why now is a great time to buy
TAblE of conTEnTs
OK. You Win. Stop Listening to Real Estate Agents! . . . . . . . . . . . . . . . . . . . . . . . . . . .1
We Think You Should Listen to Grandpa. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
4 Financial Reasons to Buy Now. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Real Estate: GOLDen Opportunity of This Decade. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Rental Costs Are About to Takeoff. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
For Buyers: The Financial Opportunity of a Lifetime?. . . . . . . . . . . . . . . . . . . . . . . . . .7
If Your Goal Is to Buy Low, Buy Now!.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
What Do Homeowners Say About Homeownership? . . . . . . . . . . . . . . . . . . . . . . . ..10
OK. You Win. Stop Listening to Real Estate Agents!
Buyers often believe that agents are ALWAYS arguing that NOW is the time to buy. For that reason, purchasers
question this advice. We want to report on what some members of the
investment community are saying:
The Wall Street Journal
Jim Woods wrote an article earlier this year for Market Watch, part of the Wall
Street Journal’s digital network. Its title: Why your best investment is a house.
Mr. Woods compared the investment potential of real estate against other asset
classes such as stocks and precious metals. Here was his conclusion.
One reason your best investment right now could be a home has to do with the
relative upside of getting in on an asset class while it’s at the bottom versus
buying into other asset classes that could be near a top. Consider for a moment
the tremendous upside we’ve seen in stocks, precious metals and agricultural
commodities over the past 12 months…
If you’re a long-term investor looking to put money to work, now is not really the
best time to get into any of these three asset classes. However, with home sales
starting to improve, and with prices now possibly forming a bottom, real estate
could well be the asset class that represents the best low-risk buying opportunity out there today…
Mr. Woods went on to talk about the financing portion of the purchase:
Yes, mortgage rates still are near historical lows, but if we see these rates rise, then the cost of a new home could
climb significantly. So, now could really be the best time to pull the trigger on that home purchase — and it could
also be your best investment right now.
Shawn Tully, senior editor at large for Fortune penned an article last week which was titled: Real estate: It’s time to
buy again. In the article, Mr. Tully explained:
Forget stocks. Don’t bet on gold. After four years of plunging home prices, the most attractive asset class in America
Let’s state it simply and forcibly: Housing is back. Two basic factors are laying the foundation for dramatic recovery
in residential real estate. The first is the historic drop in new construction … The second is a steep decline in prices,
on the order of 30% nationwide since 2006, and as much as 55% in the hardest-hit markets. The story of this
downturn has been an astonishing flight from the traditional American approach of buying new houses to an
embrace of renting. But the new affordability will gradually lure Americans back to buying homes. And the return of
the homeowner will start raising prices in many markets this year.
Neither of the two media sources mentioned above has ever been accused of cuddling up to the National
Association of Realtors. However, both have come to the same conclusion. It’s time to buy real estate. Perhaps
we should listen to them.
We Think You Should Listen to Grandpa
There are those currently debating the financial advantages of
owning a home. Some are looking at studies and reporting that
homeownership has never really been a great investment.
One of these people is Jack C. Francis, a former Federal Reserve
economist and professor at Baruch College. He said in a recent
“For generations, parents and grandparents have been telling us
that the way to get ahead was to buy a house and keep making
payments with a fixed interest rate and after 20 or 30 years it
would be way up in value and that was your nest egg in old age.
You could either live in it rent free or sell it and use the proceeds
to rent an apartment.”
The article goes on to explain the rest of Mr. Francis’ comment:
That was good advice until 2006 when home prices collapsed, he
says, and it “may become good advice 10 years from now, but
right now it’s not.”
Mr. Francis bases his conclusions on a study he completed which covered the years 1978 through 2008. In his study
it showed that home prices increased annually by 5.7% and that the S&P 500 increased by 10.8%. Based on this
information, Mr. Francis gives the following advice:
To students who come to him for guidance on whether to buy or rent in the near term, however, Francis has one
word of advice: wait. “I keep telling them this is not the time to buy,” he says.
