Should I Buy a House Quickly?

[Malerin]

The Mrs. and I want to upgrade. I think we need to do it ASAP, while rates are extraordinarly low. She thinks we have time to wait. What say the econ people here? Buy now or is there still some time before rates start creeping up?

[daenku32]

The Mrs. and I want to upgrade. I think we need to do it ASAP, while rates are extraordinarly low. She thinks we have time to wait. What say the econ people here? Buy now or is there still some time before rates start creeping up?

I'm not an econ person and you absolutely should not take my advice, but I'd say go for it.

[The Central Scrutinizer]

The Mrs. and I want to upgrade. I think we need to do it ASAP, while rates are extraordinarly low. She thinks we have time to wait. What say the econ people here? Buy now or is there still some time before rates start creeping up?

You should buy a house when it is best for you. Unless you can predict what rates will be on some particular day in the future (and as far as I know, no one can).

[Puppycow]

The Mrs. and I want to upgrade. I think we need to do it ASAP, while rates are extraordinarly low. She thinks we have time to wait. What say the econ people here? Buy now or is there still some time before rates start creeping up?

There's no reason to rush IMHO. Are you already looking at homes?
There is also no reason to delay starting to look at actual homes if you plan to get one. Looking is not buying, and you can start to get a feel for your options and look at various neighborhoods.

When I bought my house I was worried about rates going up. Five years laters rates are still at rock bottom and I refinanced to a lower rate (this is Japan, but I think the basic idea is the same). The Fed has said it will keep rates low for some time.

[bluesjnr]

You'll enjoy at least 6 to 12 months at current levels, then you can expect to see interest rates increase. It shouldn't be an issue if you do your sums correctly and buy within an affordable margin; otherwise it's a go around on the toxic debt issue as people over extend as they try to cash in.

[Malerin]

There's no reason to rush IMHO. Are you already looking at homes?
There is also no reason to delay starting to look at actual homes if you plan to get one. Looking is not buying, and you can start to get a feel for your options and look at various neighborhoods.

When I bought my house I was worried about rates going up. Five years laters rates are still at rock bottom and I refinanced to a lower rate (this is Japan, but I think the basic idea is the same). The Fed has said it will keep rates low for some time.

We have our eye on a few. If I could wait 2 years, I could pick from a much larger geogrpahical area, but I'm locked in to a smaller area because I don't want my 3rd grade son switching schools.

I just get this panicky feeling that time is running out.

[kevinquinnyo]

Not so much an economic opinion, but a philosophical one.

You can't control what the interest rate will be when the time for you to buy the perfect house comes along.

You should to try control and manipulate all the variables that are actually in your control, and don't stress over the ones that aren't. If you do, you're setting yourself up for failure.

Set a time period and location(s) that makes the most sense for you, and stick with that. That's something you do have control over. If the interest rates are a bit higher then, then so be it. It is what it is.

But at least by then, you've found an ideal house, in an ideal area, which you probably wouldn't, had you focused too much on the "gotta act now!" mentality. And more importantly, you will have the mental assurance that you didn't gamble on a big decision.

And the truth is, there is a very real economic and personal value to you in living in a house that is let's say, 20% more ideal, or the location is 10% better or the timing that is 15% more ideal than a hastily purchased house with a more ideal interest rate. That could very well outweigh the interest savings by itself.

Just a thought, good luck!

[drkitten]

You should buy a house when it is best for you. Unless you can predict what rates will be on some particular day in the future (and as far as I know, no one can).

One thing that you CAN predict, however, is the current existence and planned expiry of a fairly large homebuyer's United States tax credit. $8000 for first time homebuyers, $6500 for repeat home buyers -- but you need to sign a contract by 30 April to qualify. And, of course, be US taxpayers and buy in the United States, &c. &c (waves hands vaguely in the direction of a large law library).

Obviously, you shouldn't let this crowd you into something you wouldn't buy anyway, but given a choice between the same house in April or waiting until May/June, it could be a factor.

