2011: Right Time to Buy a House?

Is 2011 a good year to buy a house if the pocket permits? Declining home prices and a low interest rate environment suggest that the time is just perfect. Also, many of economists expect housing prices to bottom in 2011.

So, if buyers have a secure job and the confidence to meet stricter lender requirements, it would probably be a wise decision to proceed.

House Keys to Remember

Given below are pre-buying pointers for a safe and quick home transaction:

• The total cost including mortgages, insurance, taxes and regular maintenance expenses should be substantially lower than the rent of an equivalent home.
• The buyer should be able to keep the home for a long time, at least 10 years. As it is difficult to predict that home prices will decline in the near term, a long-term investment decision would be safer. Whatever the price movement, a long ownership timeline would command a higher price.
• As it is difficult to foresee the financial market, it would not be prudent to use the last penny in savings for down payment while buying a house since it would lock liquidity. However, a higher down payment than was required a few years ago should be affordable, reducing chances of defaulting regular installments.
• As interest rates are at historical low now, a fixed-rate mortgage would be advantageous and help evade rate fluctuations.

Housing Prices Nearing Bottom?

According to the analysts of Moody's Analytics, a wing of Moody's Corp. (MCO - Analyst Report), houses are most affordable now than they have been in decades. In some areas, prices have already plummeted below the valuation level prior to the housing bubble, which peaked in early 2007.

Considering home prices and peoples’ income, analysts said that, nationally, total household income for 19 months of an average family is now sufficient to buy a house. Notably, this is the lowest price seen in 35 years. Though prices vary across the nation, two years' income is the standard to buy a house.

In January, Freddie Mac's (FMCC - Analyst Report) chief economist, Frank Nothaft, said that housing prices are expected to bottom by spring 2011. Also, Mr. Nothaft expects a gradual price increase in 2012. This expectation is based on historically low mortgage interest rates and other positive economic signs such as a small drop in the unemployment rate, increased purchases of durable goods and diminishing delinquencies.

However, in some regions including Florida, Nevada and California, the housing market is expected to recover erratically as these areas were severally affected by the financial crisis.

Also, if we assume a symmetrical pattern in the housing price curve, going back to the pre-bubble level would take about seven years as it took a similar time period to reach at the top. Consequently, the final bottom is not expected to be touched before 2013-2014, if the curve follows a symmetrical pattern.

Encouraging Dip in Home Price Index?

According to the data released last week by Standard & Poor’s for its S&P/Case-Shiller Home Price Indices, the U.S. National Home Price Index declined 3.9% sequentially and 4.1% year over year during the fourth quarter of 2010.

The S&P/Case-Shiller Home Price Indices tracks changes in the value of residential real estate both nationally as well as in 20 major regions. A decline in the Index reading is a positive as many people will be attracted by lower real estate prices, which would increase overall demand and eventually iron out the housing situation.

CCI Spike to Lift Housing Demand?

According to the Conference Board, its Consumer Confidence Index (CCI) for the month of February jumped to the highest level since February 2008. The sharp rise is a reflection of growing consumer optimism on the short term, the Board says.

CCI increased to 70.4 from 64.8 in January, representing the fifth consecutive monthly increase. This was also substantially ahead of economists’ expectation of 65.0.

According to Lynn Franco, director of the Conference Board Consumer Research Center, the improvement indicates that consumers are once again upbeat about the economy and hopeful of higher income prospects. With rising income, more people will be keen on buying homes, suggesting further surge in demand.

Shadow Inventory: A Source of Supply

The chaos resulting from foreclosure paperwork flaws could result in tremendous losses for banks and a new quandary for the housing market. There still remains a large number of homes in the indeterminate state of "shadow inventory”, which will not be foreclosed as lenders will not be able to sell these homes when there is a lack of demand.

However, once demand increases, supply will not be a problem as houses will be released from the "shadow inventory" status. This would lead to a gradual increase in price.

Is it Better to Wait?

Buying seems to be a better option over renting, but rents are expected to drop with an increase in supply. Moreover, many economists expect home prices to decrease further by 5% to 10% before hitting the bottom this year. Quite obviously, it would be better to wait some more in case a buyer wants to go bottom fishing.

On the other hand, banks have learnt the hard way and are now tightening their lending standard to avoid yet another collapse. This would perhaps make it difficult for buyers to get big home loans. Given a still high unemployment rate, buyers would take some time to regain their purchasing power.

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