If you are in the throes of the buying process – you’ve probably been thinking the same thing. I’ve been hearing this from quite a few buyers these days and its gotten to the point where I feel compelled to write about it.
First, in order to put things in their proper perspective, let’s start by looking back in time one year. I was starting to hear a lot of this last year. I advised clients that although I didn’t have a crystal ball, I didn’t believe prices would drop like a rock – and guess what? They didn’t. I did advise buyers that they needed to be aware that tighter lending standards and higher down payments might severely impact their buying power if they chose to wait. Now the same buyers are back. Prices haven’t changed much locally – the overall effect has been a flat line (up in some areas, down in others.) But buying power is down significantly as lending has seized up and they are required to put down more money at closing. These new requirements have caused some of my buyers who opted to rent last year to be priced out of the market this year. Now they’re stuck in rentals with rates increasing 8-9% a year and madder than wet hens about it.
Although it’s pretty much a buyer’s market around here, I’m still seeing too many people rushing back to their rentals saying that they want to wait. Some are scared by the current market, but most seem to want way more house than they can possibly afford. This is nothing new, but having a giant case of the “I wants” with no regard to what this market will sustain is reaching epidemic proportions. No one wants to hear that they can’t afford all the house they want to have. So, encouraged by the media, many have been sitting on the fence praying for a miracle – in the form of a huge price drop. These buyers are hoping that the relatively sturdy Westchester market will take a blissful dive off a cliff so they can swoop in and bottom feed. This is a nice pipe dream, but the devil is in the details because the process of buying real estate is far more complex than the news pundits would have you think. While buyers have their eyes pealed on the “sticker price,” square footage, and amenities hoping for “more” later, they are ignoring the three elephants in the room – interest rates, tightening credit and rising rents.
Let’s be honest, this is a market where there is risk on both sides of the fence buyers are clinging to. However, this also is a time for tremendous opportunity for buyers who qualify IF they are realistic and recognize that this is a buyer’s market even though it is not a fire sale.
What are the risks of buying?
The major risk of buying is that your home will go down in value. It may well do that, temporarily. But the long-term trend for housing with an easy commute to mid-town Manhattan and easy access to major thruways and business centers and train stations is going to be up, not down. Housing is a buy and hold proposition – not a quick trade. I bought a house in 1996. It was a bad market for housing. Everyone told me NOT to buy and that I was paying way too much. The value went down – for a while. But in early 1998 about 16 months after that fateful purchase, the market turned. Twelve years later, even after a correction in single family homes, my home is still close to triple the value of my purchase price. How did I do that? I bought when everyone else was scared silly. My father always says that in a perfect world there would be a man who would ring a bell at the bottom of a market – but that man and his bell doesn’t exist. The best you can do is buy into a buyer’s market while prices are dropping because once the bottom is reached, you are no longer in a buyer’s market and you have lost your advantage.
What are the risks of renting?
While buyers are looking at the price and what they can buy with the dollars they have, they tend to ignore the major risks of renting.
1. Tightening credit – which will limit their buying ability more next year. This is particularly true for those with non-traditional jobs, and those planning to retire. If you wait until your income has decreased, it doesn’t take a rocket scientist to figure out that getting a loan is going to be more problematic. With the credit market tightening, it’s a given that finding a loan tomorrow is going to be far harder than today.
2. Rising interest rates – which can erode buying power far more severely than the “sticker price.” It doesn’t matter that the price has gone down when interest rates are up 1-2%. Buyers who do qualify for a loan can take advantage of interest rates that are near historic lows. They don’t have much more down side, but they could rise – significantly. Buyers may well be kicking themselves for not taking advantage of today’s low rates six months to a year from now.
3. The third risk has to do with rental rates. Rents are up and going higher. Some of my buyers have come off the fence because they are seeing close to double –digit increases in their rents this year. There seems to be no end in sight and many risk having their income eroded through higher and higher rents. One of the best ways to STABLIZE your housing outlay is to buy – not rent. The mortgage – which is the bulk of the monthly payment – is fixed for thirty years. Inflation can do anything it wants, that part of your payment won’t change.
Renting has other disadvantages. There are no tax deductions. There is no equity building. In a mere three years the average renter in our area is out of pocket close to $100,000 with nothing to show for it. No equity, no tax deductions, no nothing.
So renting is not risk-free. Furthermore, if you are interesting in “timing” the market…the best way to do that is put your money on the line when everyone else is running away. Remember, waiting until the “market turns” virtually ensures that you WILL miss the bottom. Meanwhile – sales are happening.
