If you're thinking about buying a home in the next couple of years, you may be concerned about all the bad press surrounding the economy, and particularly all the news about housing prices dropping further. While you definitely should be at least somewhat worried and wary, for the most part, you shouldn’t lose too much sleep over short-term fluctuations in the value of any property you may have interest in buying.
Short-term fluctuations, like the value of a property going up and down in just a few years, is normal and nothing to fret over. After all, if you buy real estate for the short term, like less than five years, you probably are going to lose money on it anyway, regardless of the state of the economy. But that isn’t because of any drop in price. Instead, it's because buying and selling real estate has high transaction costs that will eat away at any appreciation in value you may have hoped to achieve. Therefore, you should probably not buy real estate for the short term under almost any circumstances. Stay a renter if you don’t plan to own your home for at least five years!
Long-term buying, on the other hand, is the way to go. Now, since you are buying real estate with the plan to hold it for seven, ten, twelve, or more years, most likely, the price will be significantly higher down that road than whatever it is you paid in 2012 or 2013. And since the price will be significantly higher in a decade, you shouldn’t be concerned about potential price drops in the next year or two because by the time you decide to sell your home, the outlook will likely be very different.
All in all, who cares about short-term fluctuations in price?
Another reason to not be afraid of the housing market now is that the interest rate you will qualify for when borrowing mortgage money will likely be a great deal. Mortgage rates are the lowest they’ve ever been right now, due in part to the tough economic times the world is experiencing. Bankrate.com shows a 30-year fixed rate mortgage at 3.89% today. That 3.89% equates to about a $471 mortgage payment for each $100,000 that you borrow. And when you borrow, you lock in that long-term low rate!
When the economy picks up steam in a few years, rates will most likely go up again. For example, let’s say they go back up to their long-term average of about 6.0%. So if you buy a home then, guess how much your monthly mortgage payment will be per $100,000? $600 per month! That’s an extra $129 per month you will be paying, and that is a lot of money.
As you can see, the overall cost of your monthly housing payment is not just how much you pay for the property, but also is impacted by the current long-term mortgage financing rates available in the marketplace. If you wait a few years for the media to say that prices are stabilizing, but unfortunately interest rates have gone up, you will have missed out on the low interest rates that are currently available. This will cause you higher overall housing costs.
Additionally, there is a fair amount of housing inventory in the marketplace right now, which gives a buyer like yourself more choices to find the near perfect property. At a minimum, you should be shopping around and educating yourself to get ready to “strike” if you find a great property that fits your long-term needs. Learning about the marketplace will also give you a head start if you do want to hold off for a little longer on home ownership.
One more item to consider is that it may actually be much less expensive to own right now than rent. For example, in some areas of San Diego, a condominium might cost about $130,000. This would translate into a monthly housing payment, which includes principal and interest on the loan, taxes, insurance and HOA fees, of about $900-$950 per month for the owner. That same condominium probably rents for about $1,200 per month. So if you bought that property, you might be saving a few hundred dollars per month as an owner, and that adds up over time. But the cost of renting vs. owning differs dramatically by location and property type, so you’ll need to put pencil to paper and determine the amount for the exact property you are interested in.
With that being said, there are still places and properties where you should avoid buying. Towns and cities that are losing jobs tend to have high numbers of foreclosures, areas with lots of vacant land, and many rundown houses. The housing value in those areas might never recover, so be cautious about buying there.
Basically, if you are considering buying soon, don’t worry about what the media reports. Instead, just make sure you plan to own that home for a long time, educate yourself on how to make smart purchase decisions, and lock in an incredibly low interest rate for your mortgage loan. Then, when 2025 rolls around, you’ll realize how brilliant a housing purchase move you made during the great recession!
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