[drkitten]

I just get this panicky feeling that time is running out.

That's exactly the attitude you don't want to have. If rates go up a point and it costs you another $100/month but you get the house that you really want in the location you really want, you will be much happier and better off in the long run. Panic is not your friend in this instance.

[Francesca R]

One thing that you CAN predict, however, is the current existence and planned expiry of a fairly large homebuyer's United States tax credit. $8000 for first time homebuyers, $6500 for repeat home buyers -- but you need to sign a contract by 30 April to qualifyProbably should not overstate the potential opportunity for regulatory arbitrage because (i) it is hard to predict exactly what politicians will change next over the coming years (particularly since it will be influenced by home prices itself) and (ii)everyone else can see the discontinuity too--so home prices should experience at least something of a downward step (relative to the counterfactual which might not be very observable) right after that date.

[drkitten]

Probably should not overstate the potential opportunity for regulatory arbitrage

You might want to rephrase that particular comment in English, because it is (i) important and insightful, and (ii) complete jargon.

because (i) it is hard to predict exactly what politicians will change next over the coming years (particularly since it will be influenced by home prices itself) and (ii)everyone else can see the discontinuity too--so home prices should experience at least something of a downward step (relative to the counterfactual which might not be very observable) right after that date.

[Francesca R]

The jargon term would be "Regarb".

It means ability to profit (quickly, without economic risks) due to tax or regulation differences, across regions or, in this case, across dates on which the regulations are already known to change.

Sometimes it works well. In the UK, first class mail stamps say "1st" on them rather than "39p". And you know in advance when they are going to go up to, say, 41p because the Royal Mail (publicly owned) publishes this information. So you could buy a boat load of them the day before the price rise for 39p, then sell them all soon after for 40.5p and make an instant tax-free gain of a few percent. But the costs of co-ordinating this would probably rub that profit out.

With things that have market prices like homes, it would be plausible to expect transaction prices to adjust down by at least some of the tax hit right after it comes in, relative to what they would otherwise have done. In other words--the gain from the tax holiday, or the loss from it ending, are not wholly enjoyed or suffered by the buyer (as is the case with most tax burdens). I think that is what has usually happened when stamp duty has been changed here.

[JoeTheJuggler]

I took advantage of the first drop in house prices to buy my house two years ago. (I've got a very good credit rating but very low income, so previously, the prospect of being a home owner was out of my reach.) I bought mine with a rehab loan (financing based on the value of the house after some improvements)--the house itself was sold "as is" and there were a few big unknowns that all worked out just fine.

Unfortunately, I missed this first-time buyer help, which would've done me a LOT of good. I also just missed the tax credit for some expensive insulation I did. I've got plenty more to do (but no money), so I'm hoping I can get some help under the new program Obama has made vague references to.

At any rate, the end result is that I'm paying quite a bit less monthly for my mortgage (including real estate tax and insurance) than I did for rent. I've got just a bit of equity, but I love my little house (and its history (http://joethejuggler.com/OldFlyer/)) and my neighborhood.

While my story isn't the upgrade you're considering, Malerin, I do think if you're in a position to buy and you can get the down-payment assistance that runs through April, it would be a good idea to do so.

[paiute]

I just get this panicky feeling that time is running out.

This has probably been the default emotion of every homebuyer since they started charging for caves.

[Malerin]

This has probably been the default emotion of every homebuyer since they started charging for caves.

LOL, probably true. Thanks for the responses, everyone. I think it's wise to risk paying a little more for a lot more peace of mind.

And if we hit a patch of hyperinflation, a pox on all your houses. :p

[Lithrael]

Don't let yourself feel rushed. I did, feeling like I had to get in on a low rate 'before they go way up' when it was up to 6% from 4% in like 2004. It never went up, and my house is worth like 30% of what I paid. Bleah.

[pgwenthold]

In addition to the interest rate, there is the price of the house itself. Even if interest rates are the same next year, will housing prices be as low?

