Market uncertainty, record low interest rates, lack of housing inventory, signs of economic recovery, increasing rents… When you put all of these together, what do you get? A lot of questions about whether this is the “perfect” time to buy or keep renting.
I speak with a lot of people looking for houses and there seems to be a little frenzy developing for those looking to buy a 3+ bedroom home for less than $1million in Marin or San Francisco. If you are in this position or are contemplating getting in the market, first, take a deep breath and know one thing for sure: You will likely not time the market perfectly. Second, do not get caught up in the frenzy. Know exactly what is right for your financial situation and family (price, down payment size, mortgage terms, location, etc.).
Marin is a special market. The supply of housing is limited and the demand is high given its proximity to San Francisco, good public schools and family environment. The excess of demand over supply means that values tend to remain high and long-term growth prospects for this investment are strong. So, is housing a safe investment again?
Yes, if you are buying for the long-term (either as a primary residence or rental property). Over the past thirty years, real estate has tended to return about 2-3% over inflation. While not as impressive as the historic stock market return of 7%, you also get to live in your investment (or get income as a landlord), and a tax deduction for mortgage interest and property tax. This tax deduction usually makes buying more affordable than renting, but you have to have a down payment and steady income to afford all the costs associated with home ownership.
The biggest regret I have seen over the past four years is when a family buys a house because they feel they “have to” because they have kids and then losing all their equity when they quickly out grow that house or no longer want to pay a hefty mortgage on an underwater property.
Has the Marin housing market bottomed out?
U.S. home prices have fallen 34% over the past six years and there are signs that it may turn back up by spring 2013- if not before. Much of the decline has been fueled by distressed sales, which are far from over. The backlog of distress sales could push U.S. home prices down another 5% in 2012 before the market bottoms out next spring (according to Moody’s). The Case-Shiller 20-city composite shows San Francisco home prices down 40% from their peak.
However, within Marin there are a multitude of micro-markets. For example, the median home price for a 3 bedroom in Novato is down 49% from five years ago, while down only 9% in Mill Valley (source:Trulia). It is difficult to estimate the number of homes in Marin that could be in line for foreclosure or short sale, but even if the market goes down another 5% this year, you will come out ahead in the long run. For example, if you buy a $750,000 house today and it drops 5% in value in its first year but in all subsequent years the value grows by 2.5%, your house could be worth $1.14million in 20 years. That is a 52% return on your initial investment.
How do you know if buying is right for you?
First, look at your finances, income, potential down payment and whether you can find something you like in your price range. If you want move-in ready, you will pay for it in Marin. Most of the times, you can rent a nicer house than you can afford to buy.
Second, the lender will tell you. Gone are the days of easy money. It is tough to get a mortgage, and you will need to strongly meet the three “approval triangle” factors (1) Income (debt ratio), 2) Credit (median credit score), and 3) Equity (loan to value ratio)), before you will see a penny from a bank.
Finally, with low inventory and pent up demand, cash is king. The bigger your down payment, the stronger your offer will be. The market will inevitably decide whether now is the right time for you to buy a home in Marin.
For more information, check out my video on Home Purchase financial advice. Buying A Home, Katy Song CFP
Katy Song, CFP, focuses on comprehensive financial planning for families with young children and couples starting their lives together. You can contact Katy at firstname.lastname@example.org , visit her website katysong.com, or follow her on twitter @katydavissong. She lives in Mill Valley with her husband, 4 ½ year old daughter and year-old son.