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Why Buy a New Home Now?

by Steve Kaller

"Why buy now?" Today, this very valid question is being asked by just about every buyer that comes through a builder's sales office. The answer is simple: People buy for the same reasons that they always have. Better life style, better schools, nicer neighborhood, more convenient shopping, need for a bigger or smaller home, job transfer, tired of paying rent, tax benefits …. There are endless reasons why people choose to buy new homes.

In addition to all of the usual reasons, there is an incredible benefit to buying right now as we are in a "Buyers' Market"! Buyers no longer have to sit helplessly on the sidelines while prices spiral out of their reach. Now, with home prices having dropped to levels that haven't been seen since 2003, and all kinds of incredible incentives being offered, the buyer is in control.

But buyers still ask, "Why buy now?" Well, here is why:

As we all know, housing prices are controlled by the basic law of supply and demand.

In 2006, the sub-prime lending market began to implode. As a result, buyers could no longer afford to purchase homes that were now made unaffordable as a result of the lack of loans available to the average Buyer. Demand for new homes plummeted while supply was high as a result of the large number of already built unsold homes. We entered a Buyers' market.

As the market changed, builders have come under intense pressure to sell the homes they have on hand. Unlike a homeowner that can wait to sell their existing home until the market improves, builders need their unsold homes off of their books today. This is why we are seeing the prices of new homes at a lower level then the prices for used re-sale homes. In fact, today buyers are often purchasing new homes for less then it cost to build them.

But Buyers' markets (as we have recently learned with Sellers' markets) do not go on forever.

California's last Buyers' market occurred in the early 1990's. People who bought homes in that Buyers' market were told by friends, family and work associates that they were making a huge mistake. They were told that the "sky was falling" and that home prices would continue to drop.

However, those that bought in the early 1990's are known today as savvy and sophisticated buyers. Today, those buyers have huge amounts of equity in their homes. That same thing will be said about the buyers taking advantage of today's Buyers' market… that they were savvy investors that took advantage of a very temporary market condition.

Smart buyers know that at some point home prices always stop dropping. The savvy buyer knows that long term population growth will always cause increased demand for new homes. California's population is forecasted to expand from 34 million in year 2000 to 43 million by 2020 (per U.S. Census reports). California population growth caused by new births alone is very significant. This is a huge 25% increase in population in California. These new California residents will need to buy homes to live in. As supply decreases, demand will increase.

We can all see what is happening on the supply side. Builders are no longer building, and construction lenders have stopped making loans to builders. Therefore, supply is now shrinking, not growing.

Now that affordability has returned to home buying with home prices having moved to below market value levels, financing is the key to homeownership. Many potential buyers are not aware that over the past several months many new loan programs have been created, and some great old ones have returned, with minimal or no down payments, and low interest rates.

Homebuilders are beginning to report increasing sales rates every week. The reason is that buyers are able to buy their dream homes well below market value, and are now able to get the financing they need. As in the early 1990's when the last Buyers' market ended, we are again beginning to see the pendulum starting to swing back towards a neutral market.

In the not to distant future, we will be reading headlines that proclaim that home sales are up, supply is down, and guess what… builders and banks are no longer selling homes at a loss as they are back in the business of building homes to make a profit.

In addition, interest rates for the past five years have held at 25-year lows. However, we cannot expect interest rates to stay low forever as there is ever increasing pressure for the rates to rise significantly. Buyers that procrastinate may find themselves shut out of the market with such an increase.

Also, buyers should keep in mind that the next generation of new homes will be built to the affordability of each local market, and not for investors or speculators. As a result, the next generation of new homes will probably not be built with all of the extra features which we have become accustomed to, such as beautiful granite countertops, upgraded cabinets, moldings, and stainless steel kitchens. The buyers of those next generation homes will have to pay for those extras.

Remember, California housing cycles come and go. But even with the up and down of the cycles, over the last 34 years, median home values have appreciated 7% per year. On a compound interest basis, this equates to homes almost doubling in value every 10 years.

Smart home buying is about taking advantage of the convergence of supply, demand, financing and interest rates. Right now, supply of new homes is quickly diminishing, demand is still sluggish, new home prices are at their lowest point in years and financing is again becoming available. At the same time, interest rates continue at 25 year lows!

We've been in this Buyers' market for over two years. The signs are clear that the pendulum is swinging. Now is time for savvy buyers to take advantage of this "perfect storm," and purchase a beautiful new home which provides them with the life style that they desire and their families deserve.

Steve Kaller is CEO of Ultimate New Home Sales and Marketing Inc.