Purchasing a home is one of the biggest decisions that a person makes. Because of the serious financial commitment involved, most buyers are interested in securing the best deal possible when purchasing a home. As the economy continues to wreak havoc on our jobs and plans for retirement, many people are wondering when will be the best time to purchase a house.
Much like timing a move in the stock market, potential home buyers are waiting for the time when they can maximize their investment. Lower home prices, low interest rates and federal subsidies have all led to better deals in real estate, but these perks may not last much longer.
Lower Home Prices
Since the real estate bubble burst, many real estate markets have seen a dramatic price drop in median home value. While this can be devastating to home sellers or home owners who are underwater with a mortgage that is worth more than their home, it can be a great opportunity for the home buyer.
In many markets across the United States, it is truly a buyer’s market as prices continue to be well below levels from just several years ago. With many homes now going into foreclosure or short sales (where the lender agrees to sell the property at a moderate loss in order to avoid foreclosure), opportunities abound for the qualified buyer; that is, one who can still secure a loan.
While some experts believe that home prices should start to increase by summer, others think that it’s likely the prices will simply stabilize. Either way, for buyers this means it may be a good time to purchase a home. With the large number of homes currently on the market, there is a relative balance between supply and demand. As more people become willing to purchase homes, prices may reach a turning point.
Low Interest Rates
Over the past year, the Fed has been buying billions of dollars’ worth of mortgages every month, boosting the market. The mortgage-backed securities (MBS) market is similar to the stock market. When there is a high demand for a stock, the price rises; when there is a high demand for mortgage coupons, those prices rise.
Mortgage securities prices and interest rates are inversely correlated: as prices go up, mortgage rates fall; and when prices drop, mortgage rates increase. The Fed has purchased large quantities of mortgage-securities, keeping prices artificially high and mortgage rates low. Analysts believe that once the Fed ends its purchase program at the end of March, prices will fall, resulting in increased interest rates.
The Mortgage Bankers Association (MBA) expects the rate on a 30-year fixed rate mortgage to increase to 6.1% by the end of the year. This is up from an average of 4.91% for the week ending March 19, 2010.
To put this into perspective, a $180,000 30-year mortgage (excluding taxes and private mortgage insurance) at 6.1% will require a monthly payment of $1,091, with total interest paid equal to $212, 685. The same loan at a lower 4.91% rate will create a $956 monthly payment (saving $135 per month) with total interest equal to $164,305 (a substantial savings of $48,380 over the course of the loan). Rate changes as little as 0.5% can have a significant impact on the overall cost of a home.
Federal Tax Credits
The Federal home buyer tax credits will cease at the end of April. Created by The Worker, Homeownership and Business Assistance Act of 2009, these credits include the $8,000 first-time buyer credit and the $6,500 credit for current home-owners purchasing a new principal residence (repeat home buyers). The credits apply to sales occurring by April 30, 2010 – or June 30 if there is a binding sales contract in place by the April 30 deadline.
While the program has provided financial incentive and relief for many home buyers, there is no indication that it will be extended beyond April 30th. Buyers who want to take advantage of the credit will have to act quickly.
Timing a home purchase to get the best price at the best rate is a bit of a gamble. While many analysts believe that now is a sensible time to engage in a real estate purchase, six months from now might be a better time. It’s like trying to pick when the stock market will turn: you can only make a well-educated guess and hope that your research pays off. What we do know is that the Federal tax credits will soon end, interest rates will rise and home prices may begin to climb. Now just may be a good time to get into a new home.