Where is the housing market going? - Virginia Beach Neighborhoods

Everybody wants to know whether they should buy a home now or wait until prices drop further. The answer depends, of course, on whether or not prices will continue to drop and by how much. Since no one knows this answer, it becomes a judgment call.

I think we will look back on today as a good time to buy a home.

You have to live somewhere – Renting vs. Buying

In the $300,000 to $500,000 range, you will probably break even in the short term when it comes to renting vs. buying.

Owning a home has significant tax benefits. In the first years of paying off a mortgage, about 2/3 of each month’s payment goes towards interest. This interest is tax deductible which effectively reduces your monthly payment. While it may cost a few hundred dollars more per month to own, this is offset by a reduction in income tax.

On a $400,000 mortgage with a conventional 30 year loan, expect to pay off about 9% of the loan in five years ($35,000), or 20% in ten years ($80,000). Since it cost the typical homeowner about 8% to sell a home, five years is a good breakeven point assuming no appreciation.

But you should take into account appreciation.

Over the long haul, home prices and rent will keep pace with inflation. If it is comfortable for the average home buyer to spend 30% of his yearly income for housing, it is reasonable to expect that in 20 years the same will be true or close to it. But incomes rise over time with inflation. And so do home prices. What a strange world it would be if minimum wage didn’t rise or if Congress didn’t give a pay raise to the military for 20 years. Inflation has historically increased on average 2-3% per year. So, you can expect your $400,000 home to be worth $442,000 in 5 years at 2% inflation and $463,000 at 3% inflation.

If you bought a $400,000 home five years ago, it is very unlikely it is worth $450,000 today. It is probably worth about what you paid for it. But that is because the housing market has had an unprecedented national decline during this time period. Perhaps you think that decline will continue for the next five years. But I don’t. At the top of every peak most people see sunlight and at the bottom of every trough most people see darkness. Today, most people see darkness. This should tell us something.

There are many prospective buyers today that are sitting on the sidelines. Some can’t afford to move because they would have to bring cash to the closing table. Time will change that.  Some are victims of a very tight lending environment. Again, time will change that. Many people are choosing to rent today because they can’t sell their current homes. Yet again, time will change that. Remember that in five years, everyone with a conventional loan will pay off at least 9% of their mortgage. Who couldn’t use an extra $35,000 to bring to closing?

So, in five years the housing environment will be much different. There will be far fewer foreclosures and short sales. Borrowing money will likely be easier. America will have paid off at least 9% more of its mortgage dept. And the economy will likely be better. God help us all if it is not, because then we’ll have bigger things to worry about than the housing market.

Add all this up, and you can see why I am optimistic.