Sunday, February 21, 2010

Wait another 9 months?

Shopping for a house? Consider waiting 9 months

Buyers may score better deals by skipping out on the tax credit and waiting for home prices to fall.

House shoppers will have to buy soon to secure an ultracheap mortgage and collect an $8,000 tax credit. Both perks are expected to vanish in the coming months. However, some buyers might score better deals by waiting and missing the perks on purpose, precisely because so many others are buying now.

To see why, let’s first review the incentives. For about a year, the Federal Reserve has been aggressively buying mortgage securities at generous prices to drive down yields and, by extension, to reduce rates on new mortgages. Those purchases end in March. Most economists, including Boston Fed chief Eric S. Rosengren, reckon that rates on standard 30-year mortgages will rise about three-quarters of a percentage point thereafter.

Congress has been propping up the real-estate market, too. In November, lawmakers extended and expanded a refundable tax credit (a rebate, essentially) for buyers. Buyers are given 10% of the purchase price up to a maximum credit of $8,000 for first-time buyers and $6,500 for repeat buyers. They must sign a purchase agreement by April 30 and take ownership by June 30. Income limits apply. The credit is reduced for individuals who make more than $125,000 a year and couples who make more than $225,000, and it's eliminated for individuals making $145,000 and couples making $245,000.

Economics students know that subsidies increase demand and raise prices. Longstanding perks for buyers — like the mortgage interest write-off and the artificially reduced down payments for first-time buyers — were designed primarily to expand homeownership. If they increased prices, it was an accidental byproduct. But the two temporary perks were designed for the express purpose of supporting prices by attracting buyers.

They worked. Goldman Sachs reckons that government support boosted house prices by 5% last year — or rather, kept them from falling that much more. It seems reasonable to assume, then, that prices could lose 5% once the programs expire. And because economists believe the temporary incentives mostly persuaded people who were already considering buying to do so sooner rather than later, after the programs expire, buyers could disappear and prices could dip quickly. Potential buyers should consider whether they’re better off hurrying for the perks or waiting for the lower prices once houses lose their stimulus premium.

Suppose you buy a $300,000 house in February, and by doing so you forfeit a 5% price decline, or $15,000. You get the $8,000 credit, for a net forfeit of $7,000. Now suppose you put down 20% as a down payment and take out a mortgage for the $240,000 difference. The $7,000 you gave up was 2.93 points, when divided by the mortgage amount. In return, because you bought before the end of March, your interest rate is 5.16% (the current average) instead of 5.91% (the three-quarters of a point increase expected after March). Should you pay 2.93 points for a rate reduction of that size on a $240,000 mortgage? Use’s Points or No Points calculator to find out. You’ll have to assume a rate of return the buyer gets on investments under normal circumstances. I used 5%, and got a result of seven years. That’s the break-even point. If you plan to stay in the house for that long, you should pay the points — or in this case, you should buy sooner rather than later.

For a $500,000 house using the same methodology, buying early is like paying 4.25 points, which gives a break-even point of 11 years, 11 months. For a $700,000 house, it’s 4.82 points, which breaks even after 14 years, eight months. But things get tricky for pricier houses. The Fed’s buying of mortgage securities has mostly suppressed rates for what are called conforming mortgages. On single-family houses, these are loans of $417,000 or less in most areas and, for the moment, $729,750 or less in designated high-cost areas. For nonconforming loans, rates are already higher, so they might not rise much after March. Also, the $8,000 tax credit vanishes for houses that cost more than $800,000.


(thanks Shane for the heads up on this one)

I am in agreement with this article. Right now the home prices are being propped up by the intervention. Goldman Sachs recently put out a report indicating that they feel the intervention is adding about 5% to housing prices. But what will happen when it ends and rates go up. What kind of effect will that have? Initially I don't think much will change. The current crop of buyers will still want a house and with inventory low that should keep prices steady. But it's not going to take a big drop in the number of buyers to swell the inventory. REOs are hitting the market at a increasing rate. If a percentage of the buyers drop out the inventory should creep up. But it will take time. Of course I fully expect another round of government intervention if the market starts to peter out again.


Kane said...

The thing is, we're not fortune tellers, and whether waiting 9 months is going to yield a better deal or not is still a guess. An educated guess, perhaps, but "there's nowhere to go but up" was a nice educated guess 4 years ago too ... and look what's become of that.

As someone who bought 6 months already ... if the house is good and financially makes sense, then go for it. Government credit or not, low interest rate or not, "priced at the bottom of the market" or not ... all that really matters is the bottom line - how much do I have to pay per month? If it's comfortable, then forget about timing the market and just make the move.

Neudi said...

Since guessing is the game. My guess is rates won't change since we are in an election year and lots of folks are on the ropes. Wouldn't surprise me to see the tax credit extended again, right or wrong. I'm sure they'll throw another couple programs at this stuff this year.

I still think prices are high right now compared to incomes. It just doesn't make sense to buy a home and just be house poor. I enjoy the finer things in life, like putting gas in my car and eating.

Heck, since we are on the magical mystery mortgage tour why not force banks to refi people that are 5-10% underwater, with good credit and the income. That would save me hundreds of dollars each month on my out of state anchor.

Neudi said...

