Can you afford to wait to buy a home?
July Buying Advice: Home prices and mortgage interest rates are rising, and people looking to buy a home for the first time are feeling the pressure.
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Rock-bottom inventory is fueling a run-up in home prices as interest rates rise and ratchet up pressure on buyers to act. Should you be desperate? Will prices continue to surge to new heights?
In this installment of Buying Advice, we'll ask agents, a housing analyst and an economist what to expect this year, and we'll also check in with the latest housing statistics.
Moreover, we'll look at the rising cost of Federal Housing Administration loans — including the added expense of permanent mortgage insurance — and examine whether those loans are still a good option for first-time buyers. (Bing: What is mortgage insurance?)
Wishing, waiting, worrying
For buyers in many tight markets, the task of buying a home this summer seems almost Herculean. Scarce supply and an influx of cash investors have made it hard for many prospective buyers to get a bid accepted.
"It's a dogfight," says Kris Vogt, president of Coldwell Banker Residential's Sacramento, Calif., and Tahoe division. With less than a month's supply of homes on the market there and investors accounting for 37% of sales, it's hard for regular folks to make a deal.
Many buyers, he says, are exhausted after making up to 40 or 50 unsuccessful offers on homes. He says those buyers can start to feel hopeless and decide, "I will take some time off."
Buyers are beginning to feel the pressure now that interest rates are once again climbing. The average rate on a 30-year-fixed mortgage rose from a monthly average of 3.68% in the first week of January to an average of 4.68% in the week ending June 28, according to mortgage-data website HSH. Rates took their biggest weekly jump since 1987 in the last week of June, according to Freddie Mac.
"Every tenth of a point that rates go up makes buying more expensive," says Jed Kolko, Trulia's chief economist. "It will almost certainly be more expensive to buy six months, a year or even two years from now."
A rise in rates from 4.5% to 5% adds $75 to the monthly payment on a $300,000 house with $50,000 down.
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But Kolko says rates will have to rise to at least 10.5% before renting becomes cheaper, on average, than buying a similar home. "It's still 41% cheaper to buy than to rent on average nationally."
- On our blog, 'Listed': Zillow: Home-price increases will slow
And we're still far from the double-digit rates that many first-time buyers' parents experienced in the 1980s. Capital Economics predicts that rates for a 30-year-fixed mortgage will average 4.5% at year's end, rise to 5% next year and to 5.5% the following year.
Buyers, so far, seem undaunted by price increases. Sales continued their upward chug (more on that below), even as Standard & Poor's Case-Shiller 20-city home-price index reported the largest annual home price gain since early 2006 – a 12% increase for the year ending this past April. New-home sales are at their highest point since July 2008.
But home-shopping fatigue is definitely setting in for many disgruntled shoppers. At least three clients whom Sharon Carlsen represents as an agent with Coldwell Banker Bain Real Estate in the Seattle area have been looking and bidding unsuccessfully for a year.
"They don't want anything ridiculous," she says. "One wants to be near his job, one wants a contemporary home for around $1 million, and one family wants to be in a particular school district."
Carlsen tells her clients not to get caught up in a scarcity-induced bidding frenzy. She likes to dish out a little chicken soup for the home shopper's soul when clients get frustrated.
"Just keep the faith," she tells them. "People always find their home. It's just a matter of time. Don't settle for what you don't want because you don't think there will be anything else. Don't be crazy, just because the market is crazy."
To be sure, inventory is slowly beginning to rise as prices have come up, giving many homeowners enough equity to move from their current home and others a reason to downsize. "There are more homes on the market now than there were six months ago, and that's even taking into account the spring jump in inventory," Kolko says.
Many analysts and economists predict that the pace of price growth will taper off in the latter half of the year, as rising interest rates take a bit of steam out of sales. Swelling inventory and slightly less competition may mean that buyers who are still in the market six months from now could pay slightly more, but will have a better shot at finding exactly what they want.
"With more inventory, you'll have a better chance of finding something that's a good fit for you. It's less likely you'll have to compromise," Kolko says.
And, with fewer bidders, there's less stress in the equation. Carlsen says there will also be less need to waive contingencies as many bidders are now doing.