[oggiesnr]

If you find a house that says "Buy me" then do so, if not keep looking.

Steve

[popscythe]

I keep reading it Horse.

And thinking, "no."

[kevinquinnyo]

I keep reading it Horse.

And thinking, "no."

I buy horses all the time without even considering the cost. I think I bought 5 or 6 today, can't remember.

[theprestige]

I figure, the answer to the OP's question depends:

1. If you're speculating, then the answer is "yes". This is because you're an expert on the day-to-day volatilities of the housing market (or you think you are, anyway), and you believe you have special information about this market that you can profit from if you take advantage of it in a timely manner. You should buy a house quickly, while there's still time to make the profit you envision before the state of the market changes and the opportunity is lost.

Of course, in that case you should be out buying a house, not here asking our opinion.

2. If you're making a long-term investment, say, for a home to live in for the next several decades, then the answer is "no". In the long run, the few thousand dollars more or less will pale in comparison to the overall amounts of money involved, and the long-term increases in your fortune as you build equity, re-finance the original loan, etc. Buy a house when you're good and ready, preferably after several months shopping around your local area and getting a good idea of what you really want.

[jasonpatterson]

I don't know how much you have saved up at the moment, but if you decide to wait a while, start paying a "mortgage" right now. Every month/paycheck/whatever, put aside several hundred dollars into a safe, short term investment (a CD, let's say.) When you go to purchase your house in 2 years, you will have saved up a substantial additional downpayment, which will avoid interest and higher mortgage payments in the future. I have no idea where you live, but in the midwest, the wife and I have not had a mortgage on a house since we were in grad school by doing this, and we're not millionaires by any stretch of the imagination. Every penny you earn interest on now is one you're not going to have to pay interest on later, basically.

As far as your actual question goes, your happiness with your house is worth more than any additional money you might pay for it. If you're living there for another decade or two, make sure it's one you want. If that means waiting 2 more years till junior is out of school before you can move to the neighborhood you want, wait 2 more years. Most realtors can put you on a mailing list to receive new listings in certain neighborhoods/price ranges/etc, so you could always talk to someone and see if you could get on their list, then if the dream home does pop up, you'll be aware of it right away.

[Puppycow]

I just get this panicky feeling that time is running out.

Well, I can understand that feeling, but I personally do not see the evidence yet.

OTOH, is there a tax credit that will expire by the end of the year?

[Puppycow]

Don't let yourself feel rushed. I did, feeling like I had to get in on a low rate 'before they go way up' when it was up to 6% from 4% in like 2004. It never went up, and my house is worth like 30% of what I paid. Bleah.

Sorry to hear that. :rub:

[stevea]

Strictly as a financial issue, it's a decent time to invest in a home. Prices are low, interest rates are low, the amount of leverage available is still shockingly high. More important is that there is a strong evidence of impending inflation.

The ideal scenario during inflation is that you are paying some low (below inflation) fixed rate toward ownership of an inflating asset. Also hopefully your sources of income are inflating at the inflation rate at least. Say you take out a $300k mortgage at 5% fixed, based on a $75k salary and pay nothing but interest for 7 years of 10% of inflation. If housing prices and salaries kept up with inflation the house is worth $600k, your salary is $150k, but your mortgage balance (you only paid interest) is still $300k at 5%, you have 50% equity for only paying interest (minus the tax benefit).

I think this is UNrealistic for several reasons. There is a vast glut of housing due to the 1990s/2000s build up and it will be more than a decade to create general housing price pressure. We will likely have inflation, but housing prices won't keep up at the inflation rate due to the excess inventory. Also (my personal guess) is that we are staring at a jobless recovery followed by high inflation. If you feel your source of income is secure then is a net plus toward taking risk, but consider that all those unemployed ppl represent low priced competition for your job. If you are Stephen King or Yo-yo Ma you are not replaceable; OTOH if your employer can find your replacement at a lower price on any street corner, then there is little chance your income will keep up with inflation, at least early-on.

