Now's the Time to Buy a House

The following is a guest post from Marotta Wealth Management.

For years I've been annoying local realtors by claiming that real estate values were headed lower. Over the past few years, I've been advising young clients to rent and wait for better deals. And I've been suggesting that those who are holding real estate waiting for it to go back up will probably see their property decrease in value before it goes up.

Early in 2005 I coauthored the column "We Could Be in a Real Estate Bubble" with my father George Marotta. We wrote, "Home values may be peaking and ready to correct." We explained that "Delinquency among the less creditworthy 'sub-prime' market that accounts for 10% of mortgages has jumped to 8.07% from 4.5% in 1999. Delinquencies on FHA loans that make up about 15% of mortgages are at a 30-year high of 11.8%.

"As a result, Americans' equity in their homes, net of debt, has dwindled to 57%, compared with 85% a half-century ago. But those are averages. Thirty-nine percent of homes are owned free and clear, but the remaining homeowners have average debt burdens exceeding 80% of the value of their homes. Mortgages over 80% of the value of the home offer little margin of safety should home prices level off or should they fall as much as 20%."

We ended the column with this prediction: "What can be suggested is that the housing prices boom shows signs of weakness, and that they may correct or at least underperform for the next few years. Higher interest rates will slow housing growth in 2005, but the bubble, if it is a bubble, could pop as late as 2006 or 2007."

Our prediction was accurate. Real estate continued to rise through 2005. But it was relatively flat in 2006, underperforming the markets that appreciated over 15% that year.

Two years later, in "Breaking Spaghetti: A Seven-Year Financial History," I wrote, "Many homeowners with adjustable rate mortgages have seen their monthly payments increase 50%, due to the higher rates. With the sudden jump in monthly mortgage payments, many are finding they can no longer afford to stay in their homes. The rate of late payments and foreclosures has continued to rise leaving many lenders on the brink of bankruptcy themselves. "

Again, the prediction was accurate. In 2007 the Cohen & Steers Realty Majors Index turned negative, losing 18.03%. Residential real estate did even worse. Apartments suffered one of the largest declines, down 25.4%.

Since then, real estate has continued to decline. The Charlottesville Area Association of REALTORS reported that real estate prices declined 8.5% during the first two quarters of 2009 compared with the first half of 2008. The median home price fell to $247,000, a drop of $22,900 over the first half of last year. Midyear sales were down 28% compared to the same period last year.

Although inventories have started to contract slightly, the average days on the market stands at 125, well above a healthy market average of 90 days. Homes priced above $1 million are spending nearly 226 days on the market.

Nathan Rothschild offered the contrarian advice to "Buy when there's blood in the streets and sell to the sound of trumpets." It is time to consider buying residential real estate. The bottom is forming, although it may continue to do so through early 2011.

So this is the time when you should be looking for deals, which must begin with sound planning. I'm going to give you four pieces of important advice.

First, don't be afraid to make a radically low offer. Even 50% of the asking price is OK if that's what you think it is worth. Foreclosures are going for 20% or 30% of the assessed value in some regions of the country. In this market, if your first offer is accepted, you probably bid too high. When we purchased our house in Charlottesville in 1990, it took seven offers and counteroffers before we reached agreement with the owners.

Second, be patient. Some remarkable deals will be available over the next two years but only for those who are patient, amenable to making a ridiculous offer and willing to walk away. With 3,600 active listings, you can afford to wait for a deal.

Third, know how to structure your purchase to maximize your tax savings. First-time home buyers are eligible for an $8,000 refundable tax credit if the purchase is made before December 1, 2009. As long as you have not owned a house during the past three years, you are eligible for first-time home buyer status. The credit is refundable, meaning the IRS will write you a check even if you don't pay taxes. Phaseouts start at $150,000 for married couples and $75,000 for other taxpayers.

To receive some of that government money, it doesn't matter who pays the mortgage. You may want to consider helping your children or grandchildren buy their first home so they can receive the tax credit. The laws are complex enough that you should talk to a comprehensive financial planner to structure the best intergenerational financial plan and maximize everyone's tax rates and itemized deductions.

Finally, be sure not to miss out on the low mortgage interest rates. But don't buy down any points. Most families do not keep their homes long enough to justify the cost of buying down the interest rate on their mortgage.

My parents' mortgage when I was growing up was at 4.00%. I never thought rates would get anywhere near that low again. When my wife and I bought our first home, we were able to assume a 12.5% mortgage when rates for new loans were at 18%. Today you can get a 30-year fixed mortgage with no points for as low as 5.0%. Rates are at historical lows, so the next few years are the time to take advantage of them.

There's blood in the street, so don't miss this opportunity to look for a great real estate deal.

Comments

[Michael]

We just bought a foreclosure a month ago.

