Are you prepared to own a home?

When most of us got out of school (I am a baby boomer), the thought process was: get a job, get married, get a house, start a family. It all seemed pretty easy.

A lot has changed over the last ten years. Young people finishing their education have been faced with one of the hardest markets in which to find employment (having a daughter just graduated and looking, I know). With limited job prospects, more and more decide to live with roommates and delay marriage longer than their predecessors. Buying a house in today’s market can seem daunting, to say the least.

As real estate professionals, we need to be able to help young people deal with issues that previous generations perhaps did not face.

Are you prepared to own a house for 5 to 7 years?

In previous generations, the average length of homeownership was 3+/- years. That has changed! With the housing bubble, recession, and declines in real estate values nationally, the likelihood of being able to flip your house for a quick profit in a few years has the odds stacked against it.

Finding a deal on a flip house in any of the major Texas metros is possible, but the chances are slim. Secondly, unless you have been living under a rock we all know the housing bubble is long since gone, and with it the old idea that you could count on a 5% to 20% annual appreciation in your home’s value. Today, that only applies in a few high-demand niche markets. That means if you have to move again in a few years, you’re probably going to pay a higher transaction cost. Between the costs of selling and the possibility of a slower appreciation in the value of your home, you may end up netting less money than planned.

In Texas, we were spared the brunt of the bubble burst by already having one of the lowest appreciation rates during the boom years (according to FHFA). Having slow appreciation to no appreciation was and continues to be a good thing! Tremendous appreciation leads to speculation, and eventually to tremendous depreciation, history teaches us. Slow, steady appreciation is what we have seen and hope to continue.

Now that said, with the lack of inventory in most Texas metros, 2013-14 will be the time Texas realtors and investors will point to as the years when we saw the lack of inventory make the market turn.

Everyone needs to plan for fuel costs

The rapid escalation of gas prices lately has caught a lot of people off guard and put strain on household budgets. When buying, more and more consumers need to determine how much it costs to commute to work from the prospective home. Most view this last months $.50 per gallon surge in gas prices as a budget shock, but the reality is prices could vault higher.

If your 45-minute commute to work at roughly $4 per gallon would become a serious hardship at $6 per gallon or $8 per gallon, then a comparable home price or rent closer to work may make more sense. You are already seeing this trend in Austin and Houston, with rentals and downtown (CBD) apartments charging 2.5 to 3 times city average and near full occupancy in high demand areas.

It is also worth considering your potential new home’s ease of access to mass transportation, convenience, and work centers. Because as long as the US continues to use gas as it its primary transportation fuel, the nation will be vulnerable to oil shock.

Is it harder to qualify?

In a word, yes. It is harder to qualify for a mortgage today than it was at the peak of the boom years – but not necessarily harder than 10 years ago. You do have to have good credit and a job, but don’t believe everything you read in the media.

FHA 3.5% down is still available on mortgages up to $288,750. Sellers can still pick up closing costs on FHA, limiting costs. There is 95% conventional financing available for those buyers whose purchase is over $297,000, as well as 95% conventional financing for condominiums – an unusual offering in today’s national market!

As a consumer, I will tell you that it is no harder than when we bought and qualified for our loan 10+ years ago. Buying a home is more complex than it used to be. But the reasons to buy are still there!

• Personal satisfaction and sense of community- Along with owning a home, comes a sense of security and belonging that cannot be found elsewhere.
• Investment in the future – For many, homeownership represents personal and financial success.
• Stability for you and your family – There is much personal satisfaction in living in a home that you own.
• Tax savings – A home is a valued investment that can have many financial advantages and tax benefits. The interest you pay on a home loan and the real estate taxes you pay on your home are among the few major federal tax deductions.
• Owning a home is the primary way most people build wealth.
• You have to have shelter – In addition to adequate living space, good schools, great location and the potential for quiet enjoyment.

Buyers have to think for the long term, and consider what risks they might have ignored. But the boom is over, and the reasons for buying a house are still sound. Homeownership remains one of the highest goals for many people because of its many benefits.

All this said, we still get the question, “Is now the time to buy?”

Whether nationally or locally, if you look at it scientifically (all the different indices as calculated by the folks at Case-Schiller, Zillow, Trulia, Radar Logic, etc.) or believe the national media and news, based on all the information, housing prices in major markets across the U.S. have quit falling from the high they reached in 2006. If you have been reading this newsletter or following any blogs about Texas real estate, you know that values turned a couple of years ago.

Over the same period, disposable personal income has risen by about 15%, and 30-yr fixed mortgage rates have fallen from 6.5% to 3.5%. Do the math however you want, that adds up to a gigantic decline in the cost of buying a home for the average family. Available measures of housing affordability show that homes have never been so cheap. With lack of inventory in our Texas metros, the chance of housing prices falling is slim.

The Federal Reserve in this analyst’s eye has been successful in stopping the economic decline and reenergizing the economy. A sustained rise in inflation, coupled with a housing shortage (given the extremely low level of new home construction relative to new housing formations over the last five years) could translate into hefty gains for housing prices over the next 5-10 years. Houston, Austin, and the other Texas metros have already begun to see more demand for new homes, new apartments, new office space, compounded with very little development in recent years and more people moving here every year than any other state.

Everyone wants to buy at exactly the right time, but very few can time the bottom exactly. The lion’s share of the downward price action is now water under the bridge. Shadow inventory, short sales, and defaults are less and less a factor. Demand and economic growth have turned positive and appear to be headed that way over the next few years nationally as well as locally.

So where do we stand this spring? The data indicates we’re heading for continued improvement in most Texas markets. That said, there are submarkets in all markets that are still challenged. Get with a real estate professional and chart the last five years and what inventory will becoming available in the next couple of years.

What to expect

• Sellers are optimistic and know the strength of the market. The price of new listings in most channels has been moving higher starting in February 2010 in Austin and Houston, San Antonio about a 1.5 years later, and Dallas this last year.

• Active market inventory is moving lower. Supply matters. New home, office, and retail starts and listings are down. In Houston, Austin, and San Antonio there is less inventory on the ground with values increasing across the board. What strikes us most about the action in the real estate market is that it is the opposite of the action in the gold and commodities market (real estate, gold and precious metals, and commodities are all classic inflation hedges). If inflation is heating up and the Fed has trouble reining it in or doesn’t, a rising inflation tide would provide strong support for all tangible asset prices, especially real estate. Of all the things available to an investor who is worried about inflation, real estate looks like the cheapest inflation hedge out there, here or anyplace else. So…yes, now is the time to buy!