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Is now the time to buy real estate?
May 22nd, 2011
Before I get into answering this question, I would first like to premise this entire post that the "time to buy real estate" is completely relative to the individuals and families making the choice. For some, it may never be the right time, while for others looking to set down their roots as they grow their families it is the perfect time. Do you have uncertainty with the longevity of your current job? Then don't buy. Are you interested in a long term investment property that will improve your retirement outlook? More likely than not the answer is yes. You get the point. Oh, and please also keep in mind that I always recommend to plan for LONG TERM homeownership when considering buying a home. If you think there's a chance you'll want to move in five years, then consider whether the price range you are shopping in will allow you to rent out the home and hold onto it as a long term investment asset.
Now, backing up a few steps to try to grasp the bigger, "in general" picture as to whether now is the time to buy, I'm going to examine what I hear from clients as the biggest pro and con (financially speaking)...
Pro: Interest rates (and prices) are historically low and you can lock that rate and payment for 30 years - We know where rates are going from here based merely on the fact that rates are historically low and will eventually slide their way back up. But to go deeper, the government is making plans to wind down Fannie Mae and Freddie Mac, which currently purchase 90% of loans issued by banks. The quick synopsis of what happens when Fannie and Freddie are gone goes like this… without Fannie and Freddie to sell the loans to, the banks issuing them will carry more risk… more risk results in the banks requiring more skin in the game… more skin in the game results in higher interest rates and down payments as well as the end of the 30 year fixed rate loan… signs are pointing to moving towards a 15 year loan which equates to larger principal payments (skin in the game).
 So, homebuyers and investors who wisely plan the purchase of the asset for the long term currently have the opportunity to lock in a low rate and payment for 30 years. And, as rents rise, your payment stays the same.
Con: Concerns over prices dropping further - I understand why buyers have this concern. I get it. What I don't get is the over-emphasis placed on this concern. Maybe it comes from the lack of a solid grasp on the long term concept. Real estate is not a get rich quick scheme… just ask the hoards of people who bought homes with lax financing during the financial bubble thinking they'd make a quick buck. If you cannot view a home purchase as a long term investment, then do yourself a favor and just completely stop thinking about homeownership. If you want to buy and only think you'll likely live there for less than five years, then know the home you buy has to have a back-up plan as a rental property.
Guess what the good news is here? Since I moved here in 1989 the average annual appreciation of single family homes in King County, based on market sales data, is 6.13%. Keep in mind that 6.13% appreciation is on the value of the home. Meaning, you bought a $300,000 home with a $60,000 down payment… when that home appreciates on average around $18,000 you are getting an $18,000 return on your down payment investment. 6.13% suddenly becomes a 30% return.
Anyways, I suppose the answer to the question is rather simple for those who wisely plan for their purchase as a long term investment. Historical appreciation, currently low prices, and the opportunity to lock in a payment at historically low rates for 30 years says it's never been a better time to buy.
I'd like to leave you with a tale of two buyers…
Buyer A just closed on a new home, with an interest rate in the 4's, that they plan to have children in, play in the backyard with their kids and dogs, etc, etc. Most importantly about Buyer A is that they chose a home that could rent for at least what their monthly payment is should they choose to move in a shorter time frame. Simply put, they can hold onto the appreciating asset at no cost.
Buyer B is looking for a rental investment property in Bellevue. Buyer B's primary goal is to finally add an investment property to their current investment portfolio. Buyer B has been in contact with me off and on for quite some time now, but they've ultimately sat on the sidelines. Simply put, Buyer B is looking for a needle in a haystack… the "price" they want for a home is simply lower than what the quality of home they want dictates. If it's not that then they'll find some other reason why it's not the right home. I present Buyer B with all the information about appreciation, rates, etc but Buyer B can only think about where prices may go in the next year as opposed to where they'll be in 5, 10, and 20 years regardless of what happens next year. Buyer B forgets to consider that the "cost of owning" extends beyond the price paid for a home (and that it also depends largely upon the interest rate they locked in and the duration of that loan). Buyer B is indeed interested in a real estate investment as a long term asset to supplement their current retirement portfolio, but Buyer B is so focused on the short term that the long term is always beyond the bend in the road and out of sight.
Which buyer are you?
- Robert E. Wasser - Seattle and Bellevue real estate blog, market trends, statistics, and news
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