When a Good Time to Buy?

home_currency“It’s a good time to buy a home.” This phrase seems to be the universal mantra of Realtors. Agents were saying that in 2001, as home prices were rising. They also said it when home prices peaked in 2005. And many real estate agents said it was time to buy as prices began to drop — and continued to say it over the past several years as prices fell by an average of 33 percent in America’s 20 largest cities.

If agents are always motivated to make a sale, buyers on the other side of the equation are often asking an impossible question: “Will the price of this house go up?”

Look at buying a home as a place to live instead of a thinking of it as an investment. Ideally, everyone (agents, buyers, and sellers) would be better off to see a housing market that avoids the drastic ups and downs. But the real world doesn’t operate that way so the job of a Realtor is to help clients make good decisions about not only what to buy but where to buy. Buyers should be aware of how the housing market works and understand the risks of buying a home.

The Housing Market is Complicated and the Future Unknowable

Although the National Association of Realtors said for many years that home prices historically don’t fall, actually they do, and sometimes quite sharply. The current downturn in housing values isn’t the first time it happened. Real house prices dropped in the early 80s and the early 90s. “Real” prices are prices that have been adjusted for inflation. Yale University economist Robert Shiller has often dazzled audiences with a chart showing home prices from 1890 to present. It’s a bumpy ride.

The Wall Street Journal in an April 2009 article stated that no one has found a precise way to measure changes in house prices. Because no two homes are exactly alike, changes in the price of one won’t necessarily be matched even by apparently similar homes nearby, much less those hundreds of miles away. Though some indexes track price changes in the same set of houses over time, those can be distorted by major improvements in some of the houses and deterioration in others.

The housing market is complicated, and the future unknowable. To complicate matters, even if home prices rise or fall nationally, they may not follow that pattern in Las Vegas or South Florida or Portland, to say nothing of the neighborhood where you want to buy.

Rules for When to Buy

So when is it a good time to buy? Rather than get caught up in the spiral of the ups and downs of the real estate market, apply some rules to better answer that question.

Barry Ritholtz, is C.E.O. and director of equity research at FusionIQ, a quantitative research firm. He’s also the author of The Big Picture, an irreverent blog on markets. For clues to the overall direction of prices, Mr. Ritholtz advises buyers to look at three metrics:

  • The ratio of median income to median home prices, which suggests whether people can afford a house. A low ratio indicates a good time to buy – a 1 to 1 ratio is when the median income is the same as the median price of a home.
  • The cost of ownership versus renting.
  • The value of the national housing stock as a percentage of gross domestic product (GDP).

All those measures were highly inflated during the housing bubble. And many still aren’t back to historical norms. We can get back to the norm in either of two ways, Mr. Ritholtz says: home prices can either drop an additional 15 percent or go sideways for seven years or so, while G.D.P. and income presumably grow.

I personally like the first two simple rules above. Mainly because they are easy to calculated.

Ratio of Median Home Price to Median Family Income

In March, 2015 the median price of a home in the Portland metro area was $290,000 and the Portland metro area median family income for a family of four in Portland in March, 2015 was $73,900 (Portland Housing Bureau) — this income number is the latest figure available. This is a 3.9 to 1 ratio. For comparison, the ratio in July of 2007 was 6 to 1 when the Portland metro area registered the highest median price of a home.

The lower ratio for March, 2015 shows that it was better to buy a home in March, 2015 than it was in July of 2007.

Cost of Ownership Versus Renting

Determining the cost of ownership versus renting is relatively easy. Just look at the home prices and the rental fees for an area as both are easily obtained online.

The Barry Apartment Report is a publication covering economic, financial, and valuation trends affecting apartments in the greater Portland area. Barry expects the overall vacancy rate will rise to 7 percent or 7.5 percent by the end of 2010. That’s up from about 6 percent in fall 2009. Barry said more than 3,100 luxury units will be brought on the market between mid-2008 and late 2010 in central Portland.

That oversupply has driven rents – once a month or two of free rent is counted – down by as much as 30 percent below developers’ expectations. Apartment towers that originally were supposed to generate monthly rents of $2.50 a square foot are instead collecting $1.80. For a 1,000-square-foot apartment, that’s a drop in rent from $2,500 to $1,800.

In the metro area, the average rent on a two-bedroom, one-bathroom apartment was $727 at the end of 2009. The rate was highest in downtown Portland, at $1,180 and lowest in Vancouver, at $651, according to NAI Norris, Beggs & Simpson.

