Buying your first home is both a daunting and exciting experience. From browsing through property lists to walking through the actual properties to securing a mortgage, there are a lot of steps to take and things to be aware of, particularly in the current market.
Some analysts feel that the time is still not right to make a move as a buyer. Firstly, housing prices are still falling in some regions of the country while rents remain relatively low. Though the coasts are often an entirely different beast than many other areas, rents average about 3% of the purchase price while a mortgage with maintenance costs, taxes, and insurance amounts to approximately 9% of the price.
One rule of thumb to know whether or not to get into the market – or a particular property – is to divide the annual rent by the purchase price for the house in question. If it is below 6%, then renting is the way to go. If it is above 6%, then a deal may be in order. The premise of this buyer’s market rule is that, should you need to, you could rent the house and cover all of the expenses, potentially even having a bit of overage.
Another misconception is that lower interest rates indicate a good time to buy. In fact, interest rates and housing prices see-saw against each other. When interest rates are low, housing prices are high, and vice versa. Common wisdom indicates that going with a lower price – even with a higher interest rate – is the better choice. That way, your home’s value is more likely to rise and boost your equity than leave you under water in a mortgage that has you owing more than the house is worth.
A lower sticker price also means a lower downpayment, lower property taxes, and the potentiality of paying the loan off if you come into some money down the road. Hedging their bets in the wake of the housing bubble and recession, banks now suggest that a safe mortgage is at most three times your annual income plus a 20% cash downpayment. Though that has generally been the standard, it’s a far cry from the mortgage products they were touting a few short years ago.
On top of that, the banks have been putting off a wave of foreclosures in order to keep their balance sheets looking good. However, all of those houses will have to be taken over at some point and sold off to new buyers as quickly as possible. In the process, that flood of cheap properties will also cause a cascade of price cuts in new-construction homes because the builders and developers need to stay competitive.
Then there are the baby boomers who are retiring without any pensions or savings to support themselves. Some estimates say one-third of the 70 million boomers have zero retirement savings. They do, however, own homes and will be forced to sell in order to transform that equity into a liquid, livable asset to supplement their Social Security income.
All of these trends harbor good news for the patient home buyer who has done their research and saved their money.