For those who are willing to consider it, analysts say, there's also the option of variable rate mortgages.
"Prices are going up," Carlsen says, "but nobody has gotten priced out of their neighborhood they want yet."
Housing-market update: Low inventory, big price increases
The housing recovery continued in earnest in May, with existing-home sales rising 4.2% to 5.18 million from 4.97 million the previous month. That puts sales 12.9% above the 4.59 million unit pace set in May 2012.
The continued surge in sales, coupled with low inventory, pushed the national median price up 15.4% – the largest rise since the boom period of October 2005 – to $208,000 in May. It is the sixth straight month of double-digit price increases.
These rising prices should prompt more homeowners to list their properties. However, Lawrence Yun, the National Association of Realtors chief economist, says that the recovery is strengthening and that he expects inventory to be limited for the balance of the year in much of the country.
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"The housing numbers are overwhelmingly positive. However, the number of available homes is unlikely to grow, despite a nice gain in May, unless new-home construction ramps up quickly by an additional 50%," he says.
Total housing inventory at the end of May rose 3.3% to 2.22 million existing homes available for sale, which represents a 5.1-month supply at the current sales pace, down from 5.2 months in April.
I too like the buyer in the article has been at this process for 11 month's now, approaching 1 year in January, and the process is daunting and frustrating. My experience has more to do with HORRIBLE agents' wasting time and not being productive. We finally got an agent that's more than competent and I feel that we are making progress. If you're in the Atlanta area please do yourself a favor and hire Maurice Royster as your agent! When I tell you he is PHENOMIAL I'm not exaggerating. Tell him Denise referred you.
Articles like this only get people worried about "missing their chance at homeownership." If you want to buy a house YOU must EDUCATE yourself. This can lead to mistakes and errors in judgment! Don't rely on brokers or agents to tell you the truth. They make their living by selling not educating.
Don’t jump into a new home just yet. Even if you close your home sale in September, ask the buyer if you can rent the property back for 60 days, covering their principal, interest, insurance, and any dues. This gives you time to hunt for real bargains. You’ll be able to buy your home between mid-October and November, and close by New Year’s Day – prime season for grabbing great, end-of-the-year deals!
Would be great if the banks would raise interest rates on savings matching those on mortgage loans. But then people in hell dream of ice water too.....
Don't the low inventory bs fool you, banks are holding back on foreclosures to artificially inflate home prices. The Fed Reserve and government are creating another bubble in housing like the inflated and over valued Ponzi Scheme called the stock market.
Their desperation calls for using desperate measures using any and all means to jump start a still stagnant economy and unemployment. Even if leads to another long term disaster.
From what I hear, you'll be almost ready to retire, by the time those student loans are paid off, if your loan amounts are close to average.
You know what? I think people are being SUCKERED into buying houses they can't afford. If you can't afford it don't buy it!!! If you're NOT going to stay in the house until the mortgage is paid off, DON'T BUY IT!!! You're NOT guaranteed a profit anymore, the market STILL sucks in most of the country, and where the housing market doesn't suck, the job market does.
Plus, you're stuck with the property taxes [no small amount nowadays, and rising extremely fast in most areas of the country], maintenance [out of YOUR POCKET], and school taxes and fees [which have totally gotten out of hand].
Put all that together with the current uncertainty in the job market, and I wouldn't touch a house, even if it was given to me!!!
Shortage in homes... my if you walk around neighborhoods especially new developments you won't have problem finding lots, and I mean lots, of empty houses. Banks are playing the game & are saying that there are not enough houses available but the fact is that they are holding them off and puttiing a few out for sale, which are most likely bought by investors for cash. Then those investors end up renting the homes, which leads to trashed neighborhoods.
For hard working people trying to buy it is pretty impossible as often you see houses hit the market and within the hour investors have already throw money at it...
Don't belive a single word of this hyped article !! Smoke and Mirrors folks. Banks and Hedge Funds are all holding back homes and condoes to force snother inflated increase. And who will be left out in the cold?? Yes, we the people.
Media and Real estate mortage offices pushing for yet another collapse I guess.
Do Not Buy !!