Every day, homebuyers ask, “Should I buy now, or should I wait for a better deal?” These days my answer is decisive: “now is the time.”
Coming from a real estate broker, these words can seem like a sales pitch — a canned response suitable for any market. But there are solid facts backing up my opinion, and hopefully, 10 years from now, someone who bought a house after reading this blog will thank me for pushing them over the edge. I imagine how happy they will be with a 3.5% mortgage on a low purchase price negotiated during one of the strongest buyers’ markets of our lifetime. Ten years down the road, they will have significant equity in their home, and this will give them the freedom to buy other things, finance a college education or just live a little better.
There is overwhelming evidence suggesting home prices and interest rates will rise soon, and fear and indecision now could cost you thousands down the road.
1. Interest rates are under 4%.
This fact never gets the attention it deserves. Rates are at a 65-year low! Low rates reduce carrying costs more than most people realize — that is why it’s on the top of my list. If rates jump from 3.5 to 4.5 percent, it costs 13 percent more to borrow money. Even if prices don’t change much, you will still pay 13 percent more for borrowed money, and that is significant.
2. Prices are as low as they’re going to get.
Although most experts believe last year was the bottom, prices are still 20 to 40 percent lower than they were at the height of the market, and interest rates are 30 percent lower than they were in 2007. Home sales are picking up, prices are stabilizing and inventory is falling. Low inventory creates higher prices. That’s just the way it works.
3. It’s cheaper to buy than rent in most areas.
I have worked with handfuls of clients who never realized owning a home could be more affordable than renting one. I recently worked with a military family who wanted to rent a home for $2,800. After taking a pencil to it, they discovered buying a home with 100 percent VA financing would cost $700 a month less than renting. They also got a much better home to live in
This shocked them, as it does most buyers who take the time to examine both scenarios. This dynamic alleviates risk of losing a job and not being able to afford a mortgage and also the opportunity to keep the home in the future for cash flow and buy another property to live in.
4. The stock market has recovered, but the real estate market has not.
The Dow reached an all-time high this month, rebounding strongly after one of the worst recessions in history, yet the real estate market is still lagging. This is why the smartest investors in the world are pouring money into this sector. One of Warren Buffet’s biggest investments last year was real estate, and soon many more will follow his lead. As demand increases, so will prices.
5. Inflation is here.
Inflation has already begun. It is reported that lumber prices have jumped in some segments by 30 percent due to a 20 to 25 percent increase in building starts nationwide. These costs directly affect the cost of buying a home. If it costs more to build or fix up, the builder must charge more for the same product, and we will start to feel those increases in 2013.
Real estate is one of the best assets to hedge inflation, and you will see more and more people purchasing investment property and second homes in response to inflation. Again, increased demand means higher prices.
I hope this helps convince you that now is the time. This is not a sales pitch. It’s what I believe.
Matt Hadfield is a broker/co-owner of Hogan Associates.