Pick up a newspaper or watch the nightly news these days and you can’t help but see myriad stories about rising gas prices, slumping home prices, the declining US dollar, the lending crisis and impending recession despite 2008 being an election year in the US.
Just as reporters hyped the growth in real estate prices for years, they now point to the current real estate down market as the worst in decades and would have you think the sky must be falling.
However, counter to the mainstream media reports, this may be the perfect time to buy a home or refinance your home, with home prices as low as they have been in years, homebuilders offering incentives on new homes and interest rates remaining near a historic low!
So, Surf Rate decided to do some research and present this multi-part home financing guide to help average consumers like you make informed decisions on how, why and when to finance a home purchase or re-finance your existing home! Read on to learn the ins and outs of the home financing world, interpret financing speak and know how to get the lowest interest rates possible.
Top Reasons to Finance a Home in 2008
1. Cyclical Nature of Markets
Like all markets, real estate is cyclical, although the cycles are very slow compared to commodities, stocks and many others. Historically, real estate markets move in seven to ten year cycles and are geographically diverse, meaning that one area of the country may decline while another goes up.
Overall, the US market has only seen declines in the last two years or so, with the last widespread decline being in the early to mid 1990s. This indicates a bottom is likely to occur sometime within the next year or two and since it is a slow moving market with many complex indicators, predicting the precise bottom is impossible.
If you plan to live in the same place for at least the next three to five years, then you could be getting a great deal by purchasing a home now while the market is down.
A contrarian investment philosophy too often seems smart when people find themselves looking in the rear view mirror too late to capitalize on opportunity, having listened the pundits and mainstream media telling them to buy when markets are strong and warning of calamity when markets are down. However, any wise investor knows to buy when prices are down and sell when they are up!
2. The Law of Supply and Demand
With housing starts substantially lower than two years ago, the supply of new homes will start to decrease as the cycle continues and it will take a while for homebuilders to ramp production back up again when things improve.
Less supply inevitably leads to increased demand at some point, so housing starts and the poor financial results homebuilders are experiencing currently is yet another real estate buying sign.
3. Interest Rates are Still Low
Despite the mainstream media’s hype about troubled lenders, the Federal Reserve Board has acted significantly in the last year, slashing discount rates in order to make funds available so lenders can continue to lend money to businesses and individuals with strong credit.
If you have good credit, are well employed and have a 20% cash down payment, you can find great rates and loan terms in today’s market.
However, if the money supply continues to tighten, it may be harder to qualify for low interest rates later in the down cycle. And the Fed really doesn’t have a lot more stops to pull in order to keep the economy rolling.
4. Refinance to Lower Your Payments
If you financed your home several years ago with a low interest, adjustable rate mortgage product, you may want to investigate refinancing options, especially if you live in an area which has not been substantially effected by the decline in resale home prices.
While this option is not viable for everyone, it never hurts to shop around for better home loan terms. Remember that in order to make profits, lenders have to make loans. That can mean savings for people lucky enough to have good credit and enough equity in their home to qualify for a better loan!
5. Landlords Likely to Raise Rents
Another result of the current real estate down market is that more people are being forced or deciding to continue renting instead of purchasing homes.
And while this has not yet placed enough pressure on the rental market to spark higher rents, late in the cycle landlords could have enough renters available to raise start increasing the rents!
6. 2008 is an Election Year
Historically, election years are not times of recession. Already, Bush and the current administration have moved to put an economic stimulus package in place and taxpayers should see checks in May.
Once the presidential election is over and especially if the trend is to elect more democrats to office this year, which seems likely 2009 and beyond could see higher taxes to pay for increased government programs.
7. Inflationary Pressure
Gas prices continue to increase with no end in site, as world demand for oil and a troubled political situation in the Mid East continue to drive up prices, causing a trickle down effect that could begin to drive much higher inflation rates across most economic sectors.
If inflation does begin to rise, the replacement cost of homes also goes up. This historically leads to a situation in which resale housing prices do not keep up with replacement costs for a period of time. But eventually, it leads again to higher housing costs and rising home prices, which means that buying now could look like a great decision looking back in a few short years.
8. There’s No Time Like the Present
Finally, everyone considering the purchase of their first home can find reasons to wait. Putting all or most of your savings into a home can be a daunting prospect. But talk to most homeowners and they will tell you that buying their first home was a great financial move in retrospect.
The longer you wait, the more reasons you can find to put the decision off even longer. Sooner or later, you have to make a leap of faith and accept that long term, financing a home is one of the most significant decisions you will ever make.
I can tell you from my own experience that when my wife and I bought our first home at the end of the last major down market in US real estate in 1995, we had some second thoughts at first, having invested all of our savings and forced to pay the high costs of private mortgage insurance  (PMI) because we couldn’t afford twenty percent down.
But within two years, our home had increased enough in value that we were able to refinance and get rid of the PMI and found that our mortgage payment was lower than what we would be paying in rent. After owing that house for only five years, we sold it for twice what we had paid and moved into the new home of our dreams.
While nobody can predict when or how substantially the real estate markets will increase again, based on historical evidence there is little doubt homes will continue to appreciate over the long term!
Read on to learn more about home financing in the next installments of our complete guide to home financing!