Is Now The Right Time To Buy Your First Home?

#BuyFirstHome

As a Realtor I will tell you that just about any time is the right time to buy your first home.  As an investor, I am happy to collect your rent.  What is most important though is how you buy it.  So is now the right time to buy your first home?

Before you tune out and say any time can't be the right time to buy a first home, let me give a little background.  In 2004 I genuinely believed the California Real Estate Market was about to burst.  I missed the call by two years because the big banks got together and figured out how to make it look like loaning people money that didn't have the income wasn't really that risky.

From 2004-2006 I would have told you that it is very hard to "buy right", and probably wouldn't have sold you anything.  I sold my personal home and my investment properties at a substantial profit.  The reality was none of my properties value went below what I originally paid for them, so I would have been petter off sticking to my original plan and holding the properties.

In that little nugget is the truth.  Buying right is everything.  So how do you know if you are buying right.  First of all, you need to be able to afford the payments.  Even if values drop and you can afford to stay, you will be alright.  The mortgage crisis was fueled by people who over bought, banks that extended loans to people who where already over extended, and then it was accelerated by people who just wanted out of their loans because they could.

If the government said "tough luck, if you can afford it, it is yours" the dip might not have been as bad.  At the same time though, they couldn't let people stay in their homes if they couldn't afford it.  A very small percentage who were able to renegotiate the loans to a much lower value or interest rate were the only real winners.  Everyone else got the shaft because the government wouldn't hold people accountable for buying homes they couldn't afford, nor did they really hold the banks accountable for the loans they should have never made.

So here you are today, pondering the question, "Is now the right time to buy your first home?"

And the answer of course is "Yes, if you buy right".  Buying right isn't just buying a house you can afford, it means buying in a place you want to live.  Buying right means buying in a place where you would be willing to spend the time and energy to make the house your home.

If you can get a deal, then you are even better off.  Normally I favor older homes that need work in good areas.  You might not want to do a lot of work though.  If this is the case, then negotiating with a builder can be tough.  Watch the options and compare prices from other contractors.  Don't let the builder overprice your new home with upgrades.

Don't just listen to me, here is a very nice chart from my friend Michael Wright at United American:

Rent vs. Own Comparison JOE RENTER       DON'T THROW YOUR HARD EARNED $$$ DOWN THE DRAIN Joe Renter vs. Joe OwnerCalculation Assumptions Monthly Rent $2500.00 Estimated Yearly Rent Increase - 3% Estimated Yearly Appreciation-3% Estimated Tax Bracket 20% Where would you want to be in 10 years?   Year Annual Rent Annual Payment Federal Tax Savings Estimated Value Loan Balance Estimated Equity 1 $30,000 $37,377 $6,166 $463,500 $433,033 $30,467 2 $30,900 $37,377 $6,079 $477,405 $424,573 $52,832 3 $31,827 $37,377 $5,989 $491,727 $415,789 $75,938 4 $32,782 $37,377 $5,895 $506,479 $406,670 $99,809 5 $33,765 $37,377 $5,797 $521,673 $397,203 $124,470 6 $34,778 $37,377 $5,696 $537,324 $387,375 $149,948 7 $35,822 $37,377 $5,591 $553,443 $377,172 $176,271 8 $36,896 $37,377 $5,482 $570,047 $366,580 $203,466 9 $38,003 $37,377 $5,369 $587,148 $355,584 $231,564 10 $39,143 $37,377 $5,252 $604,762 $344,168 $260,594 Total $343,916 $373,774 $57,315 $604,762 $344,168 $260,594 Loan Type FHA Reg Sales Price Term $450,000 30 Years Rate APR 3.750% 5.168% Dwn Pmt Closing Costs $15,750 $1,475

Who Are The Buyers Right Now?

Warren Buffet said he would like to buy thousands of single family homes.  Why?  Simply put they are a great investment deal right now.  Did he do it?  I don't know but I am sure Berkshire Hathaway didn't just jump into the real estate brokerage business this year for no reason.

