First-time home buyers waste time and money waiting for the bottom

33-year old renter Victor De Rossi tells The Associated Press that while he's looking for a home, there's no real sense of urgency: "We're just driving around, just starting the process. If I don't find the right house, we'll just rent another year." He adds that the new $8,000 tax credit for first-time homebuyers won't factor into his decision. But, if someone offer you $8,000 to do something now instead of waiting, how could possibly not factor that into your decision?

Many potential home buyers are still waiting on the sidelines but for first-time home buyers who are ready to buy, it just doesn't make any sense to wait for the market to fall more in most places. Here's why:

  • Right now the median home price is somewhere around $160,000 -- depending on what data you believe. If you wait to buy a home until after the $8,000 non-refundable tax credit expires on December 31, you will need for the price of the home to fall by 5% just to break even.
  • The interest rate on a 30-year fixed rate mortgage is currently around 4.9%. If you wait to buy a $160,000 house with 20% down until rates are back up to 6.25% (approximately where they were a year ago), your monthly payment will just from $679.33 to $788.12 -- an additional annual expense of $1,305 -- meaning that your home will cost you an extra 0.8% of the purchase price every single year that you own it. If you live there for ten years, that's another 8% of the house's value in mortgage payments that you wouldn't have had to make otherwise: plus your monthly principal payments will be lower, so you'll be building less equity. After five years of ownership, you'll have $118,165.19 remaining on your mortgage if you buy now at a 4.9% interest rate. If you take out a $128,000 loan when rates are at 6.25%, you'll have a balance of $120,126.60 after five years -- a difference of $1,961.41 in equity which is 1.2% of the purchase price.
Putting it all together waiting to buy a home until the first-time home buyer tax credit is gone and interest rates are back at 6.25% you will need prices to fall another 14.2% if you stay in the house for ten years -- and that's not even taking into account the rent payments that you're making now, a portion of which could be used to pay off a mortgage. If you take advantage of FHA loan programs where you need a down payment of just 3.5%, these numbers are actually even more dramatic because the mortgage amount is higher.

Add in the fact that most markets have a wide selection of entry-level homes on the market and it's really hard for me to see a good argument for first-time buyers who are ready to buy waiting for prices to fall further -- unless you expect them to fall a lot further.

Here's the fool-proof test that I recommend: Look at the amount you're paying in rent now and then compare it to the cost of ownership (mortgage, taxes, and condo fees if applicable) of a similar property. If you can own for less than you can rent and your job is stable and you have enough in savings for a down payment, it's probably a good time to call a real estate agent.
Read Full Story


NASDAQ 7,336.38 40.33 0.55%
S&P 500 2,810.30 12.27 0.44%
DJIA 26,071.72 53.91 0.21%
NIKKEI 225 23,816.33 8.27 0.03%
HANG SENG 32,393.41 138.52 0.43%
DAX 13,425.73 -8.72 -0.06%
USD (per EUR) 1.23 0.00 0.06%
USD (per CHF) 0.96 0.00 -0.09%
JPY (per USD) 110.68 0.00 0.00%
GBP (per USD) 1.39 0.00 0.11%

Can't get enough business news?

Sign up for Finance Report by AOL and get everything from retailer news to the latest IPOs delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.