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| For years, rapidly rising prices kept many potential first-time home buyers on the sidelines, stuck in the rental market. However, with home values continuing to plummet and interest rates hovering at historic lows, that may be about to change. Yet, while the recession and job uncertainty may cause median home prices to fall even further, general economic uncertainty also prompts the question: Is now a good time to buy a home? Apparently, many people think so, as the housing market is already warming ahead of the usual seasonal uptick of the spring market. According to the National Association of Realtors, February’s existing home sales rose by 5.1% to an annual rate of 4.72 million, up from 4.49 million units in January. That was the largest sales jump since July 2003. However, the Realtors group points out that about 45% of sales nationwide are foreclosures or other distressed properties that are selling for about 20% less than other homes. While fire sale prices may be attracting new home buyers, it’s also worth noting the impact of the $8,000 tax credit for new home buyers included in the Economic Stimulus Package. While proponents of home ownership traditionally stress the positive tax implications such as deductions for mortgage interest and deductions for real estate taxes, this new $8,000 tax credit is available to first-time home buyers who purchase their home on or after January 1, 2009, but before December 1, 2009, and who close on the sale during this period. A first-time home buyer is defined as a buyer who has not owned a principal residence during the three-year period prior to the purchase. All U.S. citizens who file taxes are eligible to participate in the program. The credit does not have to be repaid unless the homeowner sells the home within three years of the purchase. Home buyers who file as single or head-of-household taxpayers can claim the full $8,000 credit if their Modified Adjusted Gross Income (MAGI) is less than $75,000. For married couples filing a joint return, the income limit doubles to $150,000. Single or head-of-household taxpayers who earn between $75,000 and $95,000 are eligible to receive a partial first-time home buyer tax credit, and married couples who earn between $150,000 and $170,000 are also eligible to receive a partial first-time home buyer tax credit. The credit is not available for single taxpayers whose MAGI is greater than $95,000 and married couples whose MAGI exceeds $170,000. Bargain-basement prices and tax credits are attractive carrots to dangle in front of renters, but before you start on the home circuit, it’s wise to consider how the recession may have changed the playing field. Big picture, just as “flipping,” where a buyer would purchase a home, invest a little sweat equity, and sell it at a tidy profit just months later, has gone out of vogue, so too has the home financing market transformed. That is, if you are in the market for a mortgage, you’d better have a secure job and be ready to meet lenders’ much stricter income and credit requirements. You may also have to come up with a higher down payment than was required just a few years ago. In general, in contrast with the housing boom when lenders were all too ready to allow buyers to take risky loans and max out their home equity lines, staying within budget is the mantra of today’s home buyers. If you venture into the real estate market, keep these three pointers in mind: Determine what you can afford. Typically, you should spend no more than 28% of your gross monthly income on mortgage payments, real estate taxes, and home insurance. Online calculators at RealEstateJournal.com or Bankrate.com make these calculations a snap. Once you know your budget, get pre-approved for a loan. Also, be sure to factor in extra cash for moving expenses; closing costs, which typically run between 2% and 3% of the home’s price; and ongoing home maintenance, especially if issues arise in your home inspection. In today’s uncertain economy, you also need to asses your job security. If you lost your job, could you make mortgage payments for six months while you looked for new employment? Know your market. The real estate market is different depending on where you live in the country, so pay close attention to what is happening in your own backyard. Be Patient. If you are looking for a bargain, you might consider buying a short-sale property in which a homeowner’s lender agrees to accept less than is owed on the mortgage. Be aware, however, that these negotiations often progress at a snail’s pace if lenders are considering multiple offers. Most importantly, first-time home buyers don’t generally purchase the house of their dreams. If your finances are solid and you can afford a home you could live in for seven to 10 years, the time may be right to jump into the real estate market. However, although your home is the biggest investment you likely will ever make, your decision involves much more than finances. That is, whatever’s going on in the market is secondary to what’s going on in your own life. The fact is, new jobs, a marriage, or the impending arrival of a child are often deciding factors when it comes to deciding when to purchase your first home. Editor’s Note: David M. Nelson, CFP®, CLU, ChFC, of NelsonCorp Wealth Management, in Clinton and Davenport, IA has over 28 years of experience in providing comprehensive wealth management to clientele consisting of small business owners, pre-retirees, and retirees. He has a weekly radio show, and in 2002 co-authored the book, “Strictly Business.” His second book “Living & Learning” was released in July 2005. Securities offered through LPL Financial, Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult your financial advisor prior to investing. |
Is it Time to Buy |
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