Blogs > Your Money

Dave Patterson and Erin Preston, a father-daughter team of Certified Financial Planner® licensees, provide thoughts and suggestions on a broad collection of personal finance topics.  Information provided in this BLOG is intended to be of a general nature and may not be appropriate for all situations.  Readers should consult with their own financial advisors before relying on any information contained herein.

Friday, January 7, 2011

Don’t Buy Unless You Plan to Stay

It seems like a great time to buy a home and it is. Home prices are lower than anyone might have imagined two years ago and interest rates are way down, too. Property taxes have dropped significantly, as well. Yet, you need to keep one thing in mind before you rush out and buy a new home: In spite of all the positive things about buying now, you shouldn’t do so unless you plan to keep the home for some time.

Why is that, you ask? Although home prices have dropped substantially, they may not yet have bottomed out. A couple of recent articles in the Wall Street Journal support this view.

The first, titled “Housing Market Still Facing a Blizzard” by David Reilly (Wednesday, December 29, 2010). Mr. Reilly’s article discussed the fact that housing prices continued their downward trend for three straight months ending October, 2010 and prompted fears of a double-dip in housing prices. The article went on to say that while sales were up significantly in October, it was likely due to record-low mortgage rates which have since risen more than a half percentage point.

The other article we read was titled “Home Prices Are Still Too High” by Peter D. Schiff (Thursday, December 30, 2010). In his article, Mt Schiff makes a fairly strong case that home prices could easily decline another 20%. If they did, this would put them in sync with the long-term national trend line for home prices. Mr. Schiff argues that the long-term average annual increase in home prices has been 3.5%. If you compare the actual home price graph to the long term 3.5% increase-trend line, home prices are still 20% higher.

Mr. Schiff argues that housing fundamentals have not really improved. He says that government intervention is what has stopped the decline in house prices. Mr. Schiff believes that without government assistance (home-buyers tax credit, record low interest rates, government mortgage assistance, etc.) home prices would actually decline below the trend line.

Whether home prices continue to drop and by how much remains to be seen. It does seem that a further drop is likely in 2011 and perhaps even 2012. Even if the bottom is reached in 2011 or 2012, prices may remain low for several years. Buying now with a low down payment could put you underwater if prices drop 10% or more this year or next. Therefore, to be prudent, you may want to wait on buying a new home, if there’s any chance you may have to sell in the short term.


Post a Comment

Subscribe to Post Comments [Atom]

<< Home