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.
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