Ilyce Glink of CBSMoneyWatch.com wrote a recent article titled “5 New Rules of Real Estate,” In the 20-odd years that she has been writing about real estate, there has never been a better time to buy a home. Why?
Glink listed factors like 30-year fixed-rate mortgages available for less than 5 percent. Recently, the 30-year rate hit 4.6 percent. If you want a 15-year mortgage, you can (for now) still get it for less than 4 percent, she said. These are astounding rates. As Robert Fogel, a Nobel prize-winning economist from the University of Chicago, recently told me, it’s like borrowing for free. That’s how it feels to me, too. When Glink and her husband bought their first home in 1989, their interest rate was 11.75 percent, she said.
At this point, it seems everyone wants the real estate market to get better. Realtors are selling a fraction of the homes they once were, taking a huge hit in income. Builders (at least, those that are still in business) are selling about one-eighth as many homes as they were selling in 2005. Appraisers continue to take some of the blame for the housing crisis, for over-appraising property in the boom years and under-appraising it now. Realtors say that more than 75 percent of the homes sales that fall apart do so because the appraisal comes in so far below the contract price that a deal can’t be worked out. And homeowners are desperate for the housing market to rebound — especially the more than 25 percent who are underwater with their homes — so they can refinance or sell their homes and move on with their lives.
There’s no reason you shouldn’t buy a home now and take advantage of super-low prices, historically low mortgage interest rates, and a significant supply of homes on the market. But to be successful in today’s real estate market, you need to understand that the game has changed. R.I.P. to the big pricing jumps of the past. If you want to buy a house, you have to have enough income to support the mortgage. Now that every borrower has to have a job and some sort of down payment, and the only basic loan types available are 30-year and 15-year fixed-rate mortgages, you won’t be able to leverage up with your mortgage, and housing prices should remain far more steady. In short — buy now, but don’t expect a huge pop in home prices. It isn’t going to happen.
Most home buyers don’t have enough cash in their pocket to purchase a home without a mortgage. But, lenders are extremely risk-averse at the moment — so they don’t want to approve a mortgage application unless you have an extremely good FICO score (preferably 700 or higher, and at least 760 to get the best rates); you have plenty of cash in the bank (for your down payment, closing costs and a healthy cash reserve); you don’t have anything weird or amiss in your financial data. Which is to say: They only want you if you don’t really need them. You’ll also need to make sure the property appraises at or above the contracted price and the neighborhood is steady (without too many foreclosures).
Sure, there are amazing short sales and foreclosures out there. To find them, you’ll have to hire a great Realtor who really knows what he or she is doing and can help you navigate a tricky and frustrating negotiation cycle. Short sales and foreclosures are often damaged properties that will require sometimes tens of thousands of dollars (or more) in deferred maintenance, rebuilding or renovating. Your Realtor can help you determine the condition with inspection options that you may not be aware of. Instead, you might want to consider property where the seller has equity and needs to sell, but is confronted with a neighborhood full of foreclosures. The seller will have to price the home to compete with foreclosures. You may find a property that’s in better shape and will, in all likelihood, require a lot less maintenance, renovation and upkeep.
Somewhere along the way, ordinary civilians got the idea that there were massive profits to be made in real estate, if only they could flip the properties fast enough. The problem with that strategy became apparent when the real estate market crashed. But now is an amazing time to buy investment property. Purchase a foreclosure or two (or up to 10, if you can find the financing), and focus on how much income you can get each month. Whether you’re buying as an investor or plan to live in the property, you’ll need a 7- to 10-year plan in order to make sure you won’t lose money after factoring in the costs of sale. So come up with a long-term plan that will let you rake in money ... while the rest of the real estate market catches up.
If you need some consultation about your real estate plans, buying, selling or investing, always talk to a local Realtor who can help you understand today’s market in your location.