From Main Street 7/18/14
Numerous factors make homebuying advantageous for the rest of this year.
A combination of market factors may make you think you’re getting priced out of the home market. But one observer believes first-time homebuyers might want to consider making a move.
“I know it’s hard to face rising interest rates and rising home prices at the same time,” says Ilyce Glink, real estate expert and managing editor of the Equifax finance blog. “The good news is there’s still plenty of runway if you want to buy a house this year.”
Glink believes first-time homebuyers should consider these five good reasons to buy a house before the end of the year.
1. Home prices are still off their highs
Yes, home prices are rising from the lows seen during the housing crash of 2008, but they’re still nearly 20 percent off their mid-2006 peak. According to the S&P/Case-Shiller Home Price Index, average U.S. home prices are currently at summer 2004 levels. In markets that are still recovering, first-time homebuyers could see significant appreciation over the next few years, if they buy now.
2. Interest rates are expected to keep rising
Interest rates are slowly climbing, and as the Federal Reserve concludes its economic stimulus plan, rates are expected to continue to rise. Some experts believe mortgage interest rates could hit 5 percent by the end of 2014 or the first quarter of 2015, according to Glink. And even a small bump in interest rates can mean a significant jump in your monthly note.
“If you’re offered a 4.2 percent interest rate on a $400,000 mortgage, for example, your monthly payment will be $1,961, and you’ll pay more than $300,000 in interest over the loan’s 30-year term,” Glink says. “If your interest rate were 4.9 percent, your monthly payment would jump to $2,115, and the total interest paid over the life of the loan would exceed $360,000.”
3. Rental rates are rising
There is always an argument to be made regarding whether to buy or rent. It’s all a matter of your particular situation – as well as the status of your local housing market. If you need to be mobile — prepared for job transfers or out-of-state promotions — or are continuing to search for “the perfect place,” renting is probably right for you.
However, if you would like to put down some roots, and rents are high in your hometown – it might be cheaper to buy.
“Divide the list price of the home you’re interested in by the annual rental rate of a comparable property to determine the price-rent ratio,” Glink advises. “If it’s below 20, chances are it’s a good time to buy.”
Of course, buying a home means more than a mortgage. Remember to consider the other built-in expenses: maintenance, insurance, taxes and utilities.
4. Buying power
Americans have been steadily reducing their debt load. Maybe you have, too. The lower your debt, the higher your buying power. Creditors will consider your debt-to-income ratio – how much debt you have, compared to your gross (before-tax) income.
“Experts generally agree that you can spend between 28 percent and 36 percent of your gross income in total debt service — that’s your housing expenses plus your other debt payments,” says Glink.
5. With lower debt comes a higher score
As you pay off student loans, credit cards and consumer debt, your credit score will improve. And that’s one of the biggest factors mortgage lenders consider when determining the interest rate and terms of your loan.
“You should definitely consider buying this year, because it’s unlikely the housing market will look much rosier next year, when interest rates and home prices could be even higher,” Glink says.