If you've been waiting for the best time to buy a home, your wait might be over. In fact, taking a number of factors into consideration, buying a home before 2014 could save you a lot of money.
"There are several reasons why now is the time to buy," says Jim Duffy, a mortgage banker with Cole Taylor Mortgage.
Those reasons include everything from rising mortgage interest rates and home prices, to falling affordability indexes and the fear of inflation, he and other sources say.
So we decided to dig a little deeper into what the future holds. Read on to see what we found.
Reason #1: Interest Rates Will Rise
One problem with historically-low mortgage interest rates is that they have nowhere to go but up. And a few months ago, that's exactly what started to happen after a June announcement by Ben Bernanke, the chairman of the Federal Reserve Board.
Bernanke said that he may begin a slow wind down of QE3 (Quantitative Easing, phase 3). This is the Federal Reserve's program of buying mortgage-backed securities and treasuries from banks in order to encourage the banks to lower interest rates, and as a result, stimulate the economy. Immediately after Bernanke's announcement, there was a sharp rise in mortgage interest rates of anywhere from a half to a full percent, says Duffy.
Duffy says Bernanke has backed off that statement a little since he first made it, and interest rates have settled a bit. But Duffy also says the QE3 program must end, and 2014 is the likely timeframe for that.
"And there's absolutely no doubt that rates will rise once [Bernanke] does that. Rates only have one way to go when the Fed stops buying altogether, and that's up," says Duffy.
Wondering what rates may look like once QE3 does end? Duffy predicts they will be somewhere from 5.5 to 6 percent.
Reason #2: Home Prices Are on the Rise
Interest rates aren't the only thing rising. Home prices are too. For instance, according to a July S&P/Case-Shiller 20-City Composite Home Price Index, in May 2013 home values across the U.S. were up by 12.1 percent from May 2012.
Duffy says that rising home prices, along with increasing interest rates, indicates action is needed by homebuyers. He adds that every uptick of 1 percent in interest rates means 10 percent less buying power.
"So if prices rise by 10 percent and rates go up by one percent, that means your buying power decreases by 20 percent," he says. "That's the argument for buying in 2013 and not waiting till 2014."
Here's an example: Let's use the August 8, 2013 weekly rate of 4.40 percent for a 30-year, fixed-rate mortgage according to Freddie Mac.
If you purchased a home for $300,000 at a 4.40 interest rate today, you would have a monthly payment of $1,502. But, if home values increased by 10 percent, that same house would cost $330,000. And if at the same time interest rates went up to 5.40 percent, the monthly payment would be $1,853. $1,853-$1,502/$1,853=0.189. That's a 19 percent increase in your monthly payment!
Reason #3: Homes Are Still Affordable
The Housing Affordability Index is put out by the National Association of Realtors. And according to the association, it's based on three things: the relationship between median home price, median family income, and average mortgage interest rate.
In January, 2013, the index hit a high, with a "composite" number of 210.7. An explanation of the number is somewhat lengthy. But essentially, a value of 100 means that a family earning the median national income makes enough to qualify for a loan on a home whose value is at the national median as well. So, a value of 210 means that a family earning the median national income has 210 percent - or makes more than twice - of the income necessary to qualify for the same home, assuming a 20 percent down payment. That means that homes are very affordable right now.
However, you should know that the affordability index is sliding. In fact, in May - the last figure posted - it was at 172.7. But Duffy says that's still a great number.
"The affordability factor still being near its all-time high is very important, because that's a percentage of income going out toward housing. And it's higher than it may be next year if housing prices and interest rates both continue to go up," he says.
In short, houses may get less affordable the longer you wait.
Reason #4: To Protect Yourself From Inflation
Let's say you could strike a deal to pay today's prices for your milk, eggs, and gasoline for the next 30 years. You'd probably take that deal, right? It's a hedge against inflation, which is the price of goods and services increasing, and as a result, leaving you with less buying power.
In much the same way, a 30-year, fixed-rate mortgage guards your mortgage against inflation, especially when you get it at today's low interest rates, says Duffy.
"If inflation does take hold, then as other things around the household eat up more and more income, it's going to be very helpful to have a fixed payment for your mortgage so you can control expenses, still put money away, and save for retirement," says Duffy.
And while he says QE3 might have been a concern for increasing inflation, it has not been too much of a worry so far. But that could change.
In fact, a May 2013 report by the global futures exchange firm CME Group gave a 75 percent probability that inflation would exceed 2 percent in 2014, and 3 percent in 2015 - meaning that everything will cost a little more in the years to come.
So, locking in your mortgage payment for the next 30 years might look like a very smart move, since your cost to borrow money will stay the same, regardless of inflation. "Essentially, you're insulating your mortgage payment from inflation, and now's the time to do that," says Duffy.
- interest rates
- Ben Bernanke