When is the best time to buy a house?
This past month I had a conversation with someone that was deciding whether or not now was the right time to purchase a home. I thought sharing my perspective on when is the right time might be worthwhile for my readers. Let's call him Gary (though that's not his actual name).
Gary is a bright young man with a good job out on the east coast. He has been recently recruited by one of the top companies in Madison and planning to move here this spring. He has spent a number of years as a renter throughout college and graduate school. However, moving to Madison for this new job, he wrestled with the idea of buying his first home. Gary shared with me, "I'm not sure if I want to buy or keep renting. I'm a little concerned that the market might keep going down." Now Gary is a very smart guy (probably much smarter than me) and he wanted my help to decide whether he should buy now or keep renting.
As I learned more about his situation, it seemed to me that now might be a good time to purchase. Here's why:
Tax credits available
In case you haven't heard, the federal government is offering a tax credit for first time home buyers of $8,000. First-time buyer is defined as not owning a home for at least the past three years. There is also a $6,500 tax credit for existing homeowners that decide to purchase a new principle residence. For both of these tax credits, one must be under contract by April 30th, 2010, with an offer pending to close no later than June 30, 2010. Please note, I'm not advocating purchasing a home solely because the government is offering a tax credit, but if you were on the fence about buying then this might be a little "boost" to entice you to purchase now rather than later.
Good Job with Stable Growing Company
Another thing in Gary's favor are that his job is fairly secure with a stable and growing company. As many economists will agree, one of the primary economic drivers of any community is stable jobs. Take Detroit for example. There has been severe unemployment and consequently the real estate market along with everything else has suffered tremendously. Though the Madison area is not exactly recession proof, having a diverse economy does help. As stated by the local non-profit group Thrive, "A range of target and key base industry sectors in a region's economy is an indicator of overall economic vitality. A diversified economy means we reduce over-dependence on one or two sectors, smoothing any negative impact of a contracting national or global market. Economic diversity creates a competitive advantage."
Savings with a Down Payment
Gone are the days of 100% financing with no money down to buy a house. In 2010, Mortgage lenders all around are asking for more documentation of in order to provide funding. Gary has at least enough savings to put down 5% on his home purchase. Some other clients I work with have only 3.5% for a down payment, while others can easily put down 20% or more. For others considering a home purchase, I would recommend saving enough for a comfortable down payment that doesn't completely drain your account.
Plan to Stay Put
Another factor in Gary's favor was that he is planning to stay in Madison for at least a few years. He previously went to college here and knows the area very well. In fact, one of the reasons he came back to Madison is that he enjoyed his time here and still has friends in the area. If Gary were only going to be here for a few months, then buying a house might not be a good idea. There will be a host of costs when selling a house, including things such as transfer taxes, title insurance, broker fees, attorney fees, inspection fees, home warranty, etc.
This one is obvious, but worth mentioning. The past few months interest rates for a 30 year fixed mortgage have been hovering around 5%. This is historically very low and many economists predict that mortgage rates will rise in the future. This will obviously impact monthly payments and affordability for home ownership. For example, according to our latest newsletter, the median sale price for a single family home in Dane County is $218,000. With a 20% down payment, monthly principle and interest payments at 5% interest would be $936 per month (not including taxes and insurance). If rates rise to 6.5% or 8.0%, that would have a respective payment of $1102 or $1280 per month.
But what about the market?
One of Gary's concerns in deciding to purchase was the local real estate market conditions in Madison. As a Realtor, I look at homes every day and can tell you that, there's always a market in operation. According to our local multiple listing database, in 2009 there were 5451 real estate transactions (houses and condos). This number is down from a peak in 2005 at 7981 transactions. The fact of the matter is that there will be homes that continue to sell in any market. Some will be a better "deal" than others. Ask your Realtor what they think is a good value in today's market.
So if you're like Gary and have a tax credit available, stable job with a growing company, good savings with a down payment, plan to stay put for at least a few years, favorable interest rates, and a good Realtor to help you make sense of the market, then it may be a good time to buy a house. Oh by the way, you probably have to have the desire to be a homeowner too. If the water heater breaks, it's no longer the landlords responsibility.