Hi Wooley,
I co-own a mortgage bank and real estate firm in Irvine, California. While no one has a crystal ball, I'd like to make a couple dissenting arguments to purchasing right now.
The Federal Reserve set aside 1.25 trillion dollars several months ago to purchase mortgage backed securities in the open market. This was done in order to drive down interest rates and has been largely successful. So far $721 billion has been spent. At the current purchasing speeds these funds are projected to run out at the end of December. This creates a colossal uncertainty: what will happen to rates in December when the Fed stops buying mortgages?
The opinions vary wildly. Some analysts state the market has already priced in the Fed's exit from the mortgage backed securities purchase program. Others believe rates have a potential to skyrocket. If rates do skyrocket, you can rest assured that home prices will continue to fall as the purchasing power of potential buyers drops substantially.
Of course, there is always the potential that the Fed will add funds to the program (this already occurred once before, as it was originally funded with $500 billion). The Fed also engaged in buying 10 year treasuries in order to bring the yields down and help lower mortgage rates. As of today, the Fed announced they will not be adding funds to this program and that it will end in October. I believe a good indicator of what will happen with mortgage rates will be to watch the 10 year treasury yield at the end of October. If it jumps up, then that is likely what will happen to mortgage rates at the end of December/January.
It's a tough call, and like I said no one has a magic ball! I do know there is a HUGE shadow inventory of foreclosed properties that the banks are just sitting on (so as not to flood the market). Couple that with the moratorium that California placed on foreclosures, and it doesn't become much of a stretch to see a further decline in home values when the additional homes hit the market.
My personal opinion is to purchase once you've seen 2-3 consecutive quarters of home prices increasing. Why try to catch a falling sword? At worst you'll miss out on 2-5% appreciation. On the flip side, if you bought too early you could lose 10-30% of value. The potential flaw in this strategy is that if values don't drop much further but rates skyrocket, the total cost of ownership will be more expensive long term.
For example:
Suppose you can purchase a property for $500,000 right now with a $400,000 loan at 4.875%. The payment would be $2115.61. In 30 years, you would have paid a total of $761,619 to own the home. However, if you waited and values dropped 10% in 1 year you could buy the house for $450,000 and only need a $350,000 loan (with the same downpayment). But, the rate is now 6.5% with a $2212.23 payment resulting in a total cost of $796,402 to own in 30 years. In this scenario it would have made more sense to buy when values were higher!
I could probably go on indefinitely regarding all these scenarios and the host of variables that could be taken into consideration (mortgage interest tax deduction, etc). At the end of the day, if you have the income and downpayment to comfortably afford the property and plan on keeping it long term (10 years +), then it's a pretty close call and either decision you make couldn't be frowned upon.
Good luck to you!
