Three Good Reasons to Buy a Home Now

Here are three great reasons to consider buying a home today instead of waiting.

1.) Prices Will Continue to Rise

The Home Price Expectation Survey polls a distinguished panel of over 100 economists, investment strategists, and housing market analysts. Their most recent report released last week projects appreciation in home values over the next five years to be between 12.3% (most pessimistic) and 32.8% (most optimistic).

The bottom in home prices has come and gone. Home values will continue to appreciate for years. Waiting no longer makes any sense.

2.) Mortgage Interest Rates Are Increasing

As reported by Freddie Mac, interest rates for 30-year fixed-rate mortgages have risen about one full percentage point over recent historic lows.

The National Association of Realtors, the Mortgage Bankers Association, Freddie Mac and Fannie Mae, in their July forecasts, have all projected 30-year-fixed mortgage interest rates to be between 4.8 and 5.1% by this time next year.

An increase in rates will impact YOUR monthly mortgage payment. Whether you are moving up or moving down, your housing expense will be more a year from now if a mortgage is necessary to purchase your next home.

3.) It’s Time to Move On with Your Life

The ‘cost’ of a home is determined by two major components: the price of the home and the current mortgage rate. It appears that both are on the rise. But, what if they weren’t? Would you wait?

Look at the actual reason you are buying and decide whether it is worth waiting. Whether you want to have a great place for your children to grow up, you want your family to be safer or you just want to have control over renovations, maybe it is time to buy.

If the right thing for you and your family is to purchase a home this year, buying sooner rather than later could lead to substantial savings.

When does the home buying process begin?

The buying process begins long before buyers actually contact an agent. On average, buyers started considering a purchase nearly six months (23.7 weeks) before contacting a real estate agent, up notably from 12.2 weeks last year. They are also taking their time investigating homes and neighborhoods before contacting an agent, spending a little over seven months on this compared to about 1.5 months last year. The median number of weeks that buyers spent looking for a home with their agent also increased from 9 weeks last year to 9.8 weeks this year. The lengthier consideration time and home search reflect the limited availability of homes for sale and the increasing prices, which are causing buyers to weigh their options more carefully.

When they were finally ready to make a purchase, buyers tended not to move very far away from their previous homes—the median distance from their last residence was 27 miles. More than 8 out of every 10 buyers (85 percent) made offers on other homes and one-third claim they settled for the best option given the limited supply of houses. Price decreases, desire for a better location and favorable financing were the top three reasons that buyers purchased. Nearly half did not buy sooner because there were not many good housing options, others waited to see when prices would stabilize or had difficulty qualifying for a mortgage. The average buyer plans to stay in their home for six years.

Your House As Seen By:

Yourself...



Your Buyer...


Your Lender... 


 
Your Appraiser...


Your Tax Assessor...

One of the key obstacles to a housing recovery over the past five years has been the overhang of distressed properties about to come to market which has come to be known as shadow inventory.  Shadow inventory numbers are comprised of three separate categories of properties:

1. properties where the home owner is 90+ days behind on their mortgage payments
2. properties that are already in the foreclosure process
3. properties already foreclosed on and owned by the banks but not yet on the market

The great news is that shadow inventory is down 18.2% from the same time last year. According to the latest National Foreclosure Report released by CoreLogic:

• Completed foreclosures are down 27% from a year ago
• National foreclosure inventory is down 29% from a year ago
• Seriously delinquent loans (90+ days behind) are down 22.7% from a year ago

The decline in seriously delinquent loans is phenomenal news. Dr. Mark Fleming, chief economist for CoreLogic explains why:

“The stock of seriously delinquent homes, which is the main driver of shadow inventory, is the lowest level since December 2008. Over the last year, it has decreased in 42 states by double-digit figures, resulting in rapid declines in shadow inventory for the first quarter of 2013.”

How Does Compare to Historic Norms?