Let’s take a closer look at this conclusion.
1. We have our own study.
Mr. Francis did a study over a thirty year period which did not include the last 3 years. If we look at the same
categories since January 2000 (covering one of the worst decades in American real estate history), we find that
home values GAINED 42% while the S&P LOST 4.7%. It all depends on which set of data you choose to use.
2. The proper comparison is rent vs. buy.
All of these comparisons claim that putting your money into a different investment vehicle other than real estate
might make sense. What they are not taking into consideration is that the investor will still have a housing expense.
They will still need money for shelter. They cannot just take their money for shelter and buy other assets with it. A
person can’t live in their 401k or their IRA. This leads us to…
(cont. on next page)
3. In most markets today, owning is LESS expensive than renting.
Trulia recently came out with their Rent vs. Buy Index. The report shows:
that it is more affordable to buy than to rent a two-bedroom home in 72 percent of America’s 50 largest cities.
For more on this issue including a 50 city breakdown, click here.
4. Current mortgage opportunities may never be available again
The government has driven mortgage interest rates to all time lows. You can still get a 5% rate and guarantee
it for 30 years. Both of these opportunities may soon disappear. Mortgage rates will increase as the economy
improves and the Fed no longer feels pressure to keep rates low. The 30 year mortgage may soon be a thing of
the past if suggested mortgage reforms come to be. You can lock in your housing expense for 30 years if you
purchase. Renting is like having an adjustable rate loan with no cap that readjusts EVERY year. Which way do
you think a landlord will readjust it?
For more on this, click here.
5. Most Americans see more to homeownership than financial value.
Last week, Fannie Mae released the National Housing Survey. The survey reported:
96% of all homeowners said homeownership has been a positive experience.
84% of Americans still believe that owning a home makes more sense than renting. Even 68% of
renters believe owning makes more sense.
2 in 3 Americans believe that lifestyle benefits of homeownership (65%) are superior to the financial
There are more and more studies being done on the value of homeownership. We think we will trust in what
our parents and grandparents said. Your mortgage payment is money you put into your savings. Your rent
payment goes into the garbage.
4 Financial Reasons to Buy Now
There are currently four great financial reasons why you should not wait before taking the plunge into
Interest Rates Are Increasing
Interest rates have increased almost 3/4 of a point in the
last six months. Most experts expect rates to continue to
increase through the year. Interest rates along with price
determine the overall cost of a home. Even with prices
softening, if interest rates rise, it may be less expensive to
buy now rather than wait.
The 30-Year Mortgage May Disappear
There has been much debate regarding government’s role
in providing support for homeownership. There are several experts who believe If Fannie Mae and Freddie Mac’s
roles are eliminated, or even limited, it may be the end to the 30-year mortgage. This concern is addressed in MSN
Real Estate’s Is it curtains for the 30-year mortgage?
QRM Requirements Could Be Much More Stringent
Here are proposed changes to the requirements for a ‘qualified residential mortgage’:
Certain mortgage types would be eliminated
You would need to put a minimum of 20% down
You would need a minimum 690 FICO score
The ratios of income to both the mortgage payment and overall debt would become much more
conservative (28% and 36%)
There would be loans available to purchasers who don’t qualify under the new rules. However, they will probably
be more expensive to the buyer (both in rate and costs).
Rents Are Expected to Increase
The supply of available rentals is decreasing and the demand is increasing. That will lead to an increase in rental
costs throughout the year. The Wall Street Journal this week quoted a report by Reis, Inc:
“Expect vacancies to continue declining, and rents rising through the rest of 2011 at an even faster pace.”
You may be waiting on the sidelines to see if prices will continue to depreciate before you purchase a home. The
mortgage expense is a major piece in the overall financial picture of homeownership. Make sure you consider it
when timing your decision.
