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I Do Not Want To Buy A Home Now

Praful Thakkar
03/09/2006

I DO NOT WANT TO BUY A HOME NOW…

Don’t these words sound familiar? Well, it does.

I used the same words few years ago and deferred buying my first home. Looking back, I wish, had I bought the home few years ago…I would have had amassed lots of equity in my home and would have been almost debt-free by now.

Is it not the same for many of you who still pay high rent in multi-storey apartment complexes and lament while cleaning the snow on their car. (Thank God, this winter was not as cruel…).

For those who are on the fence and trying to decide which side of the fence they want to be, here’s a realistic scenario. I have gone through it. I am sure many of you have experienced it – if not for yourself, at least for someone who is close to you.

I call this waiting game an expensive one for the first-time home buyers. And to find out how much expensive it is, lets assume that Mr. X makes about $75,000/year.

Last year, the mortgage rates were close to 4.75% (on some adjustable rate mortgage). With annual income of $75,000, at an interest rate of 4.75%, a term of 30 yrs, and using the other basic information, I estimate one could qualify for a loan of $335,476. With cash down of $ 40,000, your home price could be $375,476: or Mr. X could afford a home that was $375,476. The monthly payments for mortgage are $1,751.

This year, good news is, Mr. X got a raise in salary and is now making $80,000. The savings are extra $5,000 or say, about $45,000 now. The adjustable rate mortgage are not so visible now-a-days in market. The best rates for 30-year conventional loan are about 6.25%. Let’s re-run the numbers and see what will happen.

With annual income of $80,000, at an interest rate of 6.25%, a term of 30 yrs, and using the other basic information, I estimate one could qualify for a loan of $303,170. With cash down of $ 45,000, your home price could be $348,170: The monthly payments for mortgage are now $1,867.

Did you notice two numbers – affordability and monthly payments? One number has gone down and other has gone up. You want the reverse to be true. True? Popular belief, based on the news stories and media hype is – home prices and mortgage rates will STABLIZE. And here’s the fact:

The reality is – the purchasing power has gone down.

The reality is – monthly payments have gone up.

The reality is - Mr. X could afford a home worth $375,476 last year and would pay $1,751 monthly for the mortgage. This year, Mr. X could afford a home worth $348,170 – not to mention extra down payment of $5,000 - would pay $1,867 every month for the mortgage. Your affordability would be even lower if you would like to pay only $1,751 per month as a mortgage payment and would like to make the same $40,000 down payment – it will be $324,500!!! About 13% lower than what you could buy last year. And you believe that house prices will drop down by 13%!!!!

Do you know what could happen to the affordability and monthly mortgage payments if interest rates go up by another ½ % in next couple of months? I can run the numbers the same way to find out that to buy the same home, prices should drop by approximately another 4%!!!

Though the current mortgage rates remain historically low, NAR research division predicts that the long term trend is gradually increasing and mortgage rates are expected to rise up to mid 6% in 2006.

NAR research says ‘Despite the decreasing sales trend (10% in Northeast region) home prices continued to show strength. The median price rose 11.6% from a year ago period. With sales retreating to more sustainable levels, home prices are projected to rise by 5% in 2006.’

It’s anybody’s guess what would happen if you are playing a waiting game and these predictions – home prices go up by 5% and mortgage rate inches up – come true. Not much, just few more hundred dollars extra towards the monthly mortgage payment or perhaps, you may not be able to buy THAT home you like so much…

But there are few reasons why you should delay buying a home. If you have a uncertain job future, family problems or are new to the area, wait for a while before you buy. But if not, you know the numbers by now….

As per the current statistics by NAR (National Association of Realtors) the median prices of the single-family homes are marginally up and that of town house are up by almost double-digit percentage.

NAR President Tom Stevens, on NBC’s Today show on 2nd March 2006 did mention that the (real estate) market is cooling but ‘cooling is no cause for alarm’.

The slowdown in market does come once in a while. In last two decades, we have seen a huge upsurge in demand for real estate and couple of years of cooling, too. You would not want to wait a few years to buy a home. Because you could miss out on a substantial amount of appreciation by waiting, and end up paying much higher prices – or mortgage.

This information is provided for informational purposes only. The information is intended to be generic in nature and should not be applied or relied upon in any particular situation without the advice of your tax, legal and/or your financial advisor. The views expressed may not be suitable for every situation.

(Praful Thakkar can be reached at 508.314.1640 or praful@ipraful.com or www.ipraful.com. )

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