A shaky economy has plenty of potential homebuyers shying away from making the leap into the housing market, even in the Washington metro area where the employment base has created more stability than in the rest of the nation. With housing prices so low and rents rising, it can be difficult to know if waiting is really the right decision.
Scott Paxton, director of the Rental Protection Agency, which sets standards and practices for the rental industry nationwide, believes now is definitely the time to buy that first home if you are planning on staying in D.C. for awhile.
“If you are looking to buy and worried about declining home values, you are looking at it backward,” he said. “If you wait for consumer confidence and improved home values, you may just miss the buying boat.”
Buyers can purchase a lot more house for the dollar, Paxton said, because of declining home values and low interest rates.
“Two years ago, a $600,000 home would cost you the same amount monthly as buying a home for $720,000 in today’s market,” he said. “Interest rates are a bigger indication of buying power than anything else.”
Another side of the coin is that, in some neighborhoods, buyers may be able to snap up a home in the $700,000 range that two years ago would have listed for $1 million.
As good as that news seems for buyers, don’t be overly hasty. It probably is unwise to buy now without a stable job or plans to stay in the area at least five to seven years, said Michele Lerner, local real estate expert and author of “Homebuying: Tough Times, First Time, Any Time” (Capital Books, 2009).
The reasons are twofold: First, buyers want to be able to meet that monthly mortgage payment without any trouble. Second, home values are not rising quickly enough that home sellers can be guaranteed of a good return on their investment in less than five years.
“Take a hard look at your finances,” Lerner advised. Buyers should not spend more than 28 percent to 31 percent of their gross income on a mortgage.
“Start looking around and see what that figure would buy,” Herner said. Be mindful of the cost of home ownership in terms of taxes, maintenance and the need for a down payment. The days of easy 100 percent financing are gone, and even an FHA loan requires a 3.5 percent down payment.
People who do not have the money for a down payment or are not sure they are going to stay in the metro area for very long will find renting still is a better option. Paxton said rents are rising and likely will continue to do so for the next five years, making home ownership attractive, but people who come out at a loss when they sell two years down the road haven’t done themselves any favors.
Rents, like home prices, tend to be lower the farther you are from the District and Metro stations. “In some places, it is much cheaper to rent than to buy,” Lerner said. “In others, it breaks even.”
To help weight the balance, Lerner said buyers should get prequalified for a home loan to see what a mortgage will cost. They may not qualify for the lowest interest rates available if their credit score isn’t in good shape, which may make renting the better deal, at least until they can improve their credit.
“You need to want to buy a home for it to be part of your family and to be part of the community in which you live,” Lerner said. “Choosing to buy is not just a financial decision but an emotional one.”