Having said all that, if you have a reasonable safe income stream and understand that the housing market and prices will be weak and selling will be a long costly process then you can still take advantage of the delta between the current low fixed rates and the projected inflation.

This is NOT regarb - the $6.5-8k wealth-transfer to home buyers credit has already had a substantial impact on prices, and there is every probability that when the subsidy ends that prices and the number of home sales will drop correspondingly. If you were the only home-buyer-credit recipient then regarb would apply, but since this is a general credit to nearly all buyers this is already worked into the market price. The credit is a small matter and NOT a reason to act urgently, just avoid the correction in April if you don't buy now.. Ignore this gimick meant to make suckers bite. It makes little difference long term.

Yes, it's a reasonably good time to buy, above average by far, especially if you have a good use for a different living space. It is NOT a free-lunch.

[drkitten]

Strictly as a financial issue, it's a decent time to invest in a home. Prices are low, interest rates are low, the amount of leverage available is still shockingly high. More important is that there is a strong evidence of impending inflation.

Yes, it's showing up everywhere except in current or expected prices (or bond yields). In other words, there is NO evidence of impending inflation.

I.e. this is conspiracy-mongering at its worst. The market considers there to be strong evidence of impending deflation, which is actually even showing up in some of the indices.

[Francesca R]

Things have moved on since a year ago. The break even inflation rate on real return bonds, and the Fed's five year forward index of inflation expectations have "recovered" a fair bit. Where do you get "evidence of impending deflation" from now?

[stevea]

Yes, it's showing up everywhere except in current or expected prices (or bond yields). In other words, there is NO evidence of impending inflation.

I.e. this is conspiracy-mongering at its worst. The market considers there to be strong evidence of impending deflation, which is actually even showing up in some of the indices.

Ok Kitty - if only you would take a reading comprehension class you might be able to participate meaningfully. You are looking it past data and claiming that implies something about "impending" markets. That's just silly. You are driving by looking in the rear view mirror. Your sort of logic implies that the frothiest peak of a market is the best time to buy since the history show a dramatic climb. Your evidence shows there is currently/recently little or no inflation and nothing else.

BUT - go look at that yield curve again. Yes the yield curve is currently "normal" indicating that inflation is expected, but this also embeds the concerns of a US credit rating devaluation. In fact this past week's difference in yields between 2- and 10-year Treasuries reached a record 2.88 percentage points ! That's in inflation expectation deary.

"Conspiracy" ? Who is conspiring about anything in this scenario ? They have wonderful meds to treat paranoia - you might want to look into them. There is no conspiracy.

Things have moved on since a year ago. The break even inflation rate on real return bonds, and the Fed's five year forward index of inflation expectations have "recovered" a fair bit. Where do you get "evidence of impending deflation" from now?

Thanks for a sensible comment Francesca. Yes we have some recent deflation. The increasing weakness in demand over the past year+ is deflationary, tho' not to the extent is was in prior decades due to better inventory control. In recent months some nations other that the US (Vietnam Greece, Dubai, Argentina) have had fiscal problems in and this has caused a short term dollar rally which is deflationary. We might see a few more pops but that sort of pro-dollar activity is mostly past I think.

It's very clear to me that the big investors are on a hair-trigger alert for the first sign of inflation. That is their major fear. They well expect it and are prepared for a forceful market exit if it appears. You see quick sell-off activity whenever there is a hint of inflation news, like last Thursdays PPO numbers.

Here is a nice recent article that covers the high points
http://www.bloomberg.com/apps/news?pid=20601087&sid=aV8CH5iI6Ztw&pos=6
deflation is in check and anyone with any market/fiscal savvy is expecting inflation. Bernanke of course must try to quell these fears - it's part of his job as the cruise director of the Titianic.

“A lot of people are investing in the asset class [TIPS] viewing that with the amount of liquidity that the Fed has provided the market and the devaluation of the dollar that inflation’s inevitable somewhere down the road,” said Todd White, who oversees government debt trading at Minneapolis-based RiverSource Investments, which manages $93 billion of bonds. The breakeven rate could widen to 2.75 percentage points, he said.

