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It Might Be Smarter To Rent Because
House Prices Are Still Falling
House Prices Are Still Falling
As a tenant you are waiting for the opportunity to buy your own home. As you watch
mortgage rates drop week after week, and house prices plunge, you are tempted to
make the big plunge. But before you start looking for a house to buy you should do some
research and number crunching.
The big question is not whether buying a house is a good idea. The question many
potential homeowners are pondering is "when should I buy?". The Case-Shiller Index of
property values in 20 markets indicated a 4.2% decline in March 2011 compared to the
same month last year. Some cities showed an increase. For example, Washington, DC
was up 5.0% and Boston showed an increase of 0.6%.
Cities with low employment rates were not a problem. However if you are looking to
purchase a house in a city where getting a job is an issue expect house prices to
continue to fall. You might be able to get a great deal on a house.
High unemployment across the nation, combined with the lack of consumer confidence
in the economy getting better have caused many potential homebuyers to wait. High
gasoline prices and the stricter underwriting guidelines have added to the woes of
buyers.
The housing market is still in a bear market. It might be 2013 until we can see a full
recovery. The market is cyclical and generally runs about 16 years. In the 1900s it took
about 8 years for house prices to hit the bottom. So you might want to wait until then to
buy a house. But realize what you are in for before you sign the documents.
There are several costs to include in your calculations. When you buy a house there are
property taxes, house or hazard insurance, utilities, and maintenance. These are
ongoing costs and some are unpredictable.
Understand the price-to-rent ratio.
The sales price of the house divided by the annual rent amount gives you the
price-to-rent ratio. The higher the ratio means that is more favorable to rent. The break
even point is in the range from 15 to 20. A ratio over 20 indicates that the house should
be priced lower.
Rent to own housing is a long term proposition.
In many cases the amount of rent paid by a tenant is greater than the amount of the
mortgage. To hedge your bet consider a rent-to-own deal.
A rent-to-own house transaction allows the buyer to walk away at the end of the lease.
He is not obligated to buy the property. However, he will lose the option fee. The option
to purchase the rental property generally a percentage of the purchase price and it could
run thousands of dollars. A buyer will cancel the deal for a various reasons. The main
reason is declining house values. If the real estate market is in the tank the potential
homebuyer can sit on the sidelines and wait until prices hit rock bottom.
It is better to rent.
The numbers and sentiment seem to favor renting. If you buy now you might see your
investment lose value in a few short years.
Consider this scenario. A house was valued at $600,000 in 2006. It appraised at
$450,000 in May 2011. If you bought it for $430,000 did you get a good deal? If it
appraises at $420,000 the next year then the deal wasn't so sweet.
The bottom line is that you have to look beyond the numbers. Search for other benefits.
Is the neighborhood safe? Are the property taxes low? Is the house maintenance free?
Are there good schools for your children? While you can not put a dollar value on these
benefits, there are worth something.
mortgage rates drop week after week, and house prices plunge, you are tempted to
make the big plunge. But before you start looking for a house to buy you should do some
research and number crunching.
The big question is not whether buying a house is a good idea. The question many
potential homeowners are pondering is "when should I buy?". The Case-Shiller Index of
property values in 20 markets indicated a 4.2% decline in March 2011 compared to the
same month last year. Some cities showed an increase. For example, Washington, DC
was up 5.0% and Boston showed an increase of 0.6%.
Cities with low employment rates were not a problem. However if you are looking to
purchase a house in a city where getting a job is an issue expect house prices to
continue to fall. You might be able to get a great deal on a house.
High unemployment across the nation, combined with the lack of consumer confidence
in the economy getting better have caused many potential homebuyers to wait. High
gasoline prices and the stricter underwriting guidelines have added to the woes of
buyers.
The housing market is still in a bear market. It might be 2013 until we can see a full
recovery. The market is cyclical and generally runs about 16 years. In the 1900s it took
about 8 years for house prices to hit the bottom. So you might want to wait until then to
buy a house. But realize what you are in for before you sign the documents.
There are several costs to include in your calculations. When you buy a house there are
property taxes, house or hazard insurance, utilities, and maintenance. These are
ongoing costs and some are unpredictable.
Understand the price-to-rent ratio.
The sales price of the house divided by the annual rent amount gives you the
price-to-rent ratio. The higher the ratio means that is more favorable to rent. The break
even point is in the range from 15 to 20. A ratio over 20 indicates that the house should
be priced lower.
Rent to own housing is a long term proposition.
In many cases the amount of rent paid by a tenant is greater than the amount of the
mortgage. To hedge your bet consider a rent-to-own deal.
A rent-to-own house transaction allows the buyer to walk away at the end of the lease.
He is not obligated to buy the property. However, he will lose the option fee. The option
to purchase the rental property generally a percentage of the purchase price and it could
run thousands of dollars. A buyer will cancel the deal for a various reasons. The main
reason is declining house values. If the real estate market is in the tank the potential
homebuyer can sit on the sidelines and wait until prices hit rock bottom.
It is better to rent.
The numbers and sentiment seem to favor renting. If you buy now you might see your
investment lose value in a few short years.
Consider this scenario. A house was valued at $600,000 in 2006. It appraised at
$450,000 in May 2011. If you bought it for $430,000 did you get a good deal? If it
appraises at $420,000 the next year then the deal wasn't so sweet.
The bottom line is that you have to look beyond the numbers. Search for other benefits.
Is the neighborhood safe? Are the property taxes low? Is the house maintenance free?
Are there good schools for your children? While you can not put a dollar value on these
benefits, there are worth something.
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