Time to Buy?

By John Herzog

For 15% to 20% of Americans, the past few years have been a time of great economic difficulty due to loss of employment or dramatically reduced income. Nothing in this post is meant to diminish or ignore the economic hardship faced by this group. In the Great Depression of the late 1920’s and early 1930’s even a higher percentage were unemployed or suffered severe economic set backs. There is however, as there was in the case of the Great Depression, an economic opportunity for the 80% to 85% who have not yet been negatively impacted by the recent economic downturn.

One of the areas of economic opportunity is in the real estate market. While the focus of the majority of the media has been on the suffering of those who have been negatively impacted by the recession, and consequently have lost their homes (or much of the equity they had built in their home over the years), there is another story — the opportunity for a generation of new household formations to enter the housing market at the most affordable level since the 1950s.

According to statistics compiled by the Alabama Center for Real Estate at the University of Tuscaloosa, in the first quarter of 2005 in Alabama, it took an income of $27,104 per year to purchase the median priced home of $120,425. The median income that quarter in Alabama was $48,650. In the first quarter of 2010, surprisingly, the median income has actually risen in Alabama to $54,100, while the income to purchase the median priced home of $121,773 has declined to $25,360.

So as not to get caught up in numbers and statistics, let’s focus more on why real estate has become the most affordable it has been in over a generation. Now that one of every three sales is a house that had been foreclosed, all sales have to compete in price with the house being sold by the lender at rock bottom prices to get it off their books. This serves to bring down all real estate values, making prices the lowest they have been in decades. At the same time, in an effort to stimulate recovery, the Federal Reserve and U.S. Treasury have taken steps to drive interest rates down to levels not seen for over a generation. The 30 year fixed rate mortgage rate is hovering at 4% which is the lowest since Freddie Mac and Fannie Mae began to keep records in 1971.

With the combination of the lowest rates in modern history, the lowest prices in a generation, and a median income that continues to trend higher in Alabama, it is no wonder that real estate for the average Alabama family (not impacted by the economic downturn), is more affordable than it has ever been.

Since approximately 80% of the population has been able to hang on to their jobs, and many are actually making slightly more than in previous years, why has there not been a rush to new home ownership? The federal government understands that real estate values and sales have led the U.S. economy into every recession we have experienced and have also led us out. The feds are very focused on trying to maintain this environment of affordability and are struggling to understand why the real estate market has yet to gain traction toward recovery.

The only plausible answer can be summed up in a single word, and that word is fear. While 80% have kept their jobs and are doing well, the constant barrage of negative press concerning the economy keeps people in fear that they may be the next victim of the recession. People afraid of losing their income simply do not make major purchases like housing, even though it might be the best investment they could possibly make at the present time.

My conclusion that it is fear alone holding back resurgence in home purchases has to do with the sales that are taking place. Every month young people are coming of age, marrying, and forming new households. It is these new families that have been purchasing real estate at all time affordable rates because they have just been hired and did not experience the downturn personally over the past 24 to 36 months. In short, things have gone pretty well for them over the past 24 to 36 months and they believe the worst is over. Those of us who are older are much more cautious and much less convinced.

So what if these young families are wrong, the recession continues to drag on, and it finally reaches them? Will they have made a bad decision to buy a home rather than rent and wait to see when the economy will be in full recovery? I don’t think so. By waiting, only two things can change once the recovery really takes hold. First, prices will rise as the inventory of homes for sale declines and the number of buyers increases. Second, to avoid runaway inflation, the Federal Reserve will have to quickly and dramatically raise interest rates. The combination of rising prices and rising interest rates will cause affordability to dramatically decrease as incomes do not keep pace with the rising costs of purchasing. Those who have purchased already will have fixed payments and see their property values rise from the level they purchased the home, creating instant equity.

But, you may ask, what if the recession does hit those who purchase and they do lose their income? Everyone who loses a job (and consequently their income) is in danger of losing the roof over their head during the period of unemployment, but does it really matter if you own or if you rent? Will a landlord allow a renter to stay in a rental property indefinitely if they stop making the rent payment? Of course the answer is no, just as a mortgage company will not indefinitely allow an owner to stay in the property if they stop making their house payment.

However, it has been my observation that mortgage lenders have become much more patient than landlords in allowing the homeowner time to find new employment and catch up on their payments once they regain employment. So owning may actually be safer than renting in this economic environment. Mortgage companies do not want houses back in inventory and are often much slower to foreclose than in past years, while landlords know there are many more folks looking to rent than ever before, so they are becoming quick to evict those who get behind.

If a family has ever had the desire to own their own home, there may never be a better time. And in the words of Franklin Delano Roosevelt, “there is nothing to fear but fear itself.”

John Herzog is one of less than 350 Master Certified Mortgage Bankers designated by the Mortgage Bankers Association of America and holds their Master Faculty Fellow designation for their School of Mortgage Banking. He has taught continuing education classes for Realtors and Homebuilders throughout the southeastern states for over 20 years.

Advertisements

Leave a comment

Filed under Real Estate

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s