Time to Buy a House?

Jun 4, 2012 by

Last week’s national average 30-year fixed mortgage rate in the U.S. was an incredibly low 3.94%. Given the continuing plunge in the rate on 10-year Treasury notes last week (due mainly to a flight-to-safety effect as the Eurozone’s unraveling proceeds), mortgage rates will likely continue to fall this week and in the near future. This extraordinarily cheap, long-term mortgage money combined with the perception by some that the U.S. housing bubble has deflated translates for many Americans to The Big Question: Should I buy a house now?

Historical Mortgage Rates

No question: Mortgage rates are very, very, very low!

Chart of 30-Year mortgage rates











Housing Prices

To make the case for housing price bubble deflation, here are a couple of graphs from JP’s Real Estate Charts:

Chart of US Housing Prices

Chart of US home prices vs. rents

Inflation-adjusted U.S. house prices have dropped to 2000 levels, and nominal home prices have declined from a peak of nearly $250,000 to about $165,000, or by 34%. Further, a house price index has fallen to its traditional, pre-bubble tracking of an owner-equivalent rent index.

The trends in your area may not mirror the national trend shown in these charts. JP’s Real Estate Charts also has data focused on several major U.S. metropolitan areas.

I Don’t Predict the Future

I learned long ago to leave prognosticating to the quacks on CNBC, politicians, and other snake oil sellers. I tend to think about questions like “Is now the time to buy a house?” by building a framework that helps me make a decision. For example, I think (and you may disagree!):

  • Due to U.S. economic weakness and persistent financial chaos in Europe, a significant, sustained rise in mortgage rates I think is unlikely in the near (one year?) future.
  • The house value trend question is very location dependent, but on a national basis, it seems to me there’s a bigger likelihood over the next little while (six months?) of a continued decline in values than of an increase in values. The foreclosure backlog remains huge, and when bubbles deflate, the violence of the pop typically causes overshoot in the opposite direction of the unsustainable peak, before things get back to “normal.”
  • The chance for a significant, sustained rise in house values in the near term (one year?) feels to me very slim, except perhaps in a few select regions.

What do these reduce to? Sorry, I’m not going to make any definite conclusion and suggest whether now’s the time to buy a house, because I don’t know! How’s that for a cop out?

One Way to Think About the House Buying Timing Question

Because I don’t like to be sued or to look like a fool more often than necessary, I can’t and won’t say whether now is the time to buy a house. However, I will say this: I doubt it’s a bad time to buy a house! And it’s sure a far, far better time to buy a house now than, say, six years ago.

Seriously though, I think sometimes we (or maybe it’s just me) get hung up on a decision like buying a house or selling a stock because we want to do the deal at the optimal, perfect time. If that’s your aim, I’d suggest you’re doomed to disappointment!

Do You Think Now’s the Time to Buy?

What advice would you give a friend or relative on whether now’s the time to buy a house? How do you think about big decisions like this?

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