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The Real Risk is in Waiting to Buy a Home

by Sherman D. Harmer Jr., 2008 President Building Industry Association of San Diego County

Remember not that long ago when home sellers were calling the shots – dictating prices and terms to multiple bidders who were knocking down their doors in many markets?

Well, today, with the slowdown and changes in San Diego's real estate market, all the market fundamentals show that buyers are now in the driver's seat. Consider the facts: prices are competitive, interest rates are very affordable, there are plenty of homes in all price ranges to choose from and sellers are more likely to bargain.

Most recently, the Federal government cut rates and Congress is considering a bill that would allow home buyers to obtain conforming mortgages of much higher amounts (up to $729,000 in some parts of California). With this loan limit increase, San Diego homebuyers receive much-needed additional purchasing power. The old limit was $417,000, however, with most new San Diego homes priced at $800,000 for detached, and $500,000 for attached, buyers had no help from the Federal Housing Administration (FHA), or other government agencies. Even resale home buyers faced prices that could not be conquered with the old FHA loan amount.

New FHA loan amounts that better match our home prices in San Diego will save home buyers money on both the down payment and monthly payment. This also extends a life-preserver to those buyers who financed their homes through questionable, sub-prime loans. These FHA loans give those mortgage holders a chance to refinance into a more stable instrument, at a lower, fixed interest rate. That means they won't have to worry about that skyrocketing adjustable payment, and their monthly payments will be more manageable.

The FHA loan increase will also help first-time buyers realize their dream of homeownership. FHA conforming loans require 10% down, not 20%. That means San Diegans can earn about $30,000 less annually and still qualify. Maybe this will motivate potential homebuyers who are on the fence, thereby improving our homeownership rate which lags behind the nation.

So why have so many prospective home buyers been waiting?

It appears they allowed emotions to overtake common sense. For instance, many home owners who are looking to sell and trade up to a better house hesitated because they had seen the value of their current home drop from peak levels.

"If my neighbor sold his house for $550,000 six months ago, why should I have to settle for $500,000 today?" But waiting out the market to recoup a $50,000 "loss" could prove to be a poor decision.

While the value of the buyer's house may have fallen, that so-called loss has probably already been more than offset by a reduction in the price of the home he is thinking about buying. Furthermore, if he waits too long, he may lose out on the price advantage that currently exists. In San Diego, builders have stopped building new projects and have been concentrating on moving the inventory they have now. Downtown San Diego is a good example. There are only a handful of projects proceeding in 2008. This is a far cry from the last seven years when construction cranes dominated the skyline downtown.

First-time home buyers who are choosing to "play it safe" and keep renting are essentially postponing the opportunity to build home equity. No one can accurately predict the peaks and valleys of the housing market. If you sit on the fence and wait for the absolute best deal, you could end up literally waiting for years, and in the meantime miss out on the opportunity to become a homeowner while prices are moderating.

Not to be overlooked are the tremendous tax benefits received by homeowners as they accumulate equity in their homes. History shows that buying a home is one of the very best financial investments available to a typical household, and a relatively small downpayment enables the buyer to see appreciation on the entire value of the property.

Though local housing markets periodically adjust according to overall economic conditions, over the long term real estate has consistently appreciated, especially in San Diego. On a national level, home appreciation has historically risen 5-6 percent annually. Even at that rate, the value of a home doubles every 13 years. Not only is homeownership a stepping stone to a future of financial security, it provides a permanent place to call home and enormous personal pride and satisfaction.

In today's housing market, the real risk is in waiting to buy a home. We know that interest rates are low today. We know that San Diego's reduced home prices mean more affordability for most residents. We know that there are plenty of homes on the market to choose from. And we know that builders have stopped building new phases and are working through that standing inventory.

Any or all of these favorable variables could change for the worse in three to six months from today.