Everyone, of course, wants to buy when prices and interest rates are at rock-bottom. But that measure is only revealed after the numbers rise, so there’s inevitably some guesswork involved. Here are some principles to help you make an educated decision:...
New Home Affordability
by Jim Ray
An economist, by one cynical definition, is an “expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”
Little wonder, then, why Americans are skeptical of the increasing number of experts who say that now is a good time to purchase a home.
Everyone, of course, wants to buy when prices and interest rates are at rock-bottom. But that measure is only revealed after the numbers rise, so there’s inevitably some guesswork involved. Here are some principles to help you make an educated decision:
Favorable price / rent ratios
The “price-to-rent” ratio, created by Moody’s Analytics, is a calculation of the purchase price of a typical house divided by the annual rent of a comparable house. In many regions, the data show that housing prices have returned to late 1990s levels. A p/r ratio in your area close to, or below, its historic average is an indicator that it may be more affordable to buy than to rent.
Low interest rates
Mortgage rates are the biggest factor in the overall cost of a home for most people, and they remain remarkably low. Qualification is more difficult than in recent years, but that’s generally a good thing.
Your personal financial posture
More important than national economic indicators is your personal financial situation. Regardless of how good the opportunity may seem, you can’t be sure that prices will not drop further. That’s why it’s critical you put at least 20 percent down to minimize the risk of joining the ranks of “underwater” homeowners, and be committed to staying put for a reasonably long time.
Tim Daniell, a Chattanooga, TN financial advisor, is encouraging many of his clients to buy now. “Rates are the best they’ve been in years,” he says. “You can certainly get more house for the same money, and the supply is plentiful.” But, he cautions, “it’s only a wise investment if you’re thinking long term and considered your overall financial picture. If you’re looking to ‘flip’ a house or plan on moving within five years, you’re taking an unreasonable risk.”
Jim Ray is a writer, consultant and estate gift planner. He works for the International Fellowship of Christians and Jews and lives in Nashville, TN.