It’s Time to Buy That House

Those of you that have worked with me or read my posts over the years know I’m not a mouthpiece for the real estate community; I don’t march in lockstep with what the various real estate industries put out. I don’t think everyone should own a home; I don’t (and never did) think a home should be regarded as a significant investment vehicle – a piece rather than the main vehicle; I don’t think you should ever be house poor and I’ve never been shy to tell a client that a particular home may not be a wise choice. In short, I never consider myself to be in real estate “sales”; I’m in real estate consulting.

All that said, I do believe that if done correctly and with the right expectations, now can be a good time to buy a home. The typical challenges exist as in any market but given the tremendous rates and the expectation of them remaining favorable, the next few months should present opportunities.

As the Wall Street Journal said:

U.S. house prices have plunged by nearly a third since 2006, and homeownership rates are falling at the fastest pace since the Great Depression.

The good news? Two key measures now suggest it’s an excellent time to buy a house, either to live in for the long term or for investment income (but not for a quick flip). First, the nation’s ratio of house prices to yearly rents is nearly restored to its prebubble average. Second, when mortgage rates are taken into consideration, houses are the most affordable they have been in decades. Two of the silliest mantras during the real-estate bubble were that a house is the best investment you will ever make and that a renter “throws money down the drain.” Whether buying is a better deal than renting isn’t a stagnant fact but a changing condition that depends on the relationship between prices and rents, the cost of financing and other factors.

But the math is turning in buyers’ favor. Stock-oriented folks can think of a house’s price/rent ratio as akin to a stock’s price/earnings ratio, in that it compares the cost of an asset with the money the asset is capable of generating. For investors, a lower ratio suggests more income for the price. For prospective homeowners, a lower ratio makes owning more attractive than renting, all else equal.

Nationwide, the ratio of home prices to yearly rents is 11.3, down from 18.5 at the peak of the bubble, according to Moody’s Analytics. The average from 1989 to 2003 was about 10, so valuations aren’t quite back to normal.

But for most home buyers, mortgage rates are a key determinant of their total costs. Rates are so low now that houses in many markets look like bargains, even if price/rent ratios aren’t hitting new lows. The 30-year mortgage rate rose to 4.12% this week from a record low of 3.94% last week, Freddie Mac said Thursday. (The rates assume 0.8% in prepaid interest, or “points.”) The latest rate is still less than half the average since 1971.