Buyers: Price vs Cost

Buyers have questions.  The key one today is:  "Is it the right time to buy?  Aren't homes getting cheaper by the day?"

                            

                                                                   by Kenneth Fisk

This is the question of the day.   Just today in about 15 different news cast and mortgage company blogs/newsletters.   This AP article is a sample:

LOS ANGELES -- Home prices were falling across most of America's largest cities in November, and average prices in eight major markets hit their lowest point since the housing bust.

The Standard & Poor's/Case-Shiller 20-city home price index released this week fell 1 percent in November from October. All but one city, San Diego, recorded monthly price declines. San Diego prices rose 0.1 percent.

Prices in eight cities sank to their lowest levels since prices peaked in 2006 and 2007: Atlanta, Charlotte, N.C., Las Vegas, Miami, Portland, Ore., Seattle, Tampa, Fla., and Detroit, which saw the largest drop at 2.7 percent from the previous month.

As of November, average home prices in Las Vegas have fallen 57.2 percent from their peak in August 2006 and are back to where they were in late 1999.

Millions of foreclosures are forcing prices down, and many people are holding off making purchases because they fear the market hasn't hit bottom yet.

"With these numbers, more analysts will be calling for a double-dip in home prices," said David Blitzer, chairman of S&P's Index Committee.

As a buyer, the focus needs to be on cost of home ownership.  Price is the amount one pays for an item while cost is value of an item versus quality and time.  For example, purchase a pair of jeans at discount for $10 and a well constructed pair of jeans for $45 at the same or different store.  The price is $35 cheaper but the cost could be much higher via shrinkage, deterioration, fading or fit.   Any of these items can result in subsequent purchases which in the long run equals a higher expense.

So it is with Buying a home.

If a home priced today at $200,000 at  4.5 % interest were to be reduced to $185,000 within 2 months would it be a better deal?   If the world stood still, perhaps.  But interest rates are moving up!  And there is a cost to indecision.

If the interest rate goes to 5.5%, the increase in payment though price is lower is $37 more per month or $13,300 over 30 years.   It could be much worse in two months if either price doesn't decrease and/or rates are higher.

Add the cost of delay if rent is $800 per month and the buyer is in a 25% tax bracket. The delay will cost the buyer:

                                        $1600 additional rent                                             + $  500 loss tax credit

                    Total            $2100                       

Add the changes in Mortgage guidelines.   If any of the banks move to the higher down payments(30%) or higher Private Mortgage Insurance(PMI) rates that are being discussed, a buyer will have to come up with more money for his down payment and possible higher payment via PMI.

So the Buyer must ask themselves:  Am I really worried about the PRICE or the Cost of my new home