Is Now the Time To Buy Real Estate?
These folks might possibly jump to conclusions and post a reply without understanding the reasoning of my conclusions. To them I recommend going back and reading the article from the beginning.
The reason this article has 3 parts is because most people are too lazy to do their own research, won’t read anything longer than a McDonald’s menu and just want the conclusion. Part 3 is the conclusion, but Part 1 and Part 2 are necessary for the real estate investor/home buyer to comprehend before agreeing or disagreeing with my conclusions.
Where We Are Now With Real Estate Prices
Taking a look at the chart below one can see that we are still above the nominal pre-housing bubble trend line as indicated by the thin blue line.
But to analyze whether now is the time to buy real estate, let’s look at the data and crunch some numbers.
The following table contemplates the purchase of a $300,000 home with 20% down and a current 30 year rate of 5.14%. It then shows various alternative of higher mortgage rates of 6.14%, 7.14% and 8.14%, coupled with a hypothetical real estate decline in value of 10%, 20% and 30%.
This analysis is bare bones and does not take into account property taxes or any other fees that vary from state to state (but they are addressed below). It also assumes, based on the interest rate and economic analysis above (Part 1 and Part 2) that interest rates won’t go lower (if they do, it’s a bonus for those that wait to buy) and real estate prices won’t be moving higher anytime soon but more than likely declining. But when they do decline, how will into one’s buying decision if at the same time interest rates rise?
|Home Value||% Change In Home Value||Loan Amount (After 20% Down Payment)||30 Year
Fixed Rate %
|Monthly Payment||Interest Paid *||Total Payment|
As you can see from this table, a $300,000 home today (20% down) at 5.14% would be approximately equivalent in out of pocket expenses over the life of the loan to the cost of a $270,000 home (10% decrease in value) at 6.14%, a 240,000 home (20% decrease in value) at 7.14% and a $210,000 home (30% decrease in value) at 8.14% (represented by the highlighted sections of the table above).
If interest rates did stay the same because the Fed can’t let the economy deteriorate coupled with the value of today’s $300,000 home decreasing by 10%, 20% or 30% (because demand decreased, unemployment increased and the government stopped stimulating), the monthly payments would go from $1,308.98 a month to $1,167.18, $1,047.19 and $916.29 respectively.
It would behoove the buyer to wait before buying real estate if they only had a crystal ball to know what to do. So we have to take this analysis one step further and take into account what one is paying in rent right now for a $300,000 place versus putting that outlay into buying a home and taking advantage of the write offs.
This is where one would have to account for the fees and taxes that go into buying a home including property taxes, points, fees etc. I have included taxes and fees in the analysis below.
Note: Data calculations do not include any association dues which would add to the expense of owning a home. Every condo and many community developments these days will stick you with some association dues possibly adding to the cost of home ownership.
At the height of the real estate market, rents would be around .0100 to .0125 of the value of the home according to bankrate.com. While this may have been true for some parts of the nation, it definitely wasn’t true for California and isn’t true today. Landlords did raise their rents higher as the real estate market was risng, but many of these owners had adjustable rate mortgages (ARM’s) and as long as they could pay their mortgage payment and come close to breaking even, they were happy as they expected the price of real estate to continue going higher.
The flippers of real estate were just playing the game of appreciation…get in and get out.
Of course the real estate market peaked this didn’t occur and renters have subsequently been the benefactor as their cost for renting have continued to decrease with the overall market decline.
Rental rates in California right now are about .0060 of purchasing price. So our $300,000 home would have a rent of $1,800 a month. For those not familiar with California’s rental market, $300,000 would buy you a small 1,250 square foot 2 bedroom, 2 bath townhouse right now in Orange County. In Texas, $300,000 would buy you a nice 4 bedroom house.
All markets are not alike, but the economic effects discussed in Part 1 and Part 2 will play on home buyers pretty evenly across the nation. Yes, there will be extremes like Detroit, MI where unemployment is the highest in the nation or Farm towns in North and South Dakota where unemployment is the lowest.
Rent Or Buy?
The rule of thumb is that if you pay 35 percent less in rent than you would for owning – including the monthly mortgage, property taxes, and any homeowner’s fees – then it’s smarter to continue renting.
It also helps to have an understanding of what’s to come in order to make the best decision.
