Buy now or wait?

The real estate market has been in a downward trend for a while and many buyers have been holding out for the market to bottom out. While this is a good strategy, it is worth your while to figure out what its going to cost you to wait for the market to bottom out. Here are my thoughts about it. I want to make the disclaimer that I am not advising you to go out and buy a home. As always, you should do your own due diligence in figuring out what is best for your unique situation.

Lets assume that you are currently renting at $1200 a month, which is reasonable for a descent 2 BR apartment in Atlanta. Lets also assume that you consider buying a $200K house, but want to hold out longer with the hope of buying cheaper. In the buyers market of today, you can buy a very nice home in Atlanta today for $200K, of course depending on the location in the city. The monthly payment for a $200K, 30 year fixed rate mortgage at 5% would be below $1200 a month.

According to the CNN's Real Estate forecast for Atlanta, the decline so far from a peak in second quarter of 2007 is -11.3%. The total decline when we hit the bottom is expect at -14.6% from the peak. This means the house you can buy today for $200K has already declined $25,479 from a high of $225,479. The -2.4% drop expected this year will put the home at a bottom out price of $195,200 which is a drop of $4800. Something hardly worth the wait for a year.

Now lets look at what it will cost you to wait a year to see the bottom. At $1200 a month, it would have cost you $14,400 in rent alone. That is 7.2% of the price of the home. Now lets add to it the $8000 tax credit available to the first time buyers this year to get the sum of $22,400, which is 11.2% of $200K. Which means your effective price of buying the $200K home today is really $177,600. You could say that even if you were to buy the home today or a year from now, you would still have to pay either the mortgage or rent, so it is not a complete waste. However, the difference is that with rent, the money is gone out the window, while you can use the interest paid on your mortgage as a tax deduction and build equity in the home. I recommend talking to a CPA for the tax advantages of owing your home.

The scenario I drew above is assuming that the interest rate for a 30 year mortgage remains at historic lows. When you factor in interest rates which can change quite dramatically, what you save from one end may get sucked out from another. If the rates were to go up as a result of all the financial hiatus we are in today, the interest alone could become a huge disadvantage to make your wait worthless. However, if the rates were to drop down drastically, which I think is quite unlikely, you could come out a winner. Additionally, successfully calling the bottom and the peak is very hard... if it were that easy, many of us would have become millionaires in the stock market! I don't have a crystal ball, but my take is that waiting for the bottom in housing market may not work out for every body.