Today’s Courier Herald Column:
WSB and CNN Consumer reporter Clark Howard is advising those considering a new home and are able to go ahead and make the purchase. For those in a position to consider buying, reassurance from one of the most risk-averse broadcast financial advisors has to be looked upon as favorable news for an industry that has lacked any for the past 4 years.
His reasoning is that “smart money” – large investment funds with Wall Street backing – are now looking at residential homes as a vehicle for medium term investments. They will purchase the houses in bulk, manage them as rental properties, and liquidate them later when the market improves. Howard reasons that if Wall Street money is chasing residential property for investment value, individuals on the sidelines can make a home purchase feeling better about the underlying value of the transaction.
There’s a certain logic to the argument beyond blindly following what Wall Street folks are doing. Every market is a function of supply and demand. Bulk purchases by investors will reduce the number of foreclosures being marketed at distressed prices. This, in turn, should allow for price stabilization, while the reduced supply of homes available on the market could possibly even allow for price increases in healthier housing markets.
Though there are constant warnings about another wave of “shadow inventory” coming to the market as new foreclosures, there are signs that newer programs to allow people to refinance their homes who owe more than they are worth are successfully keeping some folks in their homes, while saving them money on monthly payments as well.
I’ve written here several times about my own difficulties in finding a seller who is able to sell their home in this market, as well as of friends trapped in homes that have declined enough in value where they owe almost three times what the home is worth in today’s market. Anecdotally, I can say that I’ve seen the number of “quality” homes available on the market in Atlanta diminish rapidly. I can also share that most of the friends I’ve written about have either been allowed to refinance under expanded federal programs or have come to terms with their need to short sale their property to orderly manage their way out of crushing housing debt.
The panic of 2008 and 2009 is gone from this housing market. While still far from efficient and still very dependent on various government programs, the transition from the bubble days to reality has taken on a much more orderly flow.
The other reason that those sitting on the sidelines may wish to move now is less than cheery. Many economists, including those at the Federal Reserve, are sending signals that today’s cheap interest rates are on borrowed time. Most say interest rates will have to increase around the end of the year. Conveniently, that’s just after the Presidential election.
Interest rates are at historic lows. Those purchasing today can get 30 year mortgages for 4% interest or 15 year mortgages for under 3.5%. As interest rates begin to increase, having mortgages below market rates act somewhat like owning a bond, but on the right side of that investment. Even if home prices decline another 10 or 20 percent, locking a 30 year rate at 4% will more than make up for that price decline should a buyer wait for the lower price but have to finance the purchase at 6 or 7%, which are much closer to historically average rates.
In fact, a person locking in a 15 year payment at 3.5% would have roughly the same payment as one who locks in a 30 year loan at 7%. One buying now can own their home free in clear in 15 years whereas waiting another year or two could result in paying for the same house twice as long if interest rates return to where they were just a few years ago.
There are no crystal balls with respect to housing prices or interest rates. The days of buying as much house as you can afford for investment purposes only are likely over. But buying the house that you need in the days and months ahead looks like a prudent move today, and a good hedge against what is likely to come tomorrow.