Real Estate: GOLDen Opportunity of This Decade
Everyone wants to comment on the current real estate market.
They want to talk about how now is not the time to buy a
home. Some even argue owning a house has never been a
great investment. Most say it will be a long time before real
estate again begins to appreciate. It all sounds so familiar to
me. It was just a decade ago that many made the same
arguments about gold as an investment.
Gold had dropped from over $400 an ounce to $250 an ounce
(a 40% decline) from February 1996 to August 1999. People ran
from gold as though it was a plague.
Lord William Rees-Mogg, the current Chairman of The Zurich
Club, in 1997 said:
“No investment has been so thoroughly exploded as gold; most
people think that there will no more be another gold boom than
there will be another boom in tulip futures in The Netherlands.”
Two years later in 1999, Don Wolanchuk author of the Wolanchuk Report explained:
“Everybody hates gold. You can’t have a bottom until everybody is out. And everybody is out of the gold sector.”
Everyone knows what happened next. The proclamation of gold’s death was rather premature. Gold rose from
$250 an ounce to over $1,400 an ounce in the next twelve years. I see the same situation with real estate today. I
am not predicting that real estate will see the same levels of appreciation. I do believe however that the market
will rebound strongly.
Those who continued to believe in gold as an investment were rewarded. Those who continue to believe in real
estate as a sound investment will also be rewarded.
Here is what Adam Hamilton wrote in October 2000 in an essay titled Is Gold Dead?
The road for gold investors has been long and parched in the last five years. They have wandered through a
seemingly endless desert, occasionally tempted by what proves to be an illusory mirage. Many have fallen beside
the sun-cracked path, their white bones picked clean by buzzards and gleaming in the sun. Nevertheless, a brave
contrarian core continues to march forward. They have studied history, currency, gold, investments, economics, and
finance. They understand the timeless value of gold, the cyclical nature of the markets, and the vagaries of human
psychology. They realize it is darkest before the dawn, and the journey most difficult right before the homestretch is
reached. Gold is in an INCREDIBLE position, and it will have its day. Nothing goes up in price forever, and nothing
goes down in price forever. Investments are cyclical. Gold is NOT dead, it is simply biding its time, waiting for its
next earth-shattering mega-rally. The spoils that go to the few remaining gold investors when that day inevitably
arrives will be fantastic. The stunning victory will quickly blot out the painful memories of the long struggle…
You could replace the word ‘gold’ with the words ‘real estate’ throughout this essay and it would apply today.
Rental Costs Are About to Takeoff
People often wonder whether it is better to rent or buy in the
current housing market. The answer to that question is: “It all
depends”. There are certain situations where renting short term
probably makes sense. It may make sense if you are retiring to a
different region of the country and are not yet sure where you
want to set down roots for the next 25 years. It may make sense if
you have a one year employment contract which will probably
require a move to another place upon termination.
However, in most other cases, renting right now makes little
sense for several reasons.
Even though prices may still soften, waiting to buy makes
no sense as the cost of owning a home may still increase.
Mortgages may soon become much more expensive than
they are right now.
Owning a home is less expensive than renting a home in
72% of major U.S. cities.
Rental costs are about to explode.
Let’s take a closer look at the last reason. We have often said that the cost of anything is based on supply and
demand. The number of widgets for sale and the number of widget buyers together create the price for
widgets. That will also apply to rents. There is a much larger demand for rentals right now. The economy has
forced many to leave their foreclosed homes and other buyers are afraid to plunge into homeownership.
At the same time, the supply of rentals is rapidly decreasing. Here is a graph from Calculated Risk showing the
apartment vacancy rate in the United States:
When supply is rapidly decreasing and demand is quickly
increasing, prices have only one place to go – and that is UP!
That is exactly where rental prices are headed.
Is now a good time to rent? We think not. You can buy a
home today at a discounted price and get a 30 year
mortgage at a historically low interest rate. You can set your
housing expense for the next thirty years. On the other hand,
rental costs are poised to increase for years to come.
