If you’re currently renting then it’s probably a question you’ve asked yourself. Is 2013 the year to buy a house? Purchasing a home is probably the biggest financial decision you’ll ever make, so it’s important to look at the facts in order to keep the emotions surrounding potential home ownership in check.
Firstly, interest rates have been low, and continue to remain low relative to historical rates. Your mortgage rate will determine the size of your monthly interest payments, which makes up the bulk of your mortgage payment for the first five years. The lower your interest rate, the lower your monthly payment. In 2012, the average 30-year fixed mortgage rate was 3.88%. Rates are expected to continue to be below 4% during the first half of 2013, and possible ease a bit higher by the end of the year. Now, nobody knows what will happen, but consensus seems to be that mortgage rates will remain reasonable throughout 2013.
So if mortgages rates are currently low and expected to remain low in 2013, it looks like one of the two factors is indicating it’s a great time to purchase a home. Now, let’s look at the other half of the equation: home prices. January 2013 marked the 15th consecutive month of home value gains, according to Zillow. January also showed the largest year-over-year gain since July 2006. Home values rose nationwide, with cities like Phoenix, San Francisco, San Jose, Las Vegas and Sacramento experiencing double-digit gains over the prior year.
I’m hearing word of bidding wars and houses selling for more than their asking price. The main reason for the uptick appears to be housing supply, with the National Association of Realtors reporting an average of 4.8 months supply of existing homes for sale in Q4 2012. In 2010 this had been 10 months, and we’d expect this to be something around 6 or 7 months.
Unfortunately, the supply constraint is being fueled by banks slowing down the foreclosure process and delaying the sale of foreclosed properties. This isn’t anything new, and is certainly in the best interest or banks and current homeowners. Homes that banks currently own on their balance sheets is typically referred to as shadow inventory. According to CoreLogic, the shadow inventory as of October 2012 was at 2.3 million homes, down 12.3% since October 2011. If banks were to try to sell these homes all at once, supply far outreach demand for homes and prices would plummet. By delaying selling, banks are able to artificially deflate the supply of homes, and inflate prices.
Even though home prices are being inflated by banks, there are a number of other indicators that point to strong housing prices in the future. Year-over-year, constructions starts are up, existing home sales are up, and the rate of delinquency and foreclosures has improved. The Trulia housing barometer for January 2013 estimates the housing market to be 50% back to normal, up from 31% of normal in January 2012. These are all good signs for future home prices and point that we may well be beyond the housing bottom of this current cycle. However, with the existing shadow inventory, home starts, and underwater mortgages, I wouldn’t expect home prices to skyrocket.
With low interest rates and stabilized (and slightly improving) home prices, 2013 may be the perfect time to purchase a home. Now comes the most important part of the equation, which is your own financial position. You’ll have to determine what type of home you want and where, and then determine how much home you can afford and how much home you need or actually want to pay for. Sometimes, what you can afford and what you need or very different. Just because you can afford something doesn’t mean you need to buy it. You’ll also need to evaluate whether it makes sense for you to rent vs. buying a home. When I looked at an example in my neighborhood, I saw that it only made sense for me to buy if I was going to stay in the home for 19 years. Yikes!
2013 does seem to be shaping up as a good year to get back into the US housing market. I think you’re exactly right about “the most important part of the equation”: your own financial position. The most costly house one can “afford” I think should mean one that generates mortgage payments that fit comfortably into a family budget that has short, medium, and long-term goals built in, including maxing out retirement account contributions. If your mortgage payment will squeeze out your IRA contribution or building an emergency fund, then you can’t afford that house!
Exactly right Kurt! Sometimes it’s tough to remember these things and it’s easy to get wrapped up in the emotional pull of wanting a house that you begin to sacrifice other goals. One of my most difficult issues is simply being patient. I can’t expect everything to happen at once.
A year ago we were contemplating to buy a house but had a second thought because of the interest we would be paying. My mom is an accountant and told us the rent vs buying a house, it would seem then that we could save more by just renting. We are still thinking of buying a house, but maybe 3-4 years from now. We just need to save a lot, lot more before doing that.
Yeah the interest is what makes it killer. The difference in payment isn’t as big as you might expect between a 15 and 30-year mortgage, yet it’s being paid off in 1/2 the time. Ideally I’d buy a house once I could afford the 15-year mortgage payments, but not sure when that will happen — houses are so expensive here!
I’ve been having similar ideas too. I’m not convinced that it’s going to start rising bunches but I do think we are beyond the bottom. I still have another 6mos. to go before I’m ready but then I hope to pull the trigger.