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Why Bying Now Can Be a Smart Move

by Alexandra Zega

RISMEDIA, Dec. 17, 2007-Although much of the housing market is in a slump, this is still a good time for most to buy a home.

Even though many economists are predicting further drops in home values in most areas, today is still an excellent time for most of us to buy a home. The direction of area home values won’t make much difference to homeowners who will both buy and sell in the same area, and other important factors very much favor buying a home now.

Most move up buyers buy their next home in the same area. Whether overall home values in that area are going down, up, or holding their own, other homes in the area will be similarly impacted. Current local home values and any future changes in those home values, whether negative or positive, will therefore have the same effect on a home they might buy as they will have on their current home when they sell it. For that reason the direction of housing values in any given area is of small consequence relative to other factors for those homeowners, who should not let declining values get in the way of buying their next home.

If you are a prospective first time buyer in one of the few appreciating markets, buying sooner rather than later certainly makes sense. Similarly, if you live in an area where home values are falling and plan to relocate to another area where prices are rising, that is a good reason to buy and sell (or sell and buy) as soon as you can, before the gap widens further.

Holding off on a home purchase due to current market conditions may make sense in some cases only for a much smaller group - prospective first time buyers who live in an area where further home price declines are likely. The same is true for those living in the relatively few areas where homes are appreciating and who plan to relocate to other parts of the country where home prices are still falling. Unfortunately some homeowners now owe more money on their mortgage than their home is worth because of dropping home values. They may be unable to afford to sell at this time regardless of local market conditions unless they have sufficient savings to make up the difference.

There are several reasons that today is a particularly good time to buy a home for most of us. The selection is as great as it will ever be, mortgage rates are still relatively low by historical standards, and costs of any desired remodeling/upgrades are a lot less because of the downturn in new home construction and the resulting glut of building supplies.

With inventories of homes for sale at all time highs in many places, there’s a much greater chance that you’ll be able to find a home that’s ideally suited for your needs. That’s a very big plus because homeowners spend an average of nearly a decade in their home before they sell it. The shortage of inventory and high home prices that existed up until 2005 forced many buyers to make many compromises on home features at that time. No doubt many of them wish that some of the nicer homes for sale in their neighborhood today had been available at that time. Today’s home buyers will have to make far fewer, if any compromises, and many will be able to pay less for a home that’s much better suited to their needs.

If today’s home buyers decide to make some upgrades and improvements to their next home they can usually do it for substantially less than it would have cost several years ago. The rate of new home construction has dropped precipitously, and prices of many building materials have dropped substantially as a result. Prices for oriented strand board, which is used for exterior wall sheathing, roof sheathing and subfloors, is down 40% from late 2005, according to the National Association of Home Builders. Lumber used for framing floor and roof joints retreated 24%, in cost according to NAHB. Drywall prices are down 35% from late last year, according to United States Gypsum Company.

Construction labor costs are down as well, as many home builders have decided to become remodeling contractors until the market for new homes improves. The remodeling market has also slowed down somewhat. With many home builders recently reinventing themselves as remodeling contractors, price competition in that market is very intense today. Only a few years ago you were lucky if half the contractors returned your call, and a few actually showed up and subsequently gave you a proposal. That has changed dramatically.

“When we remodeled our kitchen and bathrooms several months ago every contractor we called showed up, and their bids were very competitive,” said American Homeowners Foundation President Bruce Hahn. “Many of them were ready to start immediately, and none of them balked when we told them we wanted them to sign a comprehensive contract specifying all of the details of the project,” he added. (Note: Judging from the continuing number of complaints regarding remodeling contractors, the competition has yet to drive incompetent and/or dishonest contractors out of the business.

Lastly, mortgage rates are still competitive by historical standards. Although lenders have become more particular about who they will lend to, and the gap between mortgage interest rates for those with excellent credit and those with marginal credit histories has widened, mortgages with 30 year fixed rates are still affordable for a majority of home buyers. If you are looking down the reset barrel of an adjustable rate mortgage on your current home, you will also be able to resolve that problem and avoid the higher mortgage reset interest rate with a fixed rate loan on your next home.

The bottom line: Trying to employ market timing in real estate entails many of the same risks as attempting market timing in the stock market, as many real estate flippers who flocked to the market in the middle of this decade learned the hard way. Despite all the current doom and gloom in the housing market, it’s still a great time for most of us to buy a home!

Courtesy of the American Homeowners Foundation and the American Homeowners Grassroots Alliance, www.AmericanHomeowners.org

Who's Ready to Buy? The Generational Housing Bubble and You

by Alexandra Zega

RISMEDIA, Jan. 22, 2008-The recent housing price bubble has caused concern, with the post-2000 increase in house prices keeping the younger generation out of the housing market, particularly in California and Hawaii, Nevada, Florida and the east coast states from Maryland north. Yet in context, these increases are merely one facet of a larger transition on the horizon.