In the following table I had to take into account the possibility of a further deflating of the rental market to coincide with the possible decline in real estate values. As mentioned above, this is what has been happening. And if you are still renting, ask your landlord to lower your payment at the end of your lease. You have nothing to lose right?
I next compared the rental figures with buying now or deferring to a later time, taking into account the ability to write off a portion of the housing payment as well as including interest earned on the 20% down payment you have accumulated.
|Home Value||Loan Amount (After 20% Down Payment)||30 Year
Fixed Rate %
|Monthly Payment + Insurance and Property Taxes||Tax Saving From Home Ownership*||Net Home Ownership Cost||Rental Cost For Equivalent Home Minus 5% Monthly Interest Earned on Down Payment = Total Net Rental Cost **|
|300,000||240,000||5.14||1800.65||399||1401.65||1800 – 275 = 1525|
|270,000||214,000||5.14||1626.35||359||1267.35||1620 – 225 = 1395|
|(10% drop in value)||214,000||6.14||1761.53||401||1360.53|
|240,000||192,000||5.14||1473.86||319||1154.86||1440 – 200 = 1240|
|(20% drop in value)||192,000||6.14||1595.15||356||1239.15|
|210,000||168,000||5.14||1310.46||268||1042.46||1260 – 175 = 1085|
|(30% drop in value)||168,000||6.14||1416.58||301||1115.58|
*Calculators used from Home Buying Tips
**I chose 5% as the rate one can get with a diversified portfolio, subtracted that interest from the monthly rent outlay, leaving the net rental costs.
The economic data shown in Part 1 and Part 2 dictates risk versus reward is on the side of the buyer at present. They should hold off on purchasing a home unless interest rates were to shoot up immediately, something I don’t believe is in the cards according to the economic analysis I’ve conducted.
This analysis was for the person who will put 20% down on a home and not for those who would put less down utilizing an FHA loan where one could buy with a down payment of just 3% of the purchase price. There would be an added expense of PMI (California) that would have to be taken into account, but if interest rates were to shoot up, these folks would benefit by locking in the lower rate. I just don’t think interest rates are going to shoot up just yet.
Also, these FHA loans could be discontinued leaving this group of potential buyers out of the market completely until they can come up with a 20% down payment. But an indication of how well these folks that pay less than 20% down are at managing their finances might be revealed in the fact PMI lost $157 million in the first quarter with a default rate of 23.1%. Many of those still paying PMI who are still in their homes were rescued by the Home Affordable Modification Program, a discriminatory Federal gift from Congress, but paid to those who made bad financial decisions and funded by taxpayers. This of course was preceded by the $8,000 tax credit incentive to first time home buyers that is ending in a couple days, further putting a wet blanket on real estate demand.
An added incentive currently for California residents that starts May 1st however is the program just passed to give first time home buyers a $10,000 tax credit spread out over 3 years. Somehow, the Governator found $200 million to help people live the American Dream…while Rome (California) burns.
While this $10,000 gift adds to the attractiveness in buying a home, one will need to crunch the numbers to see for themselves if the timing is right. Use the calculators I have provided and develop your own worksheet to see if you should buy real estate now or wait.
Naturally, the people who won’t like the outcome of this analysis are real estate and loan agents. Their income relies on people to continue buying. If you don’t buy, they don’t get paid.
To satisfy those agents, I can only say, if someone is going to pay cash for a place and live there the rest of their lives, then they really don’t care whether the price of real estate goes up or down too much. The wealthy have proved they will buy no matter what the current market conditions dictate as the wealthy don’t always make the best decisions.
But if they want to buy, let them!
Why Is This Article On A Gold and Silver Buying Site?
If I’m making recommendations on putting a portion of one’s portfolio into gold and silver, I better have an understanding of what’s going on in the economy to justify this advice. My understanding of the economy allows me to apply this knowledge into other investment arena’s in helping people make good financial decisions in keeping and growing their wealth.
As you can see, I’m pretty thorough in my analysis, but it’s better than to be thorough about something than to just jump into an investment because someone says “buy!”
Gold and silver need to be a part of one’s portfolio to act as a U.S. Dollar decline hedge of that portion of your investments that are U.S. based. For the most part, this includes about 80% of one’s portfolio at a minimum. While real estate has been a good hedge against inflation over the years, the same can’t be said today. Times change and the management of your investments must change with them.
Only Gold and Silver offer you the peace of mind in knowing you have hedged your portfolio against the U.S. Dollar secular down trend.
Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534
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