U.S. mortgage interest rates for a conventional, 30-year, fixed-rate loan remain at a truly impressive, affordable rate: the average rate was 3.59 percent Friday.
However, while there's nothing like owning a home, this is still a risk-filled, uncertain U.S. housing market, for several reasons. There are unexpected traps/challenges that could turn the dream of owning a home into a problem-filled experience. Hence, prospective buyers need to do their home work, i.e research the market in which they’re considering purchasing a home - then recheck their findings as you’re about to place a good-faith deposit. Underscoring - this is not “your father's housing market” - and a bad home purchase decision could result in the loss of tens and in some cases hundreds of thousands of dollars.
And the reason for the added, required research and preparation? The United States used to be an economy and social environment characterized by commercial givens - basically, economic realities you could count on. An example: Real, median incomes will increase. Another: Median U.S. home prices will increase over a 10-year span.
Not so today - at least early in the postmodern, globalization era. For example, housing - long considered an essential part of the American Dream - does not appear to be that slam-dunk, no-doubt-about-it, appreciating asset that it was for decades -- basically since the end of World War II in 1945 to the start of the Great Recession in December 2007.
Propsective Home Buyers: Do Your Homework
Right now, you’re probably scared out of your wits regarding the thought of a home purchase. But fret not: here are six tips that will better-prepare you for today’s challenging U.S. housing market.
1. Buy the minimum house you need. The mantra now is not how much house you can afford, but the minimum amount of house you need. True, if the market suddenly recovers, that $500,000 luxury home could appreciate into a $700,000 bonanza. However, if your local market stagnates, that luxury home could be worth $400,000 -- or even less -- in real terms, which means you'll struggle to recover your initial investment. Lesson: Take on only as much house as you need, to minimize your downside risk.
2. Research the town/city/county. Have you researched and evaluated the local economy of the town, city, or county your prospective home is in?
In politics, there's an axiom: All politics is local. The same with real estate. If the local economy is strong and likely to experience job growth, the value of your home will benefit. The reverse, the opposite.
Research the local economy carefully. Determine what the major industries are and their prospects. Are they likely to add employees in the next five to seven years or more likely to shed employees?
Of course, it's almost impossible to predict macroeconomic conditions 10 years out, but you get the idea: based on what you know about the local employers, does the local economy have decent prospects for growth? In other words, does the local economy look more like Boston, where the prospects for growth are decent? Or like Detroit, where the local economy is not as strong?
3. Don't buy the best house in the neighborhood. Are you about to buy the best house or almost the best house in the neighborhood? In today's housing market, you have to get everything right, from a home purchase research standpoint. And one key research item is the value of your home vis-à-vis those on its street and in your potential new neighborhood. That's because a sub-par neighborhood can decrease the value of your pricey home ... and also make it harder to sell. Ideally, you want a house that's roughly in the middle, value-wise.
Lesson: Evaluate two houses to the left, two houses to the right, and a few across the street. If most are in worse condition than the one you're considering, skip it, and evaluate another house in a different neighborhood.
4. Are you prepared for $150 per barrel oil? Did you factor-in another oil shock into your commuting budget? True, oil prices have dropped stablized in the past 10 days, at about $96 per barrel Friday, pushing the aveage price of regular unleaded gasoline down to about $3.55 per gallon. Hence, for now $5 per gallon gasoline is out of the picture. For now.
But what about 2014, 2015 and beyond? A $7 or $8 per gallon is possible in the U.S. - particularly if the nation's supply of oil from the Middle East is disrupted for a sustained period. Lesson: Stress test your commute. If the commute budget from your prospective house can't tolerate $7 per gallon gasoline, consider a house that's closer to work and/or near a mass transit system.
5. Are you prepared for an interest rate negative feedback loop? Are you one of those mortgage applicants with a sky-high credit rating and a 20 percent down payment likely to lock-in a 30-year fixed rate mortgage at a sweet rate? Congrats! Think you’ve insulated yourself from the impact of volatile credit markets. Hardly.
Before you make a good faith deposit on the home you’re selected - re-research the neighborhood/town/city, and market you’re buying in to. This rule especially applies if you’re purchasing a home in an upper-income or luxury neighborhood. Make sure the home and neighborhood is not light-years in price above the median price for single-family homes. The reason, if interest rates soar, that will affect the amount even upper-income luxury buyers can finance…and that will affect the value of your upper-income or luxury home. That’s called the interest rate negative feedback loop, and it can quickly turn your $1 million dwelling into a $750,000 one; an $800,000 posh locale into a $600,000 one.
Point: there’s nothing wrong with purchasing a luxury home – just make sure your luxury neighborhood is not priced so fantastically higher than the median home price that it screams “bubble ready to burst” if 30-year, fixed rates increase by 2 percentage points, or if the Dow Jones Industrial Average drops 2,000 points.
6. Can you switch to a second field at your new location? Did you assess your -- or if two people are working in the household -- each person's ability to shift to a second career, if required?
If you're thinking about buying a home, odds are you're pretty secure and/or established in your job/career field. However, in the globalization era, most citizens realize that economic conditions can change relatively quickly, and healthy sectors can become not-so-healthy in a hurry. Or, as professional recruiters say these days, 'In the globalization era, everyone has to have two fields.'
Hence, in the town/city/county you've chosen to buy a home, evaluate how quickly you could switch to a second line of work, if your first field experiences an unexpected downsizing. Does your second field's work exist within a commutable range of your prospective new home? If not, you may want to consider a home that would allow for an easier transition to a second field.
And Ounce Of Prevention Beats A Pound Of Cure
The Great Recession and the changes triggered by globalization have removed much of the economic tailwind from the U.S. housing sector -- realities that have made it much harder to realize home price gains.
That noted, if you: 1) buy only the minimum amount of house you need, 2) research your town / city / county, 3) don’t buy the best house in the neighborhood, 4) stress-test your budget for an oil shock, 5) don’t buy into luxury market that's light-years beyond median home prices, and 6) determine you could find employment in a second field in your new locale, you still won't be guaranteed of a pleasant housing outcome, but you’ll be off to a pretty good start.
Joseph Lazzaro, U.S. Editor, served as Managing Editor of New York-based financial news web sites WallStreetEurope.com/WallStreetItalia.com, 1999-2004, and as Economics...