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.

What are banks doing with the bailout money?

Many have been wandering what the banks are doing with the bailout money as they seem to be hoarding it, instead of helping to ease the credit crunch. In this article titled "Bank CEOs flogged in Washington" CNN is reporting the CEOs of 8 top banks being questioned by the law makers for the unwillingness to lend to consumers. So, the real question that we have to ask as tax payers is "what are the banks doing with our handouts?"

While I have no insight into the practices of banks, I can only postulate.  Here is what I think... Imagine you are a home owner getting squeezed by the credit crunch. If some one were to give you a lot of money that you could use for whatever you like, what would you do? Go and blow it out on a new car, new furniture, and big screen TVs and home entertainment systems? That would be one way to spend it, but if it were me, I'd hoard that cash and spend thriftily so I wont go into foreclosure. Now imagine a bank that has acquired many homes thru foreclosure proceedings, being squeezed by the credit crunch and forced to sell those homes at huge discounts to avoid bankruptcy. Now, if a benevolent government were to hand them a ton of other people's money, all of a sudden they don't have to feel the tightening of the screws any more. Instead of being forced to sell the homes at a huge discount, the bank can hold on to the properties much longer and can afford to reject the low ball offers. Instead of lending to the consumers at around 5.5% and risk loosing money again, it seems much more profitable to hold on to the houses longer in hope of a recovery and reduce the losses with the free money. In a way you cannot blame them, but the money was given for the specific reason of unthawing the credit markets. I could very well be wrong here, but I think this is the reason why the banks are behaving as they are. While the bankers get bailed out with public money to protect their assets, the consumer gets left out in the cold to be foreclosed. In any case, it is us, the consumer, that gets screwed once again!