For Buyers: The Financial Opportunity of a Lifetime?
A buyer should be more concerned about the COST of a
home rather than the PRICE. Price obviously is a component
of cost. However, unless you buy all-cash, you must also be
concerned about the financing of the purchase. The price
and the financing together determine the cost of a home.
Today, we want to look at only the financing piece.
An opportunity exists today because of recent government
involvement; an opportunity that may never again be
available in our lifetimes. There has been much discussion
about what role the federal government should have in
supporting homeownership. We will leave our opinions on
the debate for another time. However, we want to alert you
to two advantages available to a purchaser today that may
disappear in the future:
Historically low interest rates
The ability to lock in these rates for thirty years
Because of the financial crisis, the government stepped in and instituted a series of programs which pushed
mortgage interest rates to historic lows. If we look at 30 year mortgage interest rates before and after government
intervention we see the impact these programs had
According to Freddie Mac, from 2006 to the start of the
financial crisis (the fall of 2008), the average rate was
6.29%. Since then, the average rate has been 4.92%.
A purchaser can still get a 30 year-fixed-rate-mortgage
at approximately 5%. However, interest rates this low
may soon disappear. The government has questioned
its role in supporting homeownership. In the
administration’s REFORMING AMERICA’S HOUSING
FINANCE MARKET: A REPORT TO CONGRESS, they are
very strong in voicing their thoughts on this issue:
…our plan also dramatically transforms the role of
government in the housing market. In the past, the
government’s financial and tax policies encouraged housing purchases and real estate investment over other
sectors of our economy, and ultimately left taxpayers responsible for much of the risk incurred by a poorly
supervised housing finance market
(cont. on next page)
Going forward, the government’s primary role should be limited to robust oversight and consumer protection,
targeted assistance for low- and moderate-income homeowners and renters, and carefully designed support for
market stability and crisis response…
Under our plan, private markets … will be the primary source of mortgage credit and bear the burden for losses.
What are the probable results of this decision?
The Royal Bank of Scotland:
“The (government) currently provides 95% of housing finance in the U.S.; any reductions of their involvement in
supporting mortgages mean interest rates will have to go up to induce private lending.”
AnnaMaria Andriotis, writer for SmartMoney:
“In the proposals were changes that will mean more expensive mortgages, with higher fees and, probably, higher
interest rates, larger down payments and, in the near term, fewer lenders to choose from.”
The day of a 5% rate seem to be coming to an end.
Locking in a rate for thirty years
We must also realize that having the ability to lock-in a rate for 30 years may soon be a thing of the past.
There are a growing number of people who think that our mortgage industry should imitate those of other
industrial countries around the world. If we do start limiting government support for the mortgage process, the 30-
year-fixed-rate mortgage may disappear. Other countries, like Canada, only allow a purchaser to lock in a rate for a
five year term. After that, the borrower must renegotiate a new mortgage at current rates. Could that happen
Mark Zandi, Chief Economist of Moody’s Economics.com addressing the administration’s recent report:
“A private system would likely mean the end of the 30-year fixed-rate mortgage as a mainstay of U.S. housing
finance. A privatized U.S. market would come to resemble overseas markets, primarily offering adjustable-rate
mortgages. Based on the experience overseas, the fixed-rate share in the U.S. would decline to an average of
between 10% and 20% of the mortgage market compared with a historical average of closer to 75%.”
The COST of a home is dramatically impacted by the mortgage component. Today, we can get a 5% mortgage and
lock it in at 5% for the next thirty years!! Both of these opportunities may disappear in the future. You should take
this into consideration if you’re looking to purchase a home.
If Your Goal Is to Buy Low, Buy Now!
There is a very famous saying which asserts “Sell High, Buy Low”. It is
obviously great advice no matter what the investment. Below is a graph
showing the cycle of investments. It shows the points of maximum risk
and maximum opportunity when purchasing. We want to sell high (point
of maximum risk) and buy low (point of maximum opportunity).
