Things to Consider if you are Buying a Home

[Pages:14]things to consider if you are buying a home

SPRING 2012

EDITION

TABLE OF CONTENTS

1 should you rent or should you buy?

3 the cost is more important than the price

5 if warren buffett says to buy, buy!!

7 what is suze orman talking about?

9 what value does your loan officer add?

11 is it Time for young families to buy a home?

Should you rent or should you buy?

People are delaying the decision to buy a home because they are not sure where prices are headed. If they buy and prices continue to soften, they feel that they will not have purchased at the optimal moment. They reason that, if they sit and wait, they can't be hurt. This thinking assumes that a non-decision comes without consequence.

If a family continues to rent, they are looking at a housing expense which will rise with the market. Rental costs increase by 3% a year historically. But today's rental market favors the landlord to a greater degree. HousingWire recently quoted Paul Dales, senior economist with Capital Economics:

"As a consequence of Americans being less willing and less able to buy a home, the number of households in rented accommodation is set to rise by at least 850,000 a year over the next few years."

The price of anything is determined by supply and demand. As demand increases, the price of an item will increase unless there is an equal increase in supply. The article mentioned above said:

"Dales said in his research that rental vacancy rates will fall again in the future, pushing prices up. The median rent is already up to $712 per month--well above the average monthly mortgage cost of $647, Dales reported. He estimates vacancies in the home-rental market will push average rental rates up as much as 5% by early 2013."



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Below is a graph of how rental prices have increased recently and where they are projected to go over the next few years based on a report from Marcus & Millichap.

How many markets will be impacted? A new rent index offered by Zillow:

"...showed year-over-year gains for 69.2 percent of metropolitan areas covered."

Rents are increasing and will continue to do so for the foreseeable future. In many parts of the country, buying a home might make more sense as you can lock in your housing expense for the next thirty years.



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the cost is more important than the price

Buyers are often advised to look at the COST of purchasing a house more than the PRICE of the home. Obviously, price is part of the cost equation. The other piece, assuming you are not an all cash buyer, is the mortgage rate. The mortgage rate to finance a purchase can have a dramatic impact on the overall cost. Recently, there are more people talking about the possibility that mortgage rates could begin to increase.

studies trends in mortgage rates. They explain:

"A better economic climate almost always brings higher rates, and a lessening of the troubles in Europe from massive central bank assistance adds to the movement of money from safe havens to more risky assets, driving rates upward."

Dan Green of The Daily Market Reports recently stated:

"The Fed sees growth coming faster than originally expected. There's suddenly less chance that the Federal Reserve will intervene to help keep mortgage rates low. Absent Fed intervention, mortgage rates are apt to rise and Wall Street is now betting that the Fed has bowed out. With no stimulus, mortgage rates rise."



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Lawrence Yun, Chief Economist for the National Association of Realtors, recently wrote:

"Mortgage rates will be starting to rise. From the 3.9 to 4.0 percent average rate in the past five months on a 30-year fixed mortgage, the new rates will soon be in the range of 4.3 to 4.6 percent."

Understand the potential impact on the cost of purchasing a home if rates do rise. Here is a simple table that shows, even if the PRICE of a home softens, the COST of a home could increase.

Many purchasers think they should wait until they are sure that prices have hit bottom. Deciding whether or not to wait should be determined by where the COST of a home is headed.



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if warren buffett says to buy, buy!!

Warren Buffett is seen by many as the greatest investor of our time. When he speaks, people listen. Like anyone else in his position of influence, he is criticized by some for using his bullhorn to promote his own business agendas at times. That makes it very interesting when we occasionally learn of how he privately advises those closest to him.

Such a situation occurred recently. Debbie Bosanek, Warren Buffett's secretary of 37 years, recently purchased a second home in Surprise, Arizona.

In an article in the Omaha World Herald, Mrs. Bosanek discussed her reasons for purchasing a second home and the personal advice she received from Mr. Buffett.

"I just thought it was time to buy a home. Warren tells me that it will be the best opportunity in my lifetime. Mortgage rates are low and prices have dropped dramatically... I share Warren's view about the future of America, and we believe that our country will do just fine. I'm happy to make this investment."

The greatest investor of the last century privately has told the people closest to him that buying a home right now "will be the best opportunity in [their] lifetime".



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Weeks later, Buffett appeared live on CNBC's Squawk Box. During the interview, he was asked about the current real estate market and whether he felt now was the time to buy. His response was rather emphatic and has been used as a headline in hundreds of articles since the interview:

"If I had a way of buying a couple hundred thousand single-family homes I would load up on them."

Throughout the interview, he addressed the market from a few angles. Here is what he said:

Why invest in real estate now? "It's a way, in effect, to short the dollar because you can take a 30-year mortgage and if it turns out your interest rate's too high, next week you refinance lower. And if it turns out it's too low, the other guy's stuck with it for 30 years. So it's a very attractive asset class now."

Is buying your own home better than investing in stocks right now? "If I knew where I was going to want to live the next five or 10 years I would buy a home and I'd finance it with a 30-year mortgage... It's a terrific deal."

Should we buy multiple houses? "If I was an investor that was a handy type and I could buy a couple of them at distressed prices and find renters, I think it's a leveraged way of owning a very cheap asset now and I think that's probably as an attractive an investment as you can make now."

Over the last couple of months, there have been more and more financial analysts coming to the same conclusion: It's time to buy real estate.



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