Is now a good time to be a home buyer

Home Sales Down

New home sales in December 2016 were at a 10-month low. Single-family house sales dropped 10.4 percent, the most in almost two years. Please not that this is for sales of newly constructed homes, not sales of existing homes. New-home sales, account for about 10 percent of the residential market. Sales of such homes are tabulated when the contracts are signed. This makes these homes a timelier barometer than transactions on existing homes.

The drop in demand last month was widespread, the largest drop was in the Midwest where sales saw a whopping 41 percent decline. The decline in the South, the biggest region, was 12.6 percent. Sales in the West fell by just 1.3 percent, and bucking the trend, sales in the Northeast jumped by an astounding 48.4 percent.

A lack of interest?

Why are home sales down? It’s likely due to the increases in mortgage interest of late. Over the past three months, interest rates on a 30-year mortgage have increase by 15.8 percent from 3.73 percent to 4.32 percent.

The higher interest rates means that potential homeowners will have to pay more each month for their mortgage. Assuming a $425,500 mortgage on a 30-year fixed rate loan, the monthly payment on such a loan would have increased from $1,966 to $2,111. That’s almost an extra $150 a month that you’d have to pay on your mortgage.

For many, unfortunately hindsight is 20/20. Had they bought in November, they could have had a lower mortgage and been able to use that extra cash (which today’s buyers will have to put towards their base mortgage payment) towards over paying their mortgage.

Pay down your mortgage

Did you know that you can pay down your mortgage early? It’s really easy to do. You simply pay more on your mortgage than the amount that’s due. If your mortgage payment is $2,000 a month, you could pay an extra $100 every month. Why would you do this? It’s an easy way to pay off your mortgage more quickly. That extra $100 monthly payment could shorten your mortgage by months if not years.

Let’s assume you had a $425,500 mortgage, a 30-year fixed rate mortgage, at 3.875% interest. The minimum payment would be about $2,000. If you added an extra $100 a month, you would have that loan paid off in 27.5 years. You’d lop off 2.5 years (or 30 months of payments.) You’d not only pay off the mortgage more quickly, but you’d also save money. The extra $100 a month, would cost you $33,000 ( that’s $100 for 330 months), but you would eliminate the final 30 months of payments. Those 30 months would have cost you $60,000 (30 months @ $2,000 per month). So you’d have the loan paid off 2.5 years early and you’d save $27,000. Not bad.

The more you over pay your loan, the sooner you’ll have it paid off. In this instance, if you pay $2,250, you’d have the loan paid off in about 24.5 years. The more you can pay, the quicker you’ll have the loan paid off.

Instead of overpaying your monthly mortgage, you could add an extra payment every year. That extra payment could take 4 years off your loan. If you think you don’t have and extra $2,000 every year to make a 13th annual mortgage payment? Think about your tax return. The average federal tax refund in 2015 was $3,218. You could apply some, most, or all of that refund to pay down your mortgage.

Priced out

Many people who bought homes during the early part of this century know the pain of seeing themselves priced out of their homes. In those instances, people bought homes with adjustable rate mortgages not realizing that their interest rates would adjust soon afterward. When their mortgages increased, they could no longer afford their homes. Many were foreclosed upon. Valuations on homes in those affected areas declined precipitously. Home valuations in much of the country have rebounded since then. Regardless, this was a real wake-up call for many people. Most Americans have gotten the message that property appreciation is anything but guaranteed. There are still many homeowners sitting on negative home equity.

It wasn’t all negative. If you were a homeowner in some of the larger cities in the US, you saw considerable appreciation on your property’s value. According to the S&P CoreLogic Case-Shiller national index, home values gained 5.6% nationwide annually as of October 2016. In some places, values soared even quicker: Seattle grew 10.7%, Portland 10.3%, and Denver 8.3%, according to the Case-Shiller report.

While many areas have seen valuations increase, some areas may be poised for price declines again, particularly if local job and wage growth are headed south. Credit.com has created a list of the cities which they belief may be headed for trouble. You may be surprised that places like San Francisco, Seattle, New York, and Los Angeles are not on this list. The list is dominated by smaller cities; five of the 20 are in Florida. Click the following link to read about the 20 cities that are quickly becoming unaffordable.

I’m not down with this

If you are going to buy a house, how will you pay for the down payment? DO you have the cash? Have you saved enough? It’s a big chunk. If a house costs $300,000, you need to come up with at least $60,000 to avoid PMI. Few people have that kind of money. A common idea is to borrow from your 401(k). Usually there’s only a nominal interest payment required and the interest payment is typically paid to yourself. Regardless, I’d prefer to let that money grow. Remember, the magic of compounding. A $5,000 yearly contribution earning 7% will grow to $220K after 20 years, and will be worth more than $1 million after 40 years. I never want to tap those funds unless there is no other choice.

An alternative idea is taking money from your IRA. A question today in Kiplinger:

My husband and I would like to help our son make a down payment on his first home, and we’re thinking of tapping our IRAs, but we’re not 59½ yet, so we’re worried about incurring a penalty. What are the rules for withdrawing money from an IRA to buy a house?

Their answer:

The rules are different for traditional IRAs and Roth IRAs. With a Roth, you can withdraw contributions for any reason at any time without taxes or penalties. And you and your husband can each take up to $10,000 in earnings from your Roth IRAs for a first-time home purchase without a 10% early-withdrawal penalty. If you’ve had your Roths for at least a five-year period (five calendar years, counting the year you made the first contributions), the earnings are tax-free, too.

Or you could each withdraw up to $10,000 penalty-free from a traditional IRA. You’ll avoid the early-withdrawal penalty, but the money is taxable. That $10,000 for a first-time home purchase is the maximum you can take over your lifetime, whether from a traditional IRA, Roth or a combination of the two, and whether it’s for yourself or an eligible relative.

If you are looking to help your kids buy their first home, AND if doing so won’t derail your own retirement plans, have at it.

It’s about time

If you have the money, and you live in an area that is still experiencing growth, now is probably still a good time to be looking to buy a home. Yes, interest rates on higher than they were three months ago, but they are still within shouting range of their all-time lows.

When I bought my house, I thought I was buying at the high. My home has appreciated significantly since I bought it. I also thought I was paying a fairly steep interest rate. It was in the seven range. As it came down, we refinanced and got a lower rate.

Today, interest rates are expected to rise. By locking in in the low/mid four percent range, you might be paying more than you would have had to locked three months ago, but in the coming years, if interest rates rise, you’ll be glad you locked when you did.

As with the stock market, it’s difficult to time the market. You really don;t know if interest rates are heading up or down. Given that we are still near all-time lows, I think it’s safe to assume that there is a greater likelihood that raise will rise considerably rather than fall much.

If you are looking for a home, chances are you are planning on staying there for a few years, if not decades. It may be a huge investment, but it’s your home first. Ideally, you will be able to make money on your investment, Hopefully you won’t do worse than break-even. Buy a nice house in a good neighborhood. Best of luck.

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