Bad Housing News: Why Homebuyers Aren't Buying
Why aren't homebuyers buying? Maybe they've heard the recent spate of bad housing news:
-- Home prices fell again, and housing experts are predicting an official "double dip" price decline.
-- We've lost nearly a decade of value, as home prices have slipped back to where they were around 2001-02.
-- The number of people applying for purchase mortgages (rather than refinance mortgages) has fallen all the way to levels last seen around 1997-98.
-- Some 61 percent of home sales are distressed, meaning that they are short sales or foreclosures. (No wonder housing prices are falling.)
-- Mortgage lenders want homebuyers to put down more in cash, and
-- The number of new homes sold is at a record low, at least since records were kept starting in 1963.
On the other hand, this may be the best time in several decades to buy a home: Housing affordability has skyrocketed, as super-low interest rates combine with much lower housing prices.
But the stories I hear from Realtors suggest that some buyers are looking at the housing price predictions as an indication that they shouldn't make an offer -- or that they should revise downward the offers that are on the table.
It seems that when property prices are falling, interest in buying a house wanes as well. But I wonder if that isn't the wrong way to look at an asset people typically plan to own for at least seven to 10 years. While home prices may be falling now, they are likely to rise or hold steady over that period of time. And those who buy now get to take advantage of near-record affordability and (if they qualify) near-historic low mortgage interest rates.
Is the problem psychological? Is there some sort of mental barrier homebuyers have to get past in order step in? After all, real estate investors aren't having this problem, possibly because they look at the property as an asset, something that's emotionally separate from them.
Perhaps a big part of the problem is that first-time home buyers (who traditionally account for at least half of all home purchases each year) are having trouble qualifying for a mortgage or don't have enough cash on hand to ease a lender's nerves.
Whatever the reason, buyers -- particularly first-time buyers -- seem to be having a tough time making the leap. This has not always been the case. When home prices were rising in the early 2000s, first-time buyers would jump into the market even if they knew that they were stretching themselves too thin to buy a home. In many cases, they were buying homes that they downright couldn't afford.
But back then, with the lure of increasing values, first-time buyers thought they could benefit financially from increasing home values, flipping the property quickly to lock in some of the cash. Now that home values have come down, first-time buyers have the opposite reaction.
Those holding out for a better deal need to know that timing the market -- any market -- is a difficult thing to do. Given the time frame for holding onto a home that many experts recommend -- seven to 10 years (or longer) -- first time buyers may want to look at the property they are buying as a long-term place to live rather than as a real estate investment. If a long term purchase makes economic sense now and would continue to make sense for five to 10 years, that buying may be a good decision.
Let's hope that as unemployment falls and consumer sentiment rises, homebuyers will return. Until that happens, you can't really call it a recovery -- not when it feels exactly like a recession.
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