Buying a house is a major financial decision that must be viewed from many perspectives to determine if the timing is right, if the investment is prudent, and if the Buyer is financially capable of fulfilling his potentially long-term obligations. Assuming the Buyer is qualified, the investment decision then hinges upon the condition of the market and whether the property under consideration can easily be resold at a profit in a reasonable period of time.

Buying a house is a lifetime dream, but home equity is also an important long-term consideration in anyone’s personal financial plan. For the average American family, the equity in their home represents nearly thirty-three percent of their personal net worth later in life. That asset value will gain in importance as college educations for children come and go and retirement approaches. The long-term resale value for a home depends on a variety of factors, many specific to the individual property under consideration. The time-honored phrase of “location, location, location” drives home this key point, but there are a set of market factors that affect the investment decision that cannot be overlooked as well. Here is a quick review of these items:

• The Economy: If the economy is healthy, then there will be a considerable supply of buyers willing to buy or trade up in the market. Prices typically will rise under these conditions. One of the problems contributing to today’s real estate market sluggishness is that average disposable income has actually declined over the past decade. Home values generally rise in tandem with disposable income. Until this metric improves, demand will continue to be weak and many consumers will not be able to meet their current obligations. However, as the Dollar weakens, foreign investors may abound. For example, the “AUD/USD” and “NZD USD” currency pairs have appreciated nearly 30% over the past five years, such that properties in our market may appear cheap to Australians and New Zealanders;

• Interest Rates: One benefit of a weak economy is the prevalence of low interest rates. Mortgages at reasonable rates can be found for the creditworthy, whether fixed or adjusting. The timing is now for this factor, but as the economy improves, inflation may become an issue. Our central bank will then consider raising rates to quell price appreciation. The impact of higher rates is typically to reduce home values or lower the value of home that a buyer can afford;

• Government Policy: Congress is presently reviewing the budget and determining how to deal with our nation’s massive deficit and public debt. There remain many issues dealing with mortgage-backed securities and assets held on the balance sheets of banks, but consideration is also being given to modifying the interest rate deduction for home mortgages. Changing these rules would make owning a home that much tougher and force many more homes onto the open market for resale;

• Inventory of Homes for Sale: There are close to nine months of homes to be sold on the real estate market today. The “shadow inventory”, those homes that are in or should be in foreclosure by banks, represents another year of homes that could flood the market and cause another severe reduction in present home values. New home starts are the lowest in history, due to lack of demand and construction financing.

Another real estate “selling” season is quickly approaching, and agents and sellers are combining their efforts to achieve success. Buyers should remain cautious. It is still a Buyer’s market, regardless of the urgency that an agent may suggest.

This entry was posted on Friday, February 25th, 2011 at 5:52 am and is filed under Real Estate. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.