The media has been fairly upbeat about housing market for the start of 2012, so is now a good time buy? I for one am optimistic that the housing market may stabilize a bit more in 2012, but I am not sold on a true housing recovery.
If you take a look at the S&P/Case-Shiller Home Price Index, both the Composite 10-city and Composite 20-city are both down considerably in December from the previous year. Honestly, no real indices or indicators are showing any housing recovery at all. So far it appears to be all speculation that the housing market is going to recover in 2012.
I for one am seeing some activity in my local real estate market, but it appears it is mainly people buying up cheaper homes and condos. Overall I would say things are bleak. Here are a few things to consider before buying your first home or real estate investment in the 2012 housing market.
1. Interest Rates
Interest rates are appealing because they make your payment smaller, but realize that if (and most likely when) interest rates go up, buying power goes down. If you buy a $200k home on a 30 year mortgage @ 4%, your payment will be $954.83 a month for your mortgage. If interest increase to 6% and you go to sell your home, the buyer would have to get your home for a purchase price of around $159,200 to have the same payment that you had at 4%. That is a potential $40,800 loss on your home. This maybe mitigated by the fact that the economy is getting better (implied by rising interest rates), but there is a good chance you are taking an equity hit.
2. Brokerage Fees
You purchase your home for $200,000 and later decide you need to sell the home, be ready to pay 6-7% to get out of your home. If you got the same price that you paid, be ready to take a potential $12,000 to $14,000 cash loss.
3. Location
The “place to be” might quickly become the “place not to be”, especially in this economy riddled with foreclosures. Even nice neighborhoods can turn quickly.
4. Career
You might be locking yourself into a job or career path when you commit yourself to a home. Potential career opportunities may be missed simply because you aren’t able to relocate. If you are committing to a home for 5+years, you should also be committing to your job or the area for employment for that timeframe.
5. Neighbors
While renting you can easily pick up and leave, but with owning you are stuck unless willing to endure the potential pain of selling and moving away.
6. Hassle
Yard maintenance, redecorating, repair, and all of the hassles that come with a home are expensive and time consuming. Are you ready to give up weekends?
7. Taxes
You might be happy with your monthly payment until you realize that it will increase every single year, similar to rent. Local levies may pass and potentially cost you $100’s a year in additional taxes. You will also hear the expression “You don’t really own your home… stop paying your taxes and see if you own your home.” Even if you pay off your mortgage entirely, sadly you will never be payment free.
8. Depreciation
Let’s not forget that many experts are estimating the housing market will continue to go down in 2012 and even beyond.
9. Inflation
If the housing market goes up 0.3% in 2012 and inflation was 3.3%, you effectively lost 3% that year. Your 200k home is now worth $200,600 but adjusted for inflation it is only $194,191. The housing market requires appreciation equal to inflation to make any sense investment wise.
10. Leverage
Owning a home is a highly leveraged position, especially for those who purchase with less than 20% down. A small % downturn can potentially put you underwater very quickly. With only 3.5% down on that 200k home, if the housing did decrease by another 8.5% you would be $10,000 underwater on your home. Leverage can destroy people, especially people very little cash reserves.
11. Equity
People tend to drastically overestimate how much they are building when it comes to equity. I personally earn about $168 a month or $2016 in equity on my $117k mortgage. The amount of each payment that goes towards principle will increase, but not as much as you might think (mine is increasing at about only $.60 a month!). In ten years I will owe $91,925.91 ($25,075 of equity built) if I make standard payments. That might sound like a lot, but realize that is over a decade of your life.
12. Opportunity Cost
If you make payments on your home for 30-years, you are locking your cash into equity into your home. If you would have taken that money instead and put it into another investment, there is a good chance you could have outperformed your mortgage. Remember that a 4% is approximately 3% effective rate if itemizing.
This isn’t to discourage you entirely from owning a home. People will argue that owning a home isn’t an investment, but it is important to understand the real world financial consequences of getting involved with the housing market in 2012