Housing prices have decreased significantly over the past year or two. So say people like Fed Reserve Chairman Bernanke, numerous articles in The Wall Street Journal, and my brother—who just bought a house for quite a bit below an already dramatically reduced asking price.
Although I’ve also read about specific locations which are “protected” or still “doing great,” I’m somewhat skeptical of those claims. It seems like the only people quoted in those articles are those with a vested interest in seeing the perception of housing market optimism stay high: typically local real estate agents and lenders. These articles never seem to quote people who actually have their home for sale.
Despite near universal agreement that home prices have declined, no consensus has formed as to what to do about it, especially for those who have not yet owned a home.
From bankrate.com’s “Is the time right for first-time homebuyers? (whose short answer is “. . . for most millennial homebuyers, the risks outweigh the benefits. . . ”) to Time magazine’s “Ignore the headlines!” which argues that even in an environment of falling home prices, buying now makes sense because interest rates may rise.
Personally, I’m with bankrate.com on this one, and not just because their article quotes real live homebuyers, a finance and real estate professor, and a real estate agent. (By contrast, the Time article, although recalling the past wisdom of legends such as Peter Lynch and John D. Rockefeller, only actually sources Lending Tree and one of its executives. Gee, what’s Lending Tree’s motivation on this issue?)
Time tries to make the case that even if you knew that a home you were about to purchase would go for 10% less 12 months from now, you’d still be better off buying it now rather than waiting. This relative advantage come from the hypothesis that certain macro events (which no one can predict with certainty) will cause interest rates to rise by half a percentage point over the next 12 months. (Turns out there was an error in their comparison calculations, so the online version of the article now hypothesizes a full one-point interest rate increase, conveniently once again “proving” their theory that renting for the year while home prices fall 10% is a bad strategy.)
That’s absurd.
By that logic, would it make even more sense to buy a new car which would lose 20% of its value as it’s driven off the lot? After all, if you pay full sticker price, you might be able to lock in a low interest rate on the car loan! But this is just silly. Intentionally buying a depreciating asset is always a bad idea from a financial perspective.
In addition, who’s to say that rates won’t go down (and not up) over the next 12 months? I can find as many economists predicting rates will fall as Time can find who say the opposite. But even if rates are higher at the time I choose to buy the house at a lower cost, I can refinance later when interest rates fall once again. On the other hand, those who purchase a house at a higher price can’t refinance their purchase price. What they paid is what they owe.
Can you imagine a successful real estate professional buying a property he feels is certain to be available in 12 months for 10% less? Of course not. His current financing opportunities don’t even enter the equation. I’d recommend ignoring the Time headline. Still, as the bankrate.com article says, “For young buyers . . . with good credit, a down payment and the intention to stay put, the time might just be right.” But there’s still no reason to pay more than you have to.
“personal finance” 
“financial education”
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Good points here. I also read that article and, as a potential first time home buyer who has not saved a large enough down payment yet, thought about Time’s comparison from another perspective. If their assumptions were true, and the mortgage payment were the same a year from now (due to falling prices and rising rates), you would be no worse off waiting the year and saving more money.
True enough Adam. Even if you concede every mathematical assumption in Time’s analysis, you can still come to the opposite conclusion. That’s because there is one implicit assumption built into their analysis:
The person choosing to rent will spend the same amount each month renting as she would have had she bought a home.
But that’s unlikely.
Many people, when renting, do so to be able to save for a down-payment. As such, their monthly rental payment is lower than their mortgage would be. Second–and this is a big one–there’s no additional maintenance and real estate tax expenses from renting.
Time leaves this out of the analysis completely, choosing to focus on the fact that you will be living in place you don’t like as as a renter. That may be true, but in their mythical environment of a known 10% decline, I’ll take the less expensive short-term housing option and buy lower a year from now.