It’s a question many Americans are asking today. Paralyzed by fear over the last few years, people are wondering if it is a good time to buy a house yet. The answer, for more than just one reason, would seem to be a resounding yes!
Many of those who could do it still didn’t buy homes in recent years, because home prices were on a seemingly never ending downslide. Prices remain off by 30% from their June/July 2006 peak, according to the most recent data from the Standard & Poor’s Case Shiller Home Price Index covering November. However, finally, prices have solidified and are trending higher. The S&P Case Shiller Home Price Index shows that prices were up approximately 8% to 9% over their recent lows in early 2012. The Federal Housing Finance Administration (FHFA) reports that home prices have not declined on a monthly basis since January of 2012. So it appears the trend for home prices is definitely a rising one.
Another reason potential home purchasers have not acted has been because of fear about the economy. What if things got bad again and the head of the household were laid off? That’s not the scenario a new homeowner wants to find himself in, collecting inadequate unemployment checks and finding himself unable to make mortgage payments. Yet, despite the latest GDP report showing a slight contraction in the economy in the fourth quarter of 2012, the economic outlook for 2013 is positive.
The Federal Reserve projects improved real GDP growth in 2013, to a pace between 2.3% and 3.0%, followed by even better growth in 2014. Indeed, the latest stock market gains seem reflective of confidence in that outlook, especially after the government found its way through the fiscal cliff and debt ceiling issues of late 2012 and early 2013. The SPDR S&P 500 (NYSE: SPY), a security mimicking the movement of the index by the same name, is up 7.6% this year through February 19.
Then there’s the question of the mortgage. Those interested in buying real estate will tend to track mortgage rates, waiting to snag the best rate possible. Thus, today those same folks are likely worried that mortgage rates might go lower. Greed drives us to look beyond the fantastic for something better. Oh contraire mon frère. The mortgage rates available to real estate investors today are very special, supported by the Federal Reserve’s low rate policy and its asset purchase program. The latter helps to directly flatten mortgage rates, as the Fed provides synthetic demand for mortgage securities by purchasing them itself.
Over recent weeks, mortgage rates have begun to inch higher, but they remain extremely affordable. In fact, they are a cat’s whisker away from historic record low levels. Given the increasing demand for homes today, as evidenced by rising prices, and fueled by an improving economic outlook, interest rates should trend higher. The economics of supply and demand apply to mortgage rates as well.
Unfortunately, as capital costs rise, the mortgage market has another factor at play as well. A lender shortage is likely at play, due to the burden born by the larger banks carrying heavy mortgage loads and liability. Bank of America (NYSE: BAC), Citigroup (NYSE: C) and others are now less willing to lend new capital. Another problem is that the return achievable through mortgage lending today is inadequate for the return requirements of the larger banks. Smaller players are coming back into the arena as a result, but there’s a question as to whether they will be able to pick up all of the market’s excess demand quickly enough.
Those on the white picket fence about buying a home may also be wondering if maybe it’s smarter for them to rent. Renting is usually a bad idea when the other option is available, but it could have been a brilliant idea if a homeowner had the guts to sell out of his home ahead of the real estate bust in order to rent for a few years and to reenter today at much lower levels.
Apartment rental rates are rising in America, because the rate of homeownership has deteriorated over the last few years. It’s the result of the financial crisis and the economic recession that ensued. Continued high real unemployment still costs a good many Americans their dream home today. Post the real estate bust, lending standards have been tightened and the many crooks who had been willing to qualify everyone and anyone for a mortgage have found other pursuits. But, with the cost of homeownership now so affordable in terms of both asset values and financing costs, buying a home is clearly the far better option for those who have a choice.
In other words and in conclusion, yes, now would appear to be a good time to buy a home, for each and every reason listed, and for one more. While the cost of homeownership is relatively low today, the current opportunity may not be available forever or even for much longer. If global central bank efforts to give float to economies via capital creation indirectly result in fiat currency devaluation and inflation, then real estate prices and mortgage rates could rise substantially, and effectively price many Americans out of homeownership. It would be an unfortunate result and the exact opposite of the banks’ stated intentions. So, yes, buying real estate would seem a good idea, and probably sooner rather than later.