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2009-04-17 17:48:58

How To Buy The Best Home For The Money

 

In 2008, 41 percent of homebuyers were first-timers, an amazing figure considering that mortgage money tightened, housing prices fell, and the recession was in full swing.

What these buyers responded to was improved affordability:
 
  1. FHA loans require only three and a half percent down for qualifying buyers.
  2. Other loans, including Veteran Administration and HUD home improvement loans require nothing down.
  3. Home prices retreated to 2003 levels.
  4. Interest rates hovered at near record lows, averaging below six percent.
  5. Inventories increased to over nine months on hand for existing homes, and nearly one year on hand for new standing construction, providing a wide range of choice. 
If you’re a buyer, it’s going to get even better in 2009.
 
Analysts predict that homebuying will increase in 2009, largely due to the stimulus package which gives first-timers, or those who haven’t owned in a home in the last three years an $8,000 subsidy that doesn’t have to be repaid. This is in addition to state incentives, and already generous federal and local tax breaks for property owners.  
 
Lawrence Yun, chief economist of the National Association of REALTORS® (NAR) forecasts that approximately $900,000 in additional home sales will take place due to the first-time homebuyer incentive. The incentive expires by December 2009, giving homebuyers only eight months remaining to act.
 
That means that competition for the most desirable homes will increase.
 
To buy the best possible home in today’s market, buyers should consider three major points: 
  • Affordability
  • Vantage point
  • Long-term investment 
Affordability
 
Lenders today are not looking simply at how much home a buyer can afford, but at how well the buyer can manage risk.
 
Mortgage money is available, but only for those who buy within their budgets. Lenders are looking at incomes VS mortgage payments, and are approving those who devote between 28 percent to no higher than 31 percent of their gross monthly incomes to their house payments.
 
To calculate your affordability, include PITI, otherwise known as principal, interest, property taxes and homeowner’s insurance.
 
Most households have considerable debt – student loans, car payments, and credit cards. Lenders will also look at your revolving debt obligations – those payments which are required to be met monthly. That figure should be no higher than an additional eight percent, giving you a total income-to-debt ratio of no higher than 36 percent to 38 percent.
 
While lenders suggest counting all gross income, from tips, to bonuses, to alimony and child support payments, this is one area where reserving a little for emergencies might be wise.
 
Most homeowners remodel at least one room within a year of moving in. There are furnishings, appliances and more to buy, as well.
 
Things happen, both good and bad. What if your employer doesn’t give you a bonus this year? Or you lose your job? What if you and your spouse decide to start a family? Go back to school for a post-graduate degree?
 
You might regret including last year’s bonus in your income statement.
 
Vantage point
 
Homebuyers today can afford much more house for the money than three years ago. The NAR’s Housing Affordability Index which tracks the relationship between home prices, mortgage interest rates and family income is the most favorable since the index began in 1970.

You can buy a better home for the money

As of January, a median-income family, earning $59,800, can afford a home costing $283,000 with a 20 percent downpayment, assuming 25 percent of gross income is devoted to mortgage principal and interest.

Affordability conditions for first-time buyers with the same income and small downpayments are roughly 80 percent of that amount, says the NAR.

But contrast that to a year ago, when the typical family could afford a home costing $263,300.

With $20,000 more in buying power, it’s time to think about vantage point - the neighborhood you want to be in and the size and style home that best fits your needs.

You can buy the lifestyle of your choice

According to the NAR’s 2008 Profile of Home Buyers and Sellers, 62 percent of homebuyers ranked the quality of the neighborhood as paramount in their selection of a home.

Among other considerations were:

Convenience to job(s) – 51%

ffordability of homes – 41%

Convenience to family/friends – 38%

Quality of schools – 27%

Convenience to shopping – 27%

Other considerations were convenience to public transportation, airports, parks and recreation, entertainment venues, health facilities and the availability of large lots, acreage and environmentally-friendly features. Thank about what matters most to you and your family.

Personal preferences

This is the time to buy the home of your dreams. Think about how you and your family spend time. Imagine a typical day in your life, and how you plan to spend weekends. What kind of storage, workspace and amenities do you want for your activities? How far is your commute?

Make a list of your must-haves, to narrow your search with your REALTOR®, but don’t be surprised if the home you buy has its own attractions and doesn’t match your list. That’s where compromise comes in. For example, 17 percent of homebuyers compromise on square footage to afford the other features they want. 

Long-term investment

Over 40 percent of buyers don’t know how long they’ll occupy their homes, but 33 percent of buyers plan to stay between three and ten years.

That’s wise. Although tax laws allow capital gains exemptions for those who occupy their homes two years or more and then sell them, home prices must also cooperate to provide homeowners with liquidity.

For example, a family purchases a home for $200,000. Closing costs to buy and sell the home are approximately eight percent of the purchase price, or $16,000. In order to sell the home later without incurring a loss, the buyer must net $216,000. At one percent appreciation annually, the buyer can sell and break even in eight years. At two percent appreciation, the buyer will break even in four years.

Housing experiences booms and busts like any other asset. Home prices in 2008 sank over 16 percent, according to the NAR, and that’s given some buyers pause and caused others to buy with longer occupancy in mind.

But since 1968, average annual appreciation of home prices nationally has been 6.9 percent. You read that right.

Typically, home prices beat inflation by one to two percent. Although home prices have declined in the past two years, that’s an anomaly, just as annual home price gains of 10 to 50 percent or more were during the recent boom.

Despite what Wall Street wants you to believe, owning a home isn't the same kind of investment as stocks or bonds. What you get is a use asset that depreciates over time, while it grows in market value. All you have to do is keep the home in good repair to maximize your net gain when you sell.

Uncle Sam knows that owning a home is expensive - that's why you get subsidies. What other investment can you put in 5 percent of the cost of the asset, make payments over 30 years, receive tax relief on mortgage insurance, property taxes and other expenses, and reap all the appreciation and pay no capital gains when you sell after two years?

That’s why it’s important not to worry about short-term losses in home prices. The overall gains from tax deductions to appreciation are in your favor.  Just buy within your means, and you’ll have a wonderful asset you can truly enjoy.

 

Blanche Evans is CEO of Evans Emedia, Inc. and publisher of The Evans Ezine. As an award-winning journalist, Blanche has been named one of the "25 Most Influential People In Real Estate" by REALTOR Magazine, and twice recognized as one of the industry's most "Notables."   

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