In their latest Mortgage Monitor, LPS Senior VP Herb Blecher sheds some light on where we stand compared to historic norms:

“Though they are still approximately 1.4 times what they were, on average, during the 1995 to 2005 period, delinquencies have come down significantly from their January 2010 peak. In large part, this is due to the continuing decline in new problem loans — as fewer problem loans are coming into the system, the existing inventories are working their way through the pipeline. New problem loan rates are now at just 0.73 percent, which is right about on par with the annual averages during 2005 and 2006, and extremely close to the 0.55 percent average for the 2000-2004 period preceding.”

RealtyTrac also recently reported:

“A total of 127,790 U.S. properties had foreclosure filings in June, down 14 percent from the previous month and down 35 percent from a year ago to the lowest monthly level since December 2006 — a six and a half year low.”

Going Forward?

A survey of industry experts produced by The Professional Risk Managers’ International Association (PRMIA) shows that the fall in delinquency rates is projected to continue in the future:

“For the first time in survey history, the number of respondents predicting that mortgage delinquencies would decrease (46.9%) exceeds those who believe the level will stay the same (40.7%).”

Leadership & Courage Gave Birth To This Nation

Shadow Inventory

The term “shadow inventory” refers to real estate properties that are either in foreclosure and have not yet been sold, or to homes that owners are delaying sale until prices improve. Shadow inventory can create uncertainty about the best time to sell a home and when a depressed local market can expect full recovery. Also, it typically causes reported data on housing inventory to understate the actual number of inventory in the market.

Why is this important?

According to the National Association of Realtors, only 15 to 20 percent of the homes that were foreclosed on during the downturn were making their way to the market in 2008 and 2009. The remaining 80 to 85 percent of the homes were bought back at foreclosure and are now owned by the banks. One might ask why the banks would want to own these properties. The answer is both telling and very scary.

Current bank regulations do not require the banks to “mark-to-market” their real estate holdings. Bank management, therefore, would rather continue to book an inflated real estate value and pay the debt service and management costs to hold the property rather than sell the property and book the losses. This is why some markets have no inventory, why banks are still hesitant to lend money and why we are not free from the issues we created in the U.S. and globally by overextending our leverage.

(iStockPhoto)

We have seen a decline in this inventory of about 35 percent from the peak in 2010, however, the last quarter saw a fairly dramatic increase of 9 percent. So which way is the pendulum swinging next? In April of 2012, the finalization of the national mortgage settlement clarified acceptable foreclosure processing procedures giving the banks better ability to effectively foreclose and avoid a lengthy court process. We have seen a rise from $175 billion to $205 billion in the estimated value of the shadow inventory and I am guessing there is more to come.

So what should you do given this scenario?

Consider avoiding investing in banks that hold large real estate shadow inventory. Shares of most of these banks have appreciated substantially this year and these moves are likely not sustainable. If you are looking to sell real estate in the next five years, consider doing it now. Interest rates have begun to rise and this shadow inventory will likely make selling more difficult. We suggest investing new money in real estate only if your timeline is 10 years or more, your liquidity needs are low and you’re able to lock the debt service rate for a long period of time. Invest with caution. I am not suggesting that the shadow inventory issue, our building deficit and our current interest rate environment are going to cause another 2008-like crisis, but these issues are real and are not small numbers. If the regulators forced some of these banks to mark their holdings to prices in the real estate today, losses could be substantial. In short, the banks are certainly clawing their way back but we have a ways to go before it’s safe to wade back into the bank space.

Michael Patrick Jacobs, CFP®, is a Partner at Monument Wealth Management, a Registered Investment Advisory firm located just outside Washington, D.C. in Alexandria, VA. Follow Mike and the rest of Monument Wealth Management on their “Off the Wall” blog which can be found on their website, and on their Twitter, LinkedIn, YouTube, and Facebook pages.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate please consult your financial advisor prior to investing. All performance referenced is historical and is not guarantee of future results.