What is the generational housing bubble?

The massive Baby Boomer population (78 million) is poised to enter elderly years after four decades of surging through the housing market. The elderly sell many more homes than they buy and in the next decade the relatively smaller younger generation may not absorb all the homes released by the Baby Boomers sell-off.

The younger generation is not only smaller but its purchasing power has been eroded by the rapid increase in house prices in the recent boom. This surplus of potential home sellers is expected to create a prolonged buyers’ market–a sharp reversal from recent decades-and will likely cause prices to soften and decline.

Newly estimated data reported in this article show that roughly 2% of people of all ages younger than 70 sell homes each year, but the selling rate climbs far higher after age 75 [1]. Meanwhile, the percent buying homes peaks at a much younger age, 30 to 34 (3.6%), before declining steadily into older ages.

After three decades of relative stability, the ratio of seniors to working age adults nationwide will increase by a total of 67% in the next two decades (2010 to 2030). After 2010 the leading edge of the 78m strong boomer population will pass age 65 and growth among the elderly population will substantially exceed that of younger adults, an unprecedented social and economic development that is expected to impact every state in the U.S.

How will it affect the states?

There are important differences between the states in the ages at which residents become net home sellers rather than buyers. The six earliest (where sellers dominate before age 60) are New York; Connecticut; New Jersey; Massachusetts; Illinois; Alaska. The latest (who sell on average after the age of 74) are Florida; Arizona; Nevada.

The study forecasts the time when the total number of annual sellers of all ages begins to outnumber the buyers, based on the growing number of seniors relative to younger adults, and applying typical per capita home buying rates at each age in each state.

States where sellers will dominate before 2015: New York; Connecticut; Massachusetts; Pennsylvania; West Virginia; North Dakota; Hawaii

States where sellers become surplus between 2016 - 2020: New Jersey; Rhode Island; Ohio; Iowa; Nebraska; Louisiana

A further 16 states, led by California and Illinois, develop a surplus of sellers in the 2020s .

Finally, another 21 states reach a position of surplus sellers after 2030 - including most of the Southern and Western states.

Consequences for the housing market

The market shift could begin as early as 2010, as the leading edge of the baby boom generation moves past the age of 65. As the number of sellers in the market begins to outnumber the buyers, it’s likely to lead to a drop in the housing market. It could mean:

- A collapse in home equity - for half the families in America, home equity amounts to more than half their net worth (this is especially important for the working class and most of the middle class)
- Young adults could get a bargain if they can wait long enough for prices to bottom out - but by waiting for the best price they could exacerbate the problem
- Many communities could acquire an excess of vacant and unsold properties, or they could be converted to rental units pending sale
- Property values will be assessed downward and this will diminish tax revenues available for municipal services

Planning for change

The coming generational transition in the housing market will upset the historic balance of buyers and sellers and demands action from state and local governments to reduce the impacts. They can:

- Monitor new construction and unsold inventory to prevent overbuilding
- Plan services and community designs to retain aging residents as long as possible, slowing their departure from the broader community
- Plan services to attract young households, such as better day care and schools, and more appealing amenities
- Attract new immigrants, who already account for 40% of US growth in homeownership this decade
- Invest in the economic capacity of youth, through higher education and job training - young adults with college degrees are more likely than those with high school degrees to become home owners, and they pay an average 64% higher price when better educated.

The impact of the aging boomer population will effect, not only housing prices, but transportation, land use and community development. It demands a response from urban planners and local officials that acknowledges the need to transform urban environments, and soon. Because this is a nationwide problem affecting a broad swath of the citizenry and with potential negative effects on the U.S. economy, the federal government should also assist in these solutions.

Aging and home ownership trends

A widely reported study by Mankiw and Weil (1989) predicted a 47% decline in house prices during the 1990s, based largely on their modeling of declining demand as baby boomers aged - an expectation that home investments would peak and decline after age 45. However, instead baby boomer demand for housing has grown into their 50s and house prices have doubled.

It has since proven that home ownership rates rise with age, and do not generally peak until after age 65. John Pitkin’s (1990) study of elderly homeownership was especially notable for showing how most variation in homeownership among older age cohorts over time is explained by demographic factors and inertia from prior decades, while current economic factors add small but significant effects at the margin.

Housing price changes and home ownership

In recent years, abnormally low mortgage rates have helped to inflate housing prices. This has encouraged even more home buying. In what might seem a paradox, when market fundamentals drive housing prices up, word of mouth and the fear that rising prices will make future purchases unaffordable amplify the trend. As a result, the number of buyers in the market increases to include both speculators and young adults accelerating their entry into homeownership.

This short-term housing bubble is now bursting in most of the U.S. Many analysts expect prices to decline through 2009 before beginning recovery. However, the eventual recovery in some states will be prevented by the downturn of the generational bubble that has been newly identified in this study.

Source: Journal of the American Planning Association (JAPA)

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