Or google-up some youtubes of Jim Rogers, Soros' old partner in recent months for a rather extreme doom&gloom scenario from a serious source.

Perhaps you should pick up the current (Dec21) Barron's and read the analysis on pp M-8. This is one of the more positive articles around recently. They state that Goldman's expect crummy 2010 growth (which delays inflation), and therefore only modest increases in bond yield, making the 2010 expectation "merely bad" for bonds. Eight of 10 ten bond analysts they survey expect a "steeply rising yield curve" over the next year, using their 10yr bond rate estimates as the benchmark.

So yes - the smart money is on an inflationary future - and it's no conspiracy.

The reasons why we should be expect US inflation are fundamental. The quantity theory of money states that a change in he quantity of money directly relates to an increase in prices (inflation), but this expectation relies on the velocity of money remaining constant. In the past several years the quantity of money has increased remarkably and due to the recent crash the velocity is down. Also numerous activities of the US government will force it to create more money. The Social Security overhang, the Medicate shortfalls & overhang,. And of course expensive, expansive new programs that no rational person believes are revenue neutral. Even inflation can't help alleviate US debt much when so many programs (SS, TIPS) are already inflation indexed. All we need is a pick up commerce, and the corresponding increase in money velocity to realize the inflation which is already already baked into this cake.

Here are the Federal Reserve money statistics ....
http://www.federalreserve.gov/releases/h6/Current/
also see
http://www.bea.gov/national/txt/dpga.txt
It shows a 23% M1 growth and almost 13% M2 growth in the past 23 months, a period with 10.1% negative GDP growth. That's at least ~23% unrealized inflation in a two year period and IMO this understates the forward-going problem.

The velocity of money:M1 ratio has dropped from ~10.5 to 8.3 according to Haver Analytics. A 21% drop that accounts for most of the "missing" inflation.

[mhaze]

.....
The velocity of money:M1 ratio has dropped from ~10.5 to 8.3 according to Haver Analytics. A 21% drop that accounts for most of the "missing" inflation.

Yes, and both M3 and payroll both have fell like rocks.

The danger is that the US government will try to "solve this problem" by printing money. They'll try to hide it of course.

[The Central Scrutinizer]

The danger is that the US government will try to "solve this problem" by printing money. They'll try to hide it of course.

I bet they won't be able to slip it past a smart cookie like you.

[mhaze]

The Mrs. and I want to upgrade. I think we need to do it ASAP, while rates are extraordinarly low. She thinks we have time to wait. What say the econ people here? Buy now or is there still some time before rates start creeping up?I'd say 3-6 month window.

[stevea]

Yes, and both M3 and payroll both have fell like rocks.

The danger is that the US government will try to "solve this problem" by printing money. They'll try to hide it of course.

No. The US government stopped publishing M3 figures in early 2006 - so there is no widely accepted M3. Some 3rd party figures show a decline in M3 since mid-2009, while others show modest growth. Clearly the extreme growth rate in M3 in 2008 (~15%) has disappeared and dropped to the 0-2% range (which isn't greatly inflationary). I accept the M3 growth has radically declined, causing M3 to more or less level-off. M3 in absolute terms has not "fallen like a rock".

So yes you can design an argument that the lack of M3 growth explains why we currently have little inflation. The obvious question is - why is M3 growth so low and what would cause it to return. M2 is clearly growing at a good clip, So M3-M2 = money funds, time deposits, and other short term obligations is shrinking at the same rate. There is no market for this short term money. The top MoneyMarket this week offers 0.30% compounded yield. The top GovMM fund offers 0.10%. There is little demand and little profit to risk, so rational people fled this major term of M3 in the past year. If there was any business growth and therefore borrowing demand (IOW of the economy improves) we should expect this term of M3 growth to increase.

The payroll you mention, which did fall like a rock, has no impact on money supply. It does have a negative impact on the velocity of money (deflationary) and it usually associated with a decline in GDP(inflationary).

