To buy or not to buy—that is the question!
A lot can be said for the previous statement. People all over the country are asking this as well as, “Should I sell or should I stay?” We will focus on the buy side for the moment. I will also target the situation as it is being played out in our backyard, not nationally.
Delaware, Southeastern Pennsylvania and Northeastern Maryland will give us a pretty good sample. As mentioned in the previous entry, rates are at a historic low, housing prices are at their lowest and inventory is high. This is what is called, “Nirvana” or a perfect storm of opportunity. Then why isn’t there a stampede for houses? With so many so-called deals, what is stopping the buying frenzy?
I suspect consumer confidence is the culprit—confidence in the future of the economy, more specifically the housing economy, confidence in the politicians to guide us out of this quicksand of a recession, confidence in one’s ability to get a job or keep the one we already have and frustration of watching their savings diminish while consumer prices rise.
Mix a lack of confidence with a batch of frustration and you end up with a recipe for stagnation. That’s right, a market that is stagnant and without direction. Who wants to have that served up? Here are a few questions that I hear at the water cooler, social events and anywhere someone figures out that I am a Realtor:
“Where’s the bottom?”
“I will just wait until we hit the bottom and then make my move. Great idea, right?”
“The rates could still go lower, can’t they?”
“Do you think I should just low-ball short sales and foreclosures?”
“How about if I just rent for a year or two?”
Every day I seem to be answering these and many questions just like them. Quickly, I will answer a few now.
Where’s the bottom? If you are waiting for the bottom, chances are you missed it. Can the rates go lower? These rates are fantastic. When I started in real estate, the rates were approaching 20 percent. As for low-balling short sales and foreclosures? You may be able to get a better price on some but chances are that they will be within 5 percent or so of market price. (Condition is a huge factor.)
Remember, when dealing with a bank, you are dealing with cold, hard numbers and a line item on a spreadsheet. There is very little emotion involved, as is the case when dealing with a seller.
This brings me to the main point of this blog. Why do we own houses, and should the trend continue? How about renting? Is it a good idea? Some experts think it is prudent to rent and wait it out. I think it depends on your short- and long-term housing needs. After analyzing your personal financial situation you will be able to determine what is best. Historically, housing has provided an anchor for personal financial wealth. Rates, inventory and availability make it a great time to buy. (Due diligence required.)
I will use my father as an example. He and my mom owned several homes and raised a family of five kids in our “homes.” He purchased a home in the early 1940s, when buying a home was the cornerstone of the “American Dream.” His pride beamed to have a home in Philadelphia with the expectation of filling it with kids. His dream was to pay it off and have a mortgage-burning party with the neighbors.
That dream was never fulfilled as he uprooted the family and moved to Delaware. Again, he purchased with the idea of having a safe place for his family. Not once did I hear him talk about how much appreciation he would realize if and when he sold. He never did cash out refinance or attach an equity line against his “castle.” He just moved forward paying his “obligation.”
At the time of his death in 1975, little was owed and mom was entitled. The little house that dad purchased immediately became a home. Nearly paid, the appreciation on the home was 10 times the purchase price. A great investment, you ask? Absolutely. But who knew? It was just a great home.
With the tax deduction, appreciation and conservative approach to real estate, Dad, just like about 85 percent of all Americans, realized most of his wealth through the equity in his home.
What went wrong? What changed? Wow, few people nowadays think of a real home. Times have certainly changed—lifestyles, the ability to work from anywhere, lack of attachment to anyone or anything—but one thing is for sure: we all want a place where we can call, “home,” a place to hang your hat. A home is a basic need. Food and shelter are fundamentals of life.
Let’s talk about what the so-called experts are saying regarding housing. A recent editorial from Michael Carlinier, a research affiliate at the Harvard University Joint Center for Housing Studies, is quick to mention that, “the housing market has usually led the economy into and out of recessions. It certainly led us into the latest slump. The same can’t be said of the recovery. If anything, housing today is stifling economic expansion.”
Carlinier points out several factors that have influenced housing sales. “Size of monthly mortgage payments relative to income show that housing is a bargain now.” Rates being the lowest in over 30 years, tax credits and a huge inventory have had only a modest temporary boost in sales. “This pessimism is heightened by increased uncertainty.” He also described an inventory of vacant homes for sale exceeding 2.5 percent in the second quarter of 2010—that being greater than the 2 percent recorded in the time spanning 1956-2006. Census data show 1.4 million single-family rentals between 2005 and 2009. Some of these homes were by design, others a product of the market—sellers couldn’t sell their homes so they decided to rent. Carlinier concludes that, “The reality is that the real estate market won’t fully recover until builders and consumers start believing once again that housing is a relatively safe investment, and that will take some time.”
Gene Epstein writes in the July 26 issue of Barron’s that, “The recession and shifting demographics will swell the ranks of the people who will rent, not buy, housing over the next five years.” He calls this the new Renter Nation. He points out that this is “bad news for builders but great news for those who own or are pursuing rental properties.” It’s time to start buying rental properties.
Home ownership has been slipping. In 2004, 67.2 percent of Americans owned a home. It is predicted that by 2015, the percentage will drop to 64 percent. (Each percentage point increase represents nearly 1.3 million households. A household includes more than two people. Conclusion: 10 million extra folks could be moving into rentals over the next five years.) Why? Jobs and growth will inhibit one’s ability to buy a home. Demographics and financing requirements are also having a huge impact on the market as a whole.
Statistics (and we all know how statistics work) show that, though homeownership is 67.2 percent overall, the rate for households headed by someone under 35 is a mere 38.9 percent. Since the generation of echo boomers (born 1978-1994) is larger than the baby busters, in 2015, the nation will have more 20-34-year-olds than 35-49-year-olds. With the job market being the worst in decades, the chances of a quick recovery are slim. Jobs do drive the economy, so more people will be reluctant to purchase and more likely to rent.
I can sum this up by saying that through every crisis there is opportunity. Whether renting, buying or investing in real estate, there must be a plan. If you are going to live in the area for five to seven years, you are most likely safe to purchase. If you are transient, renting may be your best option. If you are looking for an income stream and long-term financial gains, investing is your best bet.
Alex Perriello, president and chief executive of the Realogy Franchise Group (Better Homes and Gardens, Century 21, Coldwell Banker, Coldwell Banker Commercial, ERA and Sotheby’s International Realty) said, “Those who don’t purchase investment real estate in 2010-2011 will, in the future look back and ask themselves, What was I thinking?” There were many comments spoken on the stage at a conference for top producing Realtors in Nashville, Tennessee. Dave Liniger, founder of RE/MAX stated, “Anyone who doesn’t purchase investment real estate soon will miss the best opportunity in years.”
All the analysis, statistical or otherwise does not begin to touch on the real reason to buy a home. A home is just that—a home. A place to raise a family, a place to go to and feel safe and pride of ownership and a place to raise a family. My dad was proud to be able to have a home. He used to say, “Only in America.” I feel the same way. When I drive into my driveway, I feel the same pride. Only in America, like my dad said. Owning a home is the right direction.