Golfer, we shall see what happens if that credit actually expires. Didn't it expire back in December until extended? All you could see that month was the tumblin tumble weeds rolling down homebuyer road.

Tyrone said...

Some additional good data from Dr. Housing Bubble...
Recalibrating the Housing Numbers while 5.6 Million Mortgages are Delinquent. California One Two Housing Punch. 60 Percent of Option ARMs and 45 Percent of Jumbo Loans in California.

So when the Treasury states that they are concerned about option ARMs and jumbo loans they pretty much mean they are focusing their eye on California. The bulk of the loans are here. 60 percent of option ARMs are in the state and nearly 45 percent of all outstanding jumbo loans. Yet as we all know option ARMs are already facing major challenges. Nearly half of option ARMs are already 30+ days late.
But what is probably even less reported on is the size of jumbo loans that are concentrated in California. California by itself accounts for roughly 45 percent of the entire jumbo loan market and already 11.3 percent of all jumbo loans in California are delinquent.

golfer_X said...

They did exted the tax credit. But when they did it they said that they would not extend it again. It's not a very popular credit so I don't see them extending the credit again. As far as interest rates go, those are pretty much pegged to the 10 year treasury rate. Unless they Fed starts buying the MBS's again the interest rate will rise. Election or not the gov does not directly control interest rates. They can nudge them but those loans have to be sold and the buyers will only buy them if they can make more money that they would buying other stuff (like treasuries). However I would not be shocked if the government started offering low interest loans directly through fannie and freddie or some other agency like a low interest FIMA loan program.

Neudi said...

Understood, my point was they will do anything and everything in their power to keep status quo through the end of the year. I think you'll see more intervention not less this year until November. I've just hammered it into my head to think up the craziest scenario imaginable and multiple it several times and that is what they'll do.

Everything you pointed out makes total sense under normal conditions; however, its all been thrown out the window.

The Yen Guy said...

I certainly would not invest in real estate at this time, nor in the future.

The Obama administration just announced another bailout, it is the giving out the last of the TARP funds.

I do not believe there will be any more bailouts coming, even though this week, mortgage rates have come down, because:
1) the bond market is calling the yield curve, and interest rates higher; this is not condusive to an expanding economy, the creation of jobs, or an upward stock market: real estate prices will be headed down again.
2) the US Treasury Bond Market broke down on Wednesday 2-10-2010
3) the rise of the discount rate from 0.50% to 0.75%, is actually a move to consolidate interest rate setting power in the hands of Washington DC, and out of the nation's twelve districts, making Ben Bernanke a money czar, which is something I present in the article "Will The Fed Funds Rate Now Be Used As The Fed's Policy Making Rate?"

Charles said...

No one here discussing the political motivations behind the stimuli and interventions seems to understand.

The political scumbags we have as Reps are more concerned about the backlash from the voters who are steaming mad over spending than propping up the markets.

They sense a wave election and don't want to be caught up in it. If anything I think you've got it backwards. They'll do some stimulus shenanigans thing after the elections, not before.

golfer_X said...

I think some of you guys are giving those pinheads on capitol hill too much credit. With very few exceptions I don't think any of them have the foggiest clue as to what they are doing. They simply do whatever the richest lobbyist and their public opinion/PR guys tell them to do. Give em a big check and as long as the opinion polls are "close enough" they will vote for it. Every time I see freaking Barney Frank on TV I just want to reach through the screen and slap some sense into him. BTW, how the heck did that doofus ever get elected. Did the people think it was a Family Guy look alike contest they were voting in?
I don't think any of them has enough brains to understand what is going on. The county is being ass raped by the banks and Wall st and congress is worried about health care. We I suppose we might need health care since it's about the only industry left in this country. If the government runs it that should produce about 100 million new government jobs......

theY said...

I couldn't have said it better about Barney Frank et al, X.

Just my 2 cents, but I think opinion is starting to go the other way on supporting housing prices. If you've lost your home already I don't think you are writing letters to Obama asking him to help make home prices more unaffordable. Also the disgusting details we are reading about on these bank deals and the opinion pieces on why people should walk away are having an effect. More and more people have come to terms with reality and propping up prices does few any good.

Although a wild card I think that hasn't been discussed is these investors. Can prices go down while these guys are gobbling up homes still? I'm still seeing some really dumb flippers out there.

golfer_X said...

Can prices decline more? It depends on the area. If you take Moval, Perris or some other far flung area the answer is probably no. Prices are below equivalent rental prices. So investors actually can and are buying up everything that pencils out. The only question out there is can the rental prices hold up? Personally I think rental prices are still a little higher than they should be. They got a little bubbly too but nothing like home prices. Rents have fallen but they are probably a little higher than they would have been without the bubble.

Now areas like OC and most of LA are still way high. Those areas should fall some more. They have not fully corrected. They did they same thing in the early 90s too. The price correction took a good 2 or 3 years longer in the OC than it did in the IE. I still remember my OC friends telling me how it was different in the OC. Well it was for a couple of years but when the IE leveled off the OC kept falling. The only difference seems to be that the prices move slower on the way down.

Anonymous said...

can we have housing kaboom blog field trips? like to Happy Hour? i don't want to spend the next 9 months looking at more houses online.

Neudi said...

Going to be hard to pay your note without a job.