Even Though Real Estate is Gloomy, Opportunities Will Present Themselves
The negative news in the real estate market continues. Every week it seems like a new report is out highlighting record drops in home sales, lower home prices, and more difficulties in obtaining a loan. For those who already own a home, or are trying to sell their home, this is obviously a difficult time. I don’t want to dismiss the hardship that this crisis has created, but I am glass is half full kind of guy, so I wanted to highlight some of the positive aspects of what is going on.
Looking Ahead a Few Years
When will the real estate market settle down? That is the million dollar question right now, and there are a lot of different thoughts. And to make things more difficult, some areas of the country will begin to rebound faster than others, so without a crystal ball, the best we can do is guess. That being said, I think it’s fair to say that it will be a while before we see any significant improvement. Whether it’s a year or two, or five years from now, it doesn’t really matter. Trying to pick the absolute bottom is like trying to pick the day the stock market bottoms out. If you’re a little early or little late to the party, you’ll still be fine.
So, if you’re thinking about buying a house in the coming few years, you have a tremendous opportunity in front of you. In many cases, you could buy a home right now at a 25% or more discount from just a year or two ago. As prices continue to fall in coming months and years, you should find even steeper discounts. The good news is that there is no rush in buying. Even if home prices do begin to stabilize earlier than expected, they won’t immediately spike back up, especially with the excess inventory out there. This means that you’ll have a pretty long window of time where you should be able to buy your home without being concerned about skyrocketing prices or strong demand.
Start Getting Your Credit in Order Today
Even if you don’t plan on buying a home for another few years, it is never too early to begin thinking about your credit score and the effect it will have on your ability to secure lending. Banks have learned their lessons (at least I hope so), and that means we’re returning to times where credit is harder to get, and those with poor credit will find it extremely difficult to obtain financing, or may pay a significantly higher interest rate. This makes having a clean credit history more important than ever.
When it comes to improving your credit score, it’s important to have time. This is why it’s a good idea to start planning as early as possible. For one, if you have negative marks on your credit report, the only thing that will remove them is time. In most cases, seven years, or ten if a bankruptcy. So, check your credit report and look for negative marks. How long ago were they? If you have a late payment showing up five years ago and think you’ll be buying a house in about three years, it looks like that would be removed, and improve your score once it’s time to apply for a loan.
Even if you do have more recent dings on your score, the good news is that their importance diminishes over time, so that is still in your favor. Just make sure you don’t make any more late payments! In addition, if you have a few years yet and you currently have very little credit, you have time to open or close lines of credit as needed in order to maximize your score. Remember, length of credit history is also very important, as well as what types of credit you have, and the credit utilization. This gives you time to maximize those aspects of your report as well. Use this time wisely, and don’t wait until just before applying for a loan to begin thinking about your credit score. And don’t forget to check out these tips on how to improve your credit score.
Think About the Down Payment
In the past, it was common to put 20% down on a home. In the 90s, with rapidly increasing home prices and easy access to credit, this became less common, and many people were able to get attractive financing with little or even no money down. Of course, when your home is expected to increase in value by 20% each year, it made sense. As we’ve seen lately, having equity in your home from day one has many advantages, especially when it becomes clear that home values don’t always increase each year. Not only that, but putting 20% down can get you out of paying private mortgage insurance, or PMI. This keeps your monthly payments low, and helps you put more money in your pocket.
That being said, more banks are now requiring money down. There are still plenty of offers out there for zero or low down payment loans, but you’ll need even higher credit scores, and might pay a premium for those loans. Bringing money to the table will help you if you have less than perfect credit, and will help ensure you’re getting the best rate.
This doesn’t mean you have to spend years and years trying to scrape together $50,000 or more, but you have enough time to begin thinking about a down payment and to start saving up now. If you’re looking at a home purchase in the next few years, just saving a couple hundred a month can make a good dent in your down payment over time. Again, time is on your side here, and the sooner you can begin taking advantage, the better off you’ll be.
Don’t Screw This Up
If you don’t own a home and want to buy, or are thinking about upgrading in the coming years, this is a tremendous opportunity. You have just enough time to get your financial house in order so that you will be able to take advantage of the decline in home prices. Use this time wisely, and don’t screw it up. If you wait until the last minute, you’ll miss out on plenty of areas where you could maximize your purchase.
And above all, don’t make the same mistakes people have made in the past. Once the economy begins to recover, the stock market takes off, and home prices begin to rise again, it’s easy to forget about what got us into this mess. Remember, you buy a home for a place to live first and foremost. Find a home that is suitable for your needs, and understand exactly how much home you can truly afford. Don’t borrow too much, and don’t put yourself at further risk by taking on an exotic mortgage. And most of all, don’t go into your home purchase expecting the value to double in five years.
If you plan ahead, stick to the basics, and don’t get greedy, you’ll find yourself in a fantastic position. You’ll have a nice roof over your head, you’ll be able to weather future economic troubles, and since you were able to buy at a significant discount, you might even stand to make some money when you sell in the future. Opportunities to learn from past mistakes and to take advantage of relatively low prices don’t come along that often, so make the most of it.
Image credit: TheTruthAbout
Author: Jeremy Vohwinkle
My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.
You could also mention the new tax credit that targets first-time homebuyers. the credit is %10 of the purchase price of the home, with a max credit of $8,000. The tax credit works like an interest free loan and must be repaid over a 15 year period.
Buying a home during the next few years is not the 'opportunity of a lifetime' or a 'tremendous opportunity'. It will merely be buying a home at a historically 'normal' price, via 'normal' lending standards. It is BUSINESS AS USUAL, like the PAST CENTURY or more. The 'opportunity of a lifetime' was flipping homes from '02-'06 during the bubble with 'free' money. The opportunity of a lifetime (literally, lending practices had NEVER been so lax) HAS PASSED. Its OVER, so get OVER it. Anyone salivating over the 'opportunities' (i.e. housing 'correction') has clearly learned nothing from the past decade. It was an anomaly; you missed it; so calm down and return to planet earth.
You didn't address the interest rate/mortgage question. Because of the credit crisis there will be fewer ARMs approved and more fixed rate loans made.
While the window on housing prices may be open for a long time, the window on great interest rates may be shorter. The Fed will continue to hack away at the rate to try and get things going, but they're likely to be careful about making money too cheap, and at the first signs of recovery interest rates will probably go up.
So I'm thinking the most opportune time to lock in a low rate on a 30-year fixed-rate mortgage will be sometime in late 09 or early 10.
Great advice. it is never a bad time to be prepping, especially in this market. Raleigh might be like Toronto a bit. We weren't too inflated, but we haven't dropped any yet.
Great advice especially for this period. I hear that things might just get a bit worse next year as we try to recover from this recession. Really hectic stuff.
Great article!!! The situation is a bit different here (in Toronto) but housing prices are finally coming down (thank God - housing prices here have been just absurd.) I think the only caution should be for people to remember that they need to consider their own personal financial situation carefully and not just jump in too fast, hoping to get a piece of the action. The best time to buy is when you're financially prepared.
Just remember to make a sound investment, don't jump into something. And you think banks would learn from their mistakes, but there's liable to be some out there that will provide you with financing even if you can't afford it, so be wary.
I believe that this is truly the opportunity of a lifetime to purchase homes, but how many people actually meet all the credentials to receive a loan or mortgage. You have to have a credit score above 700 and also have to have a large amount of money for a down payment
Great post! I think it is especially important to think of your home as a purchase -- and one you make on credit, no less. This can help reign in the tendencies to get more house than you can afford (or need). And you are right: now is a good time to buy. I bought last year, and got a great deal, but every now and again I wish I'd waited...