In our market at least (Minneapolis) and in the price range we were looking at ($100,000 +/0 $15,000) there wasn't really an option to underoffer. Anything under $150,000 was selling very quickly. We offered on one house, and were beat out. The next two houses we wanted to see were sold before we could put together an offer.

At least in that price range it seems that 1st time home buyers and investors are still moving property fairly quickly.

Also, many of the holding banks claim that they will not negotiate/counter-offer. Maybe in slower markets and price ranges they will, but when they're getting good offers without counter-offering, I don't see why they would.

We got 4.875% on a fixed rate 30 year mortgage and put 10% down. We are eager to get our $8000 tax credit, and are also going to be using the 30%/$1500 tax credit for a new AC and Furnace.

It needs some repairs, but I'm handy and we love having our own place at a reasonable price!

[Matthew Rogers]

We're building a custom house, and we got some fantastic concessions from the builder AND we'll be getting the $8,000 tax credit because this is our first home! Even in a down market, based on comps in the neighborhood we'll have instant equity on the house when we close, and we expect things to only go up from there since this is a desireable and developing area. And it's going to be exactly how we want it!

[Michael]

One more potential benefit of buying now...

If your house value goes up, you may reach 20% equity faster than you would just paying off your mortgage. The increased equity may allow you to escape PMI earlier than if you just counted payments.

[Pop]

Instant equity- there's a phrase the knife catchers will live to regret uttering.

Real estate is local, so indeed there are a few areas that never truly participated in the bubble and are probably good buys with today's low rates. Then, on the other hand, we have the other 2/3 of the country, where foreclosures continue to skyrocket, no matter what our pathetic government tries to do to stop them. Good luck knife catchers! I'll wait another year or so for even more blood to be in the streets

[Kirk Kinder]

There are two shoes to drop on the real estate market. One, the resets and recasts for the adjustable rate Alt-A and Prime loans are set for 2010 and 2011. This means more foreclosures. Also, there is a huge number of foreclosures that banks have yet to put to market for fear of sending prices lower. On top of that shadow inventory, there are numerous people who want to sell and now that the press is calling a bottom, we may see them jump in. Hence, inventories will probably rise further.

Second, rates could see an increase over the next year or so. If rates jump 2%, then affordability goes bye-bye as affordability would require a 20% drop in home prices.

Most bear markets overshoot, and they lure investors with a head fake bull rally. I think those who jump in now will probably see some further home depreciation. I would recommend holding a bit longer.

[Apex]

I have purchased 4 properties in the Minneapolis Area in the last 12 months so I have experienced all this first hand and I can attest to the fact that Michael is spot on. Last year, and especially last fall/winter was the time when you could make low ball offers. After the forclosure moratorium went in place new inventory didn't come on the market and demand started to outstrip new supply. Add in the 8K credit and the new dip down in mortgage rates and the Minneapolis market at the low end has literally been in frenzy mode the last 4 months. A property comes on the market and if it's priced reasonably, it gets 5-10 offers in less than a week and it will almost surely sell above ask, sometimes as much as 10k above ask.

So while the advice in this article may be good with respect to now being a decent time to buy, atleast in the Minneapolis area it is way off on the advice to make low ball offers. Doing so here (and I have heard in many other places too) is a big waste of time. You will lose to other aggresive bidders.

When more inventory comes on this fall from the forclosure moratorium being lifted (it's 6 months from forclosure to market) then maybe you can offer under ask again, but for now the advice to make low ball offers is either 8 months to late or 4 months to early. 50% of ask seems a bit aggressive though. I don't know of any bank that would even respond to an offer like that on a forclosed property. Maybe a desparate home owner (although they will likely be offended) but a bank will almost surely just throw your offer in the trash without even acknowledging it.

[Apex]

@Kirk,

You may be right, but you think when the press calls a bottom that's when people want to sell? Is that when you sell your stocks? I don't know of anyone who wants to sell at the bottom.

[Mike Hunt]

Most people rent out the house and are waiting if they can. The moratorium on foreclosures distorts the market as well, so does the FED backstops of the garbage assets that a lot of banks are holding.

Be careful here- rule of thumb would be to buy if the mortgage payment is similar to the rental income you'd pay to live there minus taxes. Also another rule of thumb is if the property is less than 2-3 times your annual gross salary, it's probably managable. Be careful because if interest rates rise and you have a non-fixed mortgage, that house could get expensive fast.

-Mike

[Eugene Krabs]

I have been taking a serious look at my local housing market lately. I agree with the author that this year is a great time to buy.

[Strick]

Lots of good analysis there as to why and when the housing market was going to collapse (and good advice on how to buy back in). What I don't see is any analysis as to why the market is near a bottom (except for the "blood in the streets" quote, which I heard a lot of folks say when they doubled down on the market when it hit bear territory at S&P 1250).