NYTimes_Economix

The New York Times has a tool to break down the rent-buy equation. They used real-estate data to compare two similar houses in the same region — one for sale and one for rent. They tried to take into account all the costs and benefits of owning, including property taxes, the tax deduction for mortgage interest, and condo fees where applicable. You’ll find a list of these factors inside their newly updated interactive calculator for comparing renting and buying. More to the point, the calculator will also let you do your own comparisons.

If you’re not up for doing the full calculation, you can fall back on a rough rule of thumb. Take the cost of a house for a sale and divide it by the annual rent for a similar house. If this ratio — which we call the rent ratio — is above 20, you should at least consider renting. If the ratio is well below 20, the case for buying becomes a lot stronger.

It’s About the Money

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Another way for potential buyers to decide when to buy is about the money. Predicting interest rates is easier than predicting home prices. Before you buy the house, you buy the money!

It’s a little like walking into a dealership to buy a car, and finding the saleswoman immediately jotting down what your monthly payments will be and starting the negotiations there. We know that’s the wrong way to buy a car. But for a prospective homeowner, it’s a good place to start the analysis to determine how much house you can buy.

Instead of betting on home prices, you make a bet on whether money will become cheaper or more expensive, allowing you to buy more or less house.

That’s where the regular person has a pretty good shot of being right. You won’t know day to day, or week to week, what’s happening to rates, and a jolt like a default in Greece or a change in Chinese monetary policy can throw everything off. But, generally, the Federal Reserve is telegraphing where things are headed over the next six months.

It’s impossible to say when housing prices have definitely bottomed out. But we can say with a fair degree of certainty that the cost of money will go higher. Of course, if rates go up, home prices tend to dampen. Borrowing $300,000 at 5 percent costs you $1,610 a month. If rates rise to 6 percent, that’s $188 a month more, or $67,680 over 30 years. Would the price of a $375,000 house fall because of a half-point rate hike? Now you are back to guessing about home prices. Don’t go there. Maintain your focus.

The Income Tax Break

Homeowners do get an income tax break. But keep in mind that a buyer of a $300,000 home would have to see the house appreciate by about $10,000 – $12,000 to cover all the closing costs. Then figure in the predictable costs of maintenance as well as the opportunity costs of the mortgage down payment and the amount one could have saved by renting.

Property Taxes

In Portland, taxes can be about $4,000 a year on that $300,000 house. In states like New Jersey, where property taxes are the highest in the nation, the extra cost can be even more. According to a recent article in the New York Times, The Star-Ledger of Newark calculated that, on average, residents in the town of Lodi pay 10 percent of their income in property taxes.

Add to that that in many places property taxes could keep climbing even as home values stopped appreciating.

Other Tips on When to Buy

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We all can relate to this. Say, you need a new pair of dress shoes for work. You go to the mall. At the first shoe store, you find a fabulous pair of dress shoes. You try them on. They fit perfectly. They are glamorous. Priced right, too. Do you buy them? Of course not! You go to other stores in the mall trying on dress shoes until you are ready to drop from exhaustion. Then you return to the first store and buy those shoes. Do not shop for a home this way. When you find the home you like (warm and fuzzy feelings), buy it.

It a beautiful spring day and I’m holding an open house. The sun is shining, flowers are blooming, the Portland air is clear and everyone is smiling. People are coming through the front door in droves to view my listing. Where were they back in December during the holidays when I had another listing and only three people showed up for an open house? Of course we know what they were doing. The potential buyers were going to parties, eating holiday goodies, and toasting one another with Oregon Pinot Noir.

There is nothing like a spring real estate market. Offers fly over FAX machines, email systems are overloaded, and cell phones ring constantly. It seems like everybody’s house hunting and buyers are everywhere.

So this should tell you right away when to buy a home. Buy a home during the holidays when buyers are in short supply and willing to spent time looking for a home. The next best time to buy. Right around Easter as well as Thanksgiving. Because who wants to house hunt on these special times.

Source: New York Times, “Is Now a Good Time to Buy”. Sunday, March 14, 2010

Resources 

Owning your own home is the dream for many, but a dream that comes with a lot of responsibilities… From mortgage payments, to general maintenance and upkeep, to storm damage, to home security. It takes work to own your own home.

That said, it can still be a wonderful experience. The more educated we are on ways to take care of our homes, the better off we’ll be should disaster strike. Here’s a list of resources to help you care for your home.