In June the Berkshire name replaced Prudential in Florida and recently did so in Newport Beach, CA.

So Who Are The Buyers?

On the buyer side, investors appear to be the main buyers right now.  They are buying the houses that need work, but the prices are rising due to the competition among investors.  For instance, a recent waterfront in my area sold for $1.835 Million and was torn down, several over the sumer sold at or very close to that price only to be knocked down.  

A very nice home just around the corner, is listed at $2.4 Million and can't get even a low ball offer.  It has been on the market for over two years.  Another is listed for nearly $3 Million and as far as I know, also has no offers.

Can you really build a home and make money in that gap?  The answer is yes.  A really good investor can build for $400,000 making a total investment of $2.235, and sell for $2.3 and net $50,000 or so after interest and fees but that isn't what they are doing.  Most of them are only putting 10% of their money into the project so making $50,000 on $200,000 or even $400,000 in one year wouldn't be bad, and again that isn't what most that I talk to are doing.

What they are doing is building very slowly, taking advantage of lower labor and materials costs, locking in a good loan rate and sitting on the homes waiting for prices to go up.  Some have a sign on them, others don't.  One trick to look for as a seller is them dragging out the escrow for as long as possible to minimize their holding costs.

Maybe I am seeing more of this as an investor because I have trained myself to spot an empty house three blocks away.  I used to look for the dumpy empty homes, but now I am watching the newly remodeled empty homes.  This is how you get a micro glut.  When prices to recover to 2006 levels many of these homes will hit the market and stall pricing.  That isn't a bad thing, just something to be careful of when buying, and something you can use to your advantage if you don't want a fixer.

Are you ready to buy? 

Is A 4% Home Loan A Good Deal?

It is amazing how many people think rates will keep dropping.  Personally, I think the printing press economics of the Obama administration are going to catch up with stagflation like we saw in the late 70's and early 80's.  I think that Obama is handing his replacement a bigger economic mess than Carter handed Reagan. 

So is 4% a good deal?  If you are in investor, the question is can you make money with it?  Or can you sit on the property until you can?  If you are a home buyer the real question is, can you afford the payment?  If you can answer yes, then 4% is a good deal.

As a Real Estate investor and agent, anything below 4% is a smoking deal when it comes to financing real estate.  Why?  Inflation has been historically calculated at 3% per year.  Since the loan is fixed at 4%, as the home increases in value, the money is essentially free after just a couple of years.  On a 4% loan, nearly half of the payment is going directly to the principle.  You don't get much of a tax deduction but you get a great savings account in your house.  It might even be tax free or tax deferred.

I bought my home at 4% and refinanced at 3.25% a year later.  I did it because if rates went up to just 4.5% I couldn't get the loan for my house.  Remember the late 70's and early 80's?  If you don't, loan rates jumped from 8% to 14% and peaked right at 18%. 

The trick to surviving in the real estate game is to leave some wiggle room.  When money was really easy to borrow from 2004 to 2006 home prices went up based on greed, not economics.  People bought what they couldn't afford on the assumption they could use their home like an ATM and just keep taking money out to keep up with the bills.  Bad plan.

Think of it this way.  If you have a home with a $1000 monthly payment, over $400 is being used to pay down the loan on a 4% loan.  If you had the same loan at 8%, you would have a $1480 monthly payment that still only paid $400 of your loan that first month.  When prices go up or interest goes up, rents usually follow.  If you get transferred in just two years, and rates climb to 6%, the chances are good you can rent the house out for a nice profit.

At 4%, a $200,000 home only needs to rent for $600 a month to cover your real expenses.  Remember, the other $400 is buying you a house.  Think of it as a forced savings account.  If you can afford it, historically it is much better than a savings account.  If you rent it for $1000 per month meaning you have zero cash flow, you are still growing your equity at $400 per month plus the increase in the home value.  That is free wealth.  After five or ten years if you can rent it for $1200, then they are buying you a home and you are getting $200 a month for letting them do it.

So is 4% a good deal?  That is all up to you and your goals.