Should I Buy Now or Wait?

Are you waiting for the market to decline? Is it smart to wait?
Many buyers are convinced that waiting will allow them to buy a property at a lower cost. Take a look at these scenarios and see if this is true. The key point to consider is the hidden benefits of home ownership, not only in terms of tax consequences, but also in terms of wealth accumulation.

Moving up? A down market is ideal

If you are buying a more expensive home, a market with declining prices is ideal. Why? You save more on the purchase of the new home than on the loss of the current one.

Let’s take a look: Assume that you paid $500,000 for your property and over the last year prices have declined 10 percent. The property you would like to buy was worth $750,000 last year and is now available for 10 percent less, $675,000.

Your currently property has declined by 10% and is now worth $450,000, so if you sell now you’d lose $50,000. However, since the new property you want to buy has also declined by 10%, it’s now available for $75,000 less.

By purchasing now, you have an instant savings of $25,000 compared to one year ago. Also, your mortgage and property taxes over the next 30 years will be substantially lower as well. No one wants to lose money, but in this case you would actually save.

Buying down?

If you are retiring or trading down, you might decide to wait or you might be able to get an even better property from a nervous seller.

If you can afford to wait a few years before selling, waiting may allow you to catch an appreciation increase later. However, it’s very difficult to time the market. You know the market has peaked only when it is on the way down again and then it is too late! However, when the market is declining, sellers become very nervous and you can use this to your advantage to get a better price or a better property.

Also, by keeping your larger property, you have the continued cost of maintaining it rather than buying now and having lower overhead and more cash. To understand the exact financial ramifications, meet with your CPA, tax attorney or financial advisor before listing your property.

Is it cheaper to rent?

If you live in a pricey area, it may be difficult to buy even an entry-level property. In that case, renting is the only option.

On the other hand, when interest rates are low, purchasing usually makes more sense. To illustrate this point, use one of the online "rent versus buy" calculators (Move.com has a good one). According to the U.S. government, the average rate of inflation for the last 10 years is 2.54 percent whereas properties in our area have appreciated much more than that. Furthermore, the longer you own, the more substantial the savings are. Here are two examples that illustrate why renting is not usually a smart idea:

What if prices go down?

What many people fail to consider is that homeowners accumulate wealth by paying down their mortgage, even if their house does not increase in value. Renters lose additional wealth as their rental payments increase over time, whereas a homeowner with a fixed-rate loan has locked in the mortgage amount for the next 30 years.

Laurence Yun, the chief economist for the National Association of Realtors, shared the following facts at NAR’s mid-year conference:

From 1995 to 2004, the average renter accumulated $4,000 of wealth. In contrast, the average homeowner accumulated $184,400. To account for the difference of $180,400 of wealth accumulation, a $300,000 house would have to decline by 60 percent.

Which is better: a low mortgage rate or a price reduction?

For buyers who are waiting to see if home prices come down a little more, waiting could cost more money in the long run.

Let’s see why: Say you want to buy a home listed for $300,000 and the current interest rate for your loan would be 5.25%. You think prices will go down so you wait to make an offer. Lucky for you, the seller reduces the list price by $10,000. But, what if in the meantime, the interest rate had increased by 0.75% to 6.00%? If you were financing 90% of the purchase price, the total payments over a 30-year term would be over $35,000 more than paying the $300,000 purchase price and locking in the 5.25% interest rate. In other words, your $10,000 savings on the price would be wiped out by the $35,000 extra paid on the mortgage.

This example shows clearly that there is more to consider than just price when purchasing a property, especially when rates are favorable.

For more info or an analysis specific to your situation, please contact me.

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