Traditionally, spring is when prospective homebuyers come out of hibernation and begin the hunt for their next residence. But with the economy still in flux, budget battles raging in Washington and a housing market on shaky ground, many house hunters are wondering whether it is the right time to buy.
The wild card remains home prices, which are down 31 percent from their prerecession peak in July 2006, according to the S&P/Case-Shiller home price index. While some experts see another wave of foreclosures further depressing home values regionally, others say the worst of the housing slump is over. “I’m hopeful the spring will be better, because the job market is improving,” said Celia Chen, senior director at Moody’s Analytics, who expects housing prices to bottom out nationally by the third quarter.
Despite the uncertainty surrounding the housing market, experts say, the market climate can’t get much better for Americans poised to put down roots.
To help sort through the pros and cons of buying now, here is advice from experts:
Determine your budget
Interest rates on 30-year fixed-rate mortgages are at historic lows, but experts concede that qualifying for a mortgage this spring might be more challenging than it has been in the past.
“The big constraint on (housing) demand this year is going to be the availability of mortgages,” said Chen. “Lenders are still being very cautious.”
Although there are signs that the credit markets may be loosening a bit, even some of the most creditworthy consumers may be unable to snag the best interest rates on mortgages. Consumers with lower credit scores could also face higher down payment requirements, said Keith Gumbinger, vice president of mortgage information website hsh.com.
“You’ll need good credit to get the best pricing,” he said. “We’re talking about a FICO 740 or above for the best possible pricing.”
Would-be homebuyers must jump through additional hoops, as lenders are demanding more financial documentation from applicants.
“You need to be able to fully document your income and all your assets,” Gumbinger said. “Your debt loads relative to your income need to be pretty low. You can’t have the leverage you used to be allowed several years ago.”
Despite these obstacles, qualifying for a mortgage is an essential step, said Diann Patton, Coldwell Banker Real Estate consumer specialist.
“Too many people put the cart before the horse,” Patton said. “It’s so important to know exactly what you qualify for and have that preapproval letter in hand before you even look at houses.”
Knowing how much you can borrow to finance a home purchase is important, but it shouldn’t be the only consideration when looking at your budget.
“Look at what you qualify for and then what you really want to have as excess capital,” said Helfant-Browning. “Provide yourself a savings plan, an entertainment fund, and give yourself a little cushion. Don’t buy at the top of what you qualify for, but what’s comfortable, so you can do all the other things in life you wish to do.”
Think local, not national
Don’t let national headlines about plummeting home values or foreclosure trends spook you, said Patton.
“Real estate is not global, it’s local,” she said. “I could sit and talk to people from Wisconsin or New York or Manhattan, (and) their market could be 180 degrees different from my own market.”
Over the next year, experts say, the trajectory of home prices will vary widely from region to region, state to state and city to city. For example, home values in Minneapolis are expected to increase 21 percent by 2018, while prices in Austin, Texas, are projected to rise 8 percent, according to Moody’s Economy.com.
Pay extra attention to the local economy and job market when thinking about purchasing a home.
“You need to look at the long-term economic prospects for your area. Not even just the housing market. What does job growth look like projected out? What does the population growth look like?” said Tara-Nicholle Nelson, a consumer educator for trulia.com.
In general, markets with a diverse and varied economy are more likely to see the job and population growth that fuels home-value appreciation over the long term.
Do your homework
With so many resources available for house hunters, it’s easy to get overwhelmed by an avalanche of information. Start by using online research tools such as Zillow, Realtor.com and Trulia to get a broad sense of your market. Consider hiring a real estate agent with expert knowledge of the local community, but don’t be afraid to get your hands dirty.
“People should get more assertive about the (do-it-yourself) research and preparation they want to do,” Nelson said. “We’re seeing regular homebuyers with spreadsheets. It’s not that they’re not looking to their professionals for advice, they just want to make sure they feel comfortable with it on their own.”
After looking at the big picture, drill down to more specific metrics by neighborhood, such as how long a home has been on the market, list-price-to-sell-price ratios of comparable properties and the percentage of listings in a given market with price reductions.
Although it’s advantageous to have a good feel for your market, the decision should correlate more with personal goals than national trends or local statistics.
“You have to make your real estate decisions and decide on your strategy based on your personal life and family vision more than anything that’s going on in the market,” Nelson said.
Plan to stay put
During the housing boom, homeowners were virtually guaranteed to make money, or at least break even, on their property regardless of how long they owned it. But the luxury of rapid price appreciation is another casualty of the financial crisis and housing market collapse. These days, prospective buyers should avoid purchasing a home unless they plan to stick around for at least five years.
“People need to buy today because they’re buying the family home,” said Helfant-Browning. “This is not buying an investment you’re going to live in for a year and flip. People need to be in five, seven or eight years to break even.”
That length of time could be longer in particularly hard-hit markets, Nelson said.
“It used to be you could count on whenever you bought (a home), you’d be able to turn it around at, or more than, what you paid for it,” she said. “Now, the more hard hit your market has been by the real estate recession, the longer you should be comfortable staying put. The most powerful thing you can do to avoid locking in losses on your home is to plan to stay in it a long time.”
Home prices are expected to appreciate slower than in the past, so the direction of your career, and the location where you think you’ll ultimately end up, are important factors in deciding whether to buy.
“We’ve seen a lot of people struggling with mobility concerns around careers right now,” Nelson said. “You really want to know what your career path and trajectory is going to look like for the next five, seven, 10 years, and if you’re feeling like you need to be able to move around the country for work, then buying now is not the right idea.”
While the housing market might look gloomy, experts say the financial advantages of home ownership remain.
“If you’re going to pay to live in something every month, why not own it?” Helfant-Browning said. “By getting a 30-year fixed-rate mortgage, 10 years from now when the rents in the community are usually going to be substantially higher, the only thing that will change for you is your homeowners insurance and your real estate tax.”