The challenge is how to determine when we have hit bottom if you are a
purchaser. The only time you can guarantee a bottom is after you pass it.
However, there is more and more evidence that the COST of a home has
in fact hit bottom. Notice we have used the word COST. Unless you are
an all cash buyer, you must take into consideration the expense of
financing a property to determine the true cost
of purchasing the home. Interest rates have
increased over the last quarter; and the rise in
rates has counteracted any fall in prices.
Let’s look at an example:
Let’s say you were going to take out a $200,000
30-year-fixed-rate mortgage in November of
2010. At that time, interest rates were 4.17%
(as per Freddie Mac). Your principal and interest
payment would have come to $974.54.
According to the most recent report from Case
Shiller house prices fell 3.9% in the 4th quarter
of 2010. The most recent report from the
Federal Housing Finance Agency shows a 0.8%
fall in prices. Let’s use the larger percentage
For the sake of keeping the math simple, we will now say you can get the same house with a $192,000 mortgage
(4% discount from November price). Interest rates are now 4.95% (as per Freddie Mac).
Your principle and interest payment would now be $1,024.84.
By waiting to pay less for the PRICE of the house, the COST increased over $50 a month. That adds up to
more than $600 a year and over $18,000 over the life of the loan.
We realize that there are other things to consider (ex. the mortgage tax deduction, etc.). This example is just a
simple way to show that there is a difference between COST and PRICE.
If you want to buy low, buy now. It appears COST has hit its lowest point.
What Do Homeowners Say About Homeownership?
There is no shortage of experts that want to let us know how Americans
feel about owning a home after the collapse of the residential market in
the last five years. They MUST be devastated. They MUST feel trapped like
prisoners in their own homes. They MUST be sorry they ever bought the
house. These assumptions seem logical at times and can occasionally be
supported by anecdotal evidence.
However, we want to go to the only people who truly understand how
homeowners feel - the homeowners themselves. There have been three
major surveys done this year that can shed light on the issue:
The National Housing Survey
This survey conducted by Fannie Mae showed:
96% of all homeowners said homeownership has been a positive experience.
64% consider buying a home as a safe investment. Buying a home was considered safer than buying stocks by
over three times the number of people (64% vs 17%).
The top four reasons to buy:
1. It means having a good place to raise children and provide a good education
2. You have a physical structure where you and your family feel safe
3. It allows you to have more space for your family
4. It gives you control over what you do with your living space (renovations & updates)
American Attitudes About Home Ownership
According to this survey conducted by Harris Interactive for the National Association of Realtors, home owners
believe that home ownership benefits individuals and families and strengthens our communities.
The vast majority of home owners say that owning a home is a smart decision over the long term. Even in today’s
challenging economy, 95% of owners believe that over a period of several years, it makes more sense to own a
Home owners are much more likely to be satisfied with the quality of their family and community life than renters.
While more than half of owners (56%) are “very” or “extremely” satisfied with the overall quality of their family life,
only about one-third (36%) of renters report the same levels of satisfaction. Also, 43% of home owners are “very” or
“extremely” satisfied with their community life, compared with 30% of renters.
An overwhelming majority of home owners are happy with their decision to own a home. A full 93% of owners
surveyed would buy again.
(cont. on next page)
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Pew Research Center Survey
This recent survey titled “Home Sweet Home. Still” delves into homeowners’ current belief in homeownership as a
long term investment:
Homeowners whose home value has fallen only a little are equally enthusiastic about housing as a long-term
investment: 85% say buying a home is the best long-term investment a person can make. Among those who say
their home has maintained it value or increased in value, 88% agree…
Even those who have seen their home values plummet are still committed to the idea that buying a home is a solid,
long-term investment. Among those who say their home has lost a lot of its value, 80% agree that buying a home is
the best long-term investment (36% strongly agree, 44% agree somewhat).
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