year, fixed-rate mortgage interest rates rose from a historical bottom of 4.32% to 4.77%. If you purchased a home with a mortgage of $300,000 when rates were 4.32%, your payment would be $1488.14 a month. Over the term of the loan, you’d pay a total of $535,730.17, with $235,730 in interest. The same home purchased in March 2011 would cost you $1,568.56 per month, for a total of $564,681.72, and $264,681.72 in interest. That’s a difference of $80.41 per month, and an extra $28,951.71 in mortgage interest over the term of the loan.
That’s why prices can’t compete with interest rates. For prices to drop enough to beat the low interest rates of 2010, your home’s value would have to decline nearly 10%. At the current rate, that would take approximately a year and a half. Eighteen months is a lifetime in economics, and with inflation growing, the chances that market conditions will improve are slim. Pent-up demand ready to release According to the National Association of Builders (NAHB) and the Census Bureau, household formation – a key ingredient for regulating housing supply - has declined significantly since the Great Recession. Like many economic indicators, it too has overcorrected to about 1.0% annually. But considering that the largest generation ever –81 million Echo Boomers – are at renting and homebuying ages, the numbers should be closer to the 2.3% annual growth of the 1970’s when 78 million Baby Boomers reached maturity. Based on that and other calculations, the NAHB says about 2.1 million households have delayed formation due to the recession, creating pent-up demand for housing.
Buy vs rent ratios favor homeownership As the economy improves, households increase, which is already starting to show in the decline of rental vacancies. Mark Zandi, chief economist for Moody’s, said he expects buying to beat renting in most markets by mid-year. The NAHB’s Multifamily Market Index shows that rental vacancies have been falling steadily since Q2 2009. More renters mean higher rents can be charged. Right on cue, rents increased a modest 3% in 2010. The California Market After three months of higher transaction volume, sales softened 9% in February 2011 over January, and were 4% below the pace set in February 2010. Unsold inventory rose from 6.7- months to 7.3-months on hand, tipping the state back into a buyer’s market. Statewide median prices fell 2.8% to $271,320 from $279,140 in January. The median price is 2.5% below the level of February 2010, and it is the lowest since May 2009, when the median price was $263,440. The California Association of REALTORS® chalks the reversal up to two opposing factors. Sales volume may be down due to continuing consumer uncertainty. The takeaway is that a housing recovery doesn’t occur in a straight line, but in surges and dips. Buyers could wait for even better conditions, but the current alignment of falling mortgage interest rates, lower home prices, and larger selection is unlikely to reoccur. Prices may go lower, but mortgage interest rates may go higher. If this isn’t the bottom, it’s close.
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