So I take your comments about M3 dramatic switch to "flatness" as a serious comment, but the evidence still supports the idea that we have inflation baked-in-this-cake. Any budge toward growth will mean inflationary pain. If you want the economy to languish in ~zero growth then you can avoid M3-M2 growth, not acceptable I think.

I'd say 3-6 month window.

I don't disagree, but my crystal ball is hazy. You want to lock-in the current rates and housing market glut low-prices. Maybe 3-6 months, but it's possible (less likely) the market will stagnate for a couple years.

[mhaze]

....I don't disagree, but my crystal ball is hazy. You want to lock-in the current rates and housing market glut low-prices. Maybe 3-6 months, but it's possible (less likely) the market will stagnate for a couple years.

But we don't have housing market glut low prices, in most places. The government is propping prices up. We need a correction in housing. So I think that right now the question is whether you buy at higher than "real" prices, with lower than "real" interest.

That people know things like this, causes a reluctance to buy - they figure things will be cheaper in the future. So M3 is depressed. Stagnation can certainly occur as an intelligent response to irrational government actions.

Irrational is for example, a reluctance to allow the corrections to occur, said corrections being the correction to the problem, not the problem. But these corrections occurring, bring with them several issues for the government side:

1. They have to own up to however many credit derivative instruments based on mortages are still being propped up artificially, some of those fail and others are very devalued, with results on the instituions holding those worthless chips
2. The government has to start paying a realistic rate of interest on money loaned to it
3. The excess of fiscal demands over receipts requires monetizing the debt or printing money
4. Reactions (all bad) by foreign nations holding USD
5. With the total debt teetering on 40% of GDP, that's the thresh hold at which historically, nations have careened into hyperinflation.

[stevea]

Time passes - 10 months laer ...


I don't disagree, but my crystal ball is hazy. You want to lock-in the current rates and housing market glut low-prices. Maybe 3-6 months, but it's possible (less likely) the market will stagnate for a couple years.

I'm feeling kinda genius at the moment. I've already made a killing on inflation fears wrt commodities and (anti)dollar positioning, and then Bernanke got a good public spanking at the 10yr T-bill auction today.

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201010141533dowjonesdjonline000 581&title=bond-reportten-year-treasury-yields-rise-after-auction

http://seekingalpha.com/article/230124-long-end-of-the-yield-curve-keeps-getting-steeper

If you want to live in denial of the inflation potential here your savings will end up as (dr)kitten litter.

[Puppycow]

Time passes - 10 months laer ...



I'm feeling kinda genius at the moment. I've already made a killing on inflation fears wrt commodities and (anti)dollar positioning, and then Bernanke got a good public spanking at the 10yr T-bill auction today.

http://www.nasdaq.com/aspx/stock-market-news-story.aspx?storyid=201010141533dowjonesdjonline000 581&title=bond-reportten-year-treasury-yields-rise-after-auction

http://seekingalpha.com/article/230124-long-end-of-the-yield-curve-keeps-getting-steeper

If you want to live in denial of the inflation potential here your savings will end up as (dr)kitten litter.

That's a spanking? Yields rise by 7 or 8 basis points after a four-week rally? Note that yields on 30-year bonds are still under 4%

[Puppycow]

I'd say 3-6 month window.

How'd that work out? :)

[Jim_MDP]

An odd thread to get bumped (for me).

I did just buy a house quickly. My sister (I live on her property) desperately wants to move and the next door neighbor of her friend in Oregon had to sell (divorce etc.).

I guess soon I'll be making a "Hey, I'm moving" thread.

[drkitten]

I'm feeling kinda genius at the moment. I've already made a killing on inflation fears wrt commodities and (anti)dollar positioning, and then Bernanke got a good public spanking at the 10yr T-bill auction today.

Spanking?

0.07% is a spanking?

People think that inflation for the next ten years will be less than 2.5%, well below its historical average,.... and you're talking "inflation fears"?