Is Now a Good Time to Buy a First Home?

Or to Buy Any Home, For That Matter?

Is Now a Good Time to Buy a First Home?
May 5, 2014

After the housing crisis of the late 2000s, some optimism in the housing market has reemerged. Many analysts are cautiously optimistic in their 2014 housing outlooks. However, 2013 brought an increase in home prices, with an average of 12% increase in some areas, and a rise in mortgage rates from historic lows to rates fluctuating in the 4-4.6% range. Given these insights, is this a good time for you to buy?

For the average person, the answer is probably yes. The March National Housing Survey from Fannie Mae confirms cautious optimism in most market measures. Current homeowners who think it is a good time to sell a home rose to 38% in March 2014 – up 4% from a month ago and 12% from a year ago. 40% of the respondents said that their financial situation has improved.

Other research suggests that first-time homeowners may find slim pickings. According to the National Association of Realtors, 26% of January 2014 home sales were first-time buyers, compared to 30% in January 2013. A recent Bloomberg article recited this statistic, pointing out that the combination of upward prices, stagnant wages and limited supply of houses were squeezing first-time buyers out of some markets.

As you evaluate your home-buying situation, take these factors into account:

  • Interest rates – Interest rates are rising, but doing so slowly. Most analysts expect this to continue. Locking in a lower fixed rate while you can is not critical – but every little bit helps.

  • Supply and Demand – There is a limited supply of homes for sale, according to the National Association of Realtors. A six- to seven-month supply constitutes a normal market. At the end of 2013, the inventory of available homes dropped to 1.86 million, or a 4.6-month supply. However, given the optimism of the Fannie Mae survey, people may be entering the market to upgrade their homes, creating a greater inventory of starter homes.

  • Available Credit – The Consumer Finance Protection Bureau (CFPB) rules starting in 2014 have increased lenders' scrutiny of new loans. Even so, credit seems to be easing.

    The Ellie Mae Origination Insight Report, a tracker of mortgage trends, reported that the average FICO® credit score for approved mortgages dropped to 724 in February 2014, continuing a steady downward trend from a 750 average in November 2012. Federally backed FHA loans are now being approved in the low 600s.

    Overall, barring a major economic disruption, credit should be available for most homebuyers.

  • Fed Philosophy – The Federal Reserve has been winding down their historic bond-buying stimulus program, and appears willing to allow interest rates to slowly rise with the matching recovery of the overall economy. An abrupt shift in policy may cause a ripple in interest rates – but so far there is no evidence of that.

  • Your Local Market – If you need or want to stay in a particular area, you really don't care what's going on in other areas of the country. Localized trends may trump an overall recovery. Check online or with local realtors on the trend of average prices, and whether there is reason to expect better buying conditions in the future.

With still-low interest rates by historical standards, increasing availability of credit, and questionable supply of homes, in our opinion the current overall market is giving mixed signals but leaning slightly toward buying now. Ultimately, only you can answer the question if it is the right time for you to buy a home given your goals, financial situation, and local home-buying competition.

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