To buy or to rent? That is the question for many folks who have been trying to time the market for the best deals in real estate. Over the last few years many Realtors have seen what seems to be an increasing number of “fence sitters.” Most of these potential buyers are well qualified and have down payments tucked away, but what is holding them back and is their indecision hurting the housing market?
Let’s take a look at some of the challenges in the housing market today in order to try and understand the hesitancy of many buyers.
Loans. As most people know, historically speaking mortgage rates are lower now then they have been in a very long time. One might think this is reason enough for a potential buyer to run out and find a great house, make an offer and open escrow. But the reality is that getting a loan is extremely difficult. Even buyers with stellar credit, steady long-term jobs and plenty of money stashed away for a down payment are facing difficulties with lenders.
Of course lenders are skeptical of any buyer who applies for a loan, and rightly so. After the ridiculous free-for-all lenders hosted in the last real estate boom – giving out loans to those who really would never qualify under scrutiny – and the resulting market crash that followed, who can blame them? But there is a point where they need to let that money go to those who DO qualify, or else risk more trauma to the housing market, which effects the economy…and the vicious cycle continues.
Lenders need to make it easier for qualified buyers to purchase homes. This will likely coax many buyers off the fence, help keep neighborhood prices stabilized, possibly prevent more foreclosures and benefit the economy.
Inventory. In many areas, like San Diego County, California, inventory levels are still
low. While normal inventory is about a 9 month supply currently we are seeing a 2-3 month supply (although it has risen slightly over the last few months, which is considered the “selling season”). Many would-be buyers are waiting for more to choose from. Obviously in no hurry and still in the driver’s seat in this market, they feel they can wait until the right home lists.
Most buyers are very savvy today, with close to 90% of all home searches self-started online before ever consulting an agent. Buyers know what they want, many already know what neighborhood and even what floor plan they desire, and they will wait for it.
Sellers, often frustrated by neighborhood comparable sold properties, tend to wait to list their homes unless it is necessary or if they can no longer afford their payments. Many buyers decide to just rent and wait it out.
Economy. The state of the national economy obviously plays a big role in the decision to purchase property. Even those with a steady employment history tend to hesitate to make big purchases, instead putting money away in case things get more difficult. One thing the economic downturn has taught many is that no job is safe.
Although the economy is challenging for the majority of Americans in one way or another, home ownership is still seen by many as the American dream. The difference is that many buyers are purchasing smarter – buying sustainable homes they can live in for many years, avoiding “McMansions.” They look for green features, lots that will allow for expansion, neighborhoods that are “walkable.” Square footage is not the buzz word any longer and smaller homes seem to be more desirable.
Still, many see value in paying a mortgage over throwing rent away to a landlord. The difference today is that people are willing to wait for the right time, and this is tied into how they view the economy.
Prices. Homes are priced well compared to the recent market boom. In fact, most neighborhoods have reduced enough so that buyers can afford to live in areas they could not afford just a few years ago. This is a great news for buyers, but not so great for sellers. Again, some sellers choose to wait out the storm (although personally I think they may be waiting a long time and should take the hit and sell now).
Most rent versus buy charts demonstrate that payments are close whether you are renting or buying, so if you have the down payment the prices should allow you to become a home owner. The key is to look at the purchase in terms of a long-term investment. Seen in this way the numbers almost always make more sense for a purchase as opposed to renting.
The Unknown. Fear of the unknown is another factor that plays into the rent/own decision. People in general are afraid of what may happen. They do not trust the fragile economy enough to make mega purchases, which is understandable. But taking risks is not only natural, but is also important to sustain any economy. If a buyer buys smart the risk will more than likely be outweighed by the benefits, especially from a long-term perspective.
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The rent versus purchase decision is highly personal. Buyers must do their homework first in order to buy smart. I suggest sitting down with a financial planner or accountant and an experienced Realtor to determine what is affordable and sustainable, allowing for at least six months of emergency reserves. When you have your magic numbers go out there and see if you can find a home that fits your budget, your plans and your future. If you play it right you will build equity in the long term and be a happy homeowner.
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