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should i buy a houseShould I buy a house now or wait until the market cools?  This question is one that I hear every day.  Prices are sky high.  Interest rates are up 1 percent.  The Fed is beginning it’s tapering program in another week.  Rates will rise further.  There will be an inevitable pull back.  Pricing should come down.

All of this is why people ask me “Should I buy a house nor or wait until the market cools?”  It certainly seems that waiting makes a lot of sense.  This is because we’ve always been told to sell when it’s high and buy when it’s low.  Additionally there are many people who believe we’re dur for a crash.  Well let’s look at this.

Are we headed for a crash in real estate values?

Do you think we’re headed for a crash in real estate values?  This is not an uncommon thought by the general public.  For those of you who’ve read my writing on this before, nothing has really changed.

Mortgages

The crash we had in 2006-2008 creating the Great Recession was vastly different from today.  Mortgages were given to people who would never qualify for one today.  Irresponsible lending was the norm for a variety of reasons.  The change in how people must qualify for a loan since the Great Recession is exactly why we will not have a crash.

Foreclosures today are a very small part of the real estate world.  Projections for the next several years increase this modestly.  We will not see anything close to what we did before.  Because qualifying for a mortgage loan requires the income to pay for it along with a debt limit and credit score minimums, there will be fewer people losing their homes.

Equity in a house

Here’s another huge reason – equity.  House values have recovered since the crash.  Losses people suffered in the value of their home have been made up and those houses are now worth even more.  As a result, the great majority of people who can’t pay their mortgage do not have to lose their house.  They can sell it and walk away with a good amount of cash.  They’ll have a fresh start and preserve their credit.

This is a tremendous change from 2008 and the years immediately later.  Values went down as much as half.  There was no equity in nearly all homes bought between 2004 and 2006.  When your home forecloses, you lose it.  You lose the down payment you made, the value of the mortgage payments you paid and whatever you did to improve the house.  You lose it all.  Today homes have equity and that saves you.

Will we have another major recession?

Everyone knows this saying:  Nothing goes up or down forever.  We’ve had a positive real estate market for 13 years.  When you consider that most real estate cycles are 7-9 years, this is a decided WOW!  What’s extended this up market has been a lack of inventory and never before seen low rates.  Even at today’s 4% we’re still way below the 7-8% average over the long haul.  Inventory I’ve written about a lot.  Let’s just say that it’s around 30% of what it should be.

So how do you slow down a roaring real estate market?  You raise rates and it’s already happening.  Only a few months ago it was 3.25-3.5%.  Now it’s at 4% and moving higher.  This will cool off the market but it won’t destroy it.  Because no one wants a bubble (it’s awfully painful when they burst), it’s time to change things.

On top of all this, we now have inflation which is only gong to get worse.  As a result, the Fed is tapering to raise rates.  The coming slow down is being caused by policy and the markets.  The Great Recession was caused by a melt down of a ridiculously overheated real estate market fueled by toxic lending.  Today is very different indeed.

Should I buy a house now or wait?

So should I buy a house now or wait?  If you’re waiting for a crash or a major recession, that’s not going to happen.  I am assuming that the folks in DC will not mess things up so we’ll avoid a recession.  But, if one does come, it won’t be a crash and it should last like so many others – about 2 years.

To answer should I buy a house now or wait relating to a pull back where pricing recedes, think rates  When you take out any loan, there’s interest.  That’s the price you pay to get the money.  Over the time you own your home, the interest adds up to quite a lot.  As a result, what you really pay for a house (or for any other kind of loan) is always more than the purchase price at the closing.  Because of this, higher rates are a bigger cost than losing some value in a slow down or moderate recession.  This is why what you pay for a house is less important than the cost of the mortgage which is the interest rate.

The bottom line is this – homes should be purchased for long term ownership.  During the years you own your home, you’ll be way ahead in what the house costs you with a lower rate.  AND don’t forget that values do eventually come back up and get even bigger.

The answer to the question, Should I buy a house now or wait until the market cools?, is Yes you should.

 

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