We tend to make financial plans looking backward, learning the lessons of our most recent costly experiences. That's why individuals don't buy stocks at the market bottom; they're simply too scared. And in a similar scenario, that's probably why people aren't buying homes right now, despite still relatively low home prices and historically low finance rates.
It's time to take a step back, and take another look at the housing market. Of course, the decision to buy is a complex one, often depending on your own job situation and your current credit rating, as well as having enough savings for a down payment. But you can work your way through those issues -- if you believe in the benefits.
It's time to reassess the housing market, and the opportunities in front of us.
The first signal that should catch your eye is the fact that the rental market has tightened considerably, pushing rents higher. Fewer apartment buildings have been constructed in recent years, and as the economy recovers even condo owners who were caught in the crunch are demanding higher rents. In San Francisco, rental rates rose 14.8 percent in the last 12 months. And even smaller markets like South Bend, Ind., saw rents rise 4 percent.
Meanwhile, mortgage rates remain low. At Bankrate.com, the average rate on a 30-year fixed-rate mortgage is 3.89 percent -- and it's lower in some areas of the country. Viewed in historical context, today's rates are a terrific deal. Back in 1981, when people feared inflation, mortgage rates neared 16 percent!
Many potential buyers are intimidated by the widely publicized 20 percent down payment requirement. They don't realize that there are many federal programs designed to help first-time homebuyers and even those who have lost their homes to foreclosure.
For example, Freddie Mac and Fannie Mae have loans available to first time buyers with as little as 3 percent down payment, although they do require monthly private mortgage insurance (PMI) payments. The FHA has similar programs that require 3.5 percent down, and payment of mortgage insurance. (Credit scores for these programs must be at least 660.) And for veterans, the VA even has loans available requiring no down payment for qualifying military members and veterans.
Don't be worried about entering the home-buying market now just because prices have risen recently. If you buy now, five years into the real estate recovery, you're not getting the cheapest price on that home you want. However, you're certainly not overpaying. Home prices rose 8 percent in 2012, 11 percent in 2013, and 5 percent in 2014. But that's off previous depressed levels. It's not too late to get a good deal, as the economic recovery remains below par.
The time to get into the market is when there is little competition pushing prices higher. That time is coming to an end. The most recent sales figures for existing homes rose more than 6 percent in March, to a rate of over 5 million homes a year. And inventories of homes on the market are low at 4.6 months' supply. But builders recently reported disappointing sales of new homes, which account for about 7 percent of the housing market. New home sales slumped 11 percent in March from a seven-year high earlier this year. That's where buyers who act now might get some good deals from builders.
Why wait? What's the worst that could happen if you buy a home now? You've already seen it -- believe me. The 2008 mortgage crisis wiped out $8 billion of home equity for Americans. It will be generations, if ever, before the banking system lets mortgages get that far out of hand again. Far more likely is the possibility that home prices will steadily climb as Americans get back to work and lead the global economy out of stagnation.
So don't be blinded to the future by your past experiences. The American population will continue to grow, creating more demand for housing for families of all types. Don't view your home as a trading vehicle or a one-way-up investment. Instead, look at the home ownership benefits that are mostly forgotten by today's potential homebuyers -- the chance to build equity (instead of throwing rent down the drain) and the opportunity to customize your own environment.
That's what has always motivated Americans to own their own home. And it isn't going to change in the long run. That's the Savage Truth.
(Terry Savage is a Registered Investment Advisor, blogger and the author of four best-selling books, including "The Savage Truth on Money." Terry responds to question on her blog at TerrySavage.com.)
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