Tuesday, October 9, 2012

Is Now the Time to Buy: Part III

One of the biggest questions I field from my clients on a weekly basis is whether or not the market has "bottomed-out" and is now the time to buy.

There are many factors that go into answering such a question so I thought I would address a few of them here.

1). A few weeks ago the Federal Reserve said it would keep the federal funds rate at zero to 1/4 percent at least through mid-2015.

Notwithstanding what impact this will have on inflation after 2015, this effectively means that mortgage rates will stay at record lows over the coming years.

This is a major plus point for any buyer in today's real estate market as with the cost of money at record lows, buyers can buy "more house" than ever before.

2. Inventories are shrinking nationwide (and in my backyard) bolstering prices. Its a simple supply & demand equation. As the inventory drops (supply) and demand remains constant (or even rises) prices are going up.

The big question on this front is whether the shrinking inventory and subsequent increase in price is an artificial new bubble being created by the banks who are sitting on large #s of "shadow inventory".

There is no easy answer to this question but recently I did an analysis of the foreclosure filings in my back yard juxtaposed to the rate of distressed sales and I did find the lis pendens filings remained constant (actually slightly up) from 2011 to 2012 while the # of distressed sales has markedly decreased (over 40% in my area).

So on this point a buyer has to make a decision. Do they wait for the banks to bleed out the remaining distressed inventory, which could take years at the current rate, and possibly buy a home at a lower price per square foot, or do they buy now while prices are starting to tick up again, risking a potential future loss of equity should there be another crash.

This is a personal question each buyer, and their buying circumstances, must answer.

However there is one BIG caveat. Will the banks exhaust their shadow inventory before the FED raises interest rates in 2015 (and by all accounts eventually they must).

For when the rates rise, (and all accounts I read predict a rapid inflation in the future) then whatever gain in price drop by the "over supply" of banks dumping their remaining inventory, will be offset by the increase in the price of money.

By way of example, a mortgage of 200,000 at 3% is a P&I of $843 while that same mortgage at 6% jumps to $1199 a 27% jump in the cost of money. Homes would have to drop in value 27% just to have a net zero affect on a buyer.

Granted one can't predict what interest rates will be in 2 years, assuming inflation kicks in, but I think its highly unlikely prices will drop an additional 27% (especially after the 50+% they've already dropped since 2008).

Further, if rates go even higher (to even 8% which is not unrealistic) then all bets are off since that same 200,000 mortgage now costs in P&I $1467 or a 43% increase in the cost of money.

So as I have stated in previous posts (notwithstanding my inherent bias as a Realtor wanting to sell you a house) the facts and statistics seem to suggest NOW is still the time to buy and take advantage of historically low interest rates, even with lower inventories and rising prices.

As always I welcome your feedback. What do you think?