With a child on the way in less than two months, there's been a constant itch to think about buying a home. Renting, has a stigma in American culture as being wasteful. However, in this economy, I continue to disagree that it's a great time to be a first time homeowner.
There's a lot of factors in play that make taking the home ownership plunge sound appealing. There's the $8,000 housing gift if you purchase a home (which can be used as a down payment, much to my dismay.) There's all time historic low interest rates, around 5%. Most noted, however, are all the "deals" that abound in a market. With home prices in DuPage County down 23% from their peak, it would appear that now is the time to buy!
However, I would argue that now is not the time to buy unless you are very certain you will own your property for at least five years, and definitely not the time to buy if you are looking for the best price. I repeat: We are not at the bottom of housing prices.
I have basically three reasons why I'm not buying:
1. The economy is not at the bottom. Major companies who announced layoffs in the past 6-12 months have not completed these layoffs. For those that have, many of these workers were high wage earners that received excellent severance packages and are still able to pay their mortgage. With the April 2009 unemployment rate at 8.9%, and having it increase every month, it's safe to say that foreclosures will continue to rise until this rate decreases to historical norms. This is more than one year off. Hence, I can safely choose to sign one year leases and continue to rent and not put my money into a depreciating asset. I already own two large depreciating assets, our cars. No need to add more to the list.
2. Even if the recession ended today, the housing inventory is still historically too high. With 9.8 months of inventory which took nearly two years to rise from 6.5 to 10.5 months, I don't think that we're going to see a swift turnaround. As homeowners become more desperate to sell, prices will continue downward.
What I've only seen briefly mentioned (You hear it here first!) is a recently published survey from Zillow that states 31% of homeowners would be somewhat likely, likely, or very likely to put their home up for sale if they saw signs of a real estate market turnaround in the next 12 months!
With roughly 75 million homes in the U.S. per the somewhat outdated 2000 census, this means that 75 x .31 = 23 million homes could be put for sale when the housing market "turns around". Compare this to the fact that 17 million homes where sold in the year 2006, 2007 and 2008 combined! This implies we could have up to four years of shadow inventory. The high inventory will continue downward housing prices.
3. As municipalities try to make ends meet with their budget, we can expect property taxes to increase significantly within the next several years, possibly dramatically changing the expected payments of a home. This risk and the ability to negotiate rent, compared with the complete inability to negotiate taxes, makes this another significant risk to purchasing a home today.
With all that said, I'll have to take a pass on the pulling the trigger on this one, and I advise my friends the same.
Sunday, May 17, 2009
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