Coile, chairman of Rockville-based multiple-listing service MRIS, writes commentary on the Washington-area housing market.
The recent spike in mortgage rates has caused a frenzy of speculation about how the housing recovery may be negatively impacted. Doomsayers abound, with some rushing to declare the housing recovery over.
I say: Not so fast.
It is true that mortgage rates rose almost a full point between late May and early July, but they are still far, far lower than they have been for years. While rates have recently nudged out of the 3 percent range and into the 4s, you would still have to go back almost 50 years to find rates that low. A 4 percent or even 5 percent interest rate is still nothing short of phenomenal. Americans can borrow money far cheaper than the nation of Australia can.
December 2012 represented an almost perfect moment for home buying. Interest rates and home prices were both at an all-time low. But that doesn’t mean you should say, “Well, I guess I missed out, so now I’m going to be a renter for the rest of my life.” That’s like missing a sale at a department store and declaring you’re never going to buy clothes again.
It’s not just interest rates that make this an especially good time to buy a home. Even at the so-called “best” time to buy, there weren’t that many houses on the market, so buyers were forced to choose from lots of picked over inventory. It’s a lot like when you go to the grocery store, and the tomatoes are all a little bruised, so you settle for the one that’s the least bruised and make it work for dinner.
Right now, we’ve sold off those “bruised” houses and have lots of fresh inventory. Prices, meanwhile, have inched up only slightly. They haven’t doubled or shot up sharply, which means that monthly payments really won’t be affected all that much in the big picture. If you’re letting a $100 a month increase keep you from buying, you’re missing the forest for the trees. Buying a home right now with a fixed rate mortgage can be an essential investment. Thirty years from now, you’ll have a hugely valuable asset for retirement.
With that said, if you are buying a home and don’t plan to stay there more than three years, my advice is to not buy — whether that means continuing to rent or staying in the current home you own.
Here’s why: The rule of thumb is that you need about 20 percent appreciation to make money on a home because of closing costs associated with buying and selling. So, if you only plan to live in the home for a year or two, now is not the time to buy because you won’t be able to make enough to cover the costs associated with the sale.
Additionally, for individuals moving out of the market or downsizing, this isn’t the time for you to make any real estate moves. Home prices are trending upward and most likely houses will be worth more in a few years. If you can hold off on downsizing a little longer, you can benefit from the price appreciation that is happening in our market right now.
I came across an interesting example of this situation the other day. A couple looking forward to retirement in a few years were thinking that when the time came, they would downsize to a condo, sell their primary home, and buy a vacation home at the beach.
The solution was to buy the condo and vacation home now, but hold off on selling their primary home. The couple will be living in the primary home for the next few years and continue to build appreciation, while renting out the condo they will retire into, and enjoying their beach place. Of course, you need to be in a comfortable financial situation to afford three properties, but for them it made sense to buy right now and hold off on selling their primary home.
Home buyers tend to follow a herd mentality. When everybody was buying houses, everybody was buying houses, thinking if they didn’t, they’d miss the boat. And when nobody’s buying houses, nobody’s buying, whether they’re going on reliable data, or just reacting — or overreacting — to the crowd.
Don’t follow the herd; follow the reliable data. And the reliable data says that now is a fantastic time to buy real estate.
Last fall, Wall Street hedge funds began snapping up hundreds of thousands of single-family home portfolios for the first time in history. They’re buying them not to flip, but to hold and rent, because they know they are excellent long-term investments.
The rest of us should take their cue. Don’t hold off on buying because you’re trying to time the market perfectly. You need to live your life in the here and now.