Is now a good time to buy real estate amid glowing reports of low mortgage rates and high demand?
Professional pictures of stunning homes and condos with granite, marble and nine-foot ceilings all serve as eye candy, tempting gullible and not-so-financially-savvy home buyers to drop that down payment.
And those great July sales numbers? Can they be true?
Can the papers really afford to sing a song of sadness and annoy their major advertisers by printing accurate numbers?
Efforts by the media and the real estate boards to spin and fluff the data are failing. People are examining the numbers put out by the boards and noticing that their interpretation is suspect.
But aren't home prices rising? And didn't July have some great sales numbers? Yes, in some cases and in some areas. Sales numbers are decreasing on the whole and the number of available buyers are dropping dramatically.
How many buyers -- or upgraders -- were young people who were signing purchase offers based on low-rate pre-approvals? If they did, they likely wanted to lock their low five and 10 year rates before they went up.
So what are some questions to ask about buying now?
1. What will happen as interest rates increase?
The big banks have increased rates four times in the past two months from below three per cent to a full percentage higher at 3.89 per cent. That one per cent increase raised the cost of a five-year mortgage by 37 per cent. Since interest rates can only go up, prices must come down.
2. Can I afford to leverage my money?
Leverage means using a small amount of the final price as a down payment and financing the balance as debt to amplify gain. A 10 per cent down payment will increase in value only if the house price goes up.
If home values decline because of increased rates and lower buyer numbers, a 10 per cent decrease erases 100 percent of the down-payment!
If forced to sell, the losses escalate as the 10 per cent is added to the real estate transaction, closing, and legal costs. Bank economists predict a two per cent annual gain (less than inflation) over the next few years. Are you prepared to take the risk of a questionable leverage strategy?
3. What can, or should I, afford?
Governments and financial institutions suggest that a safe mortgage is a maximum of three times the buyer's annual income with a 20 per cent down payment. So a $75,000 annual salary could buy a $270,000-$300,000 home if the down payment is around $50,000. But, where can you find a $300,000 home in Vancouver of Toronto?
4. Is it cheaper to rent than to own?
In many areas, rental payments are still only three to five per cent of purchase prices. A rent of $2,000 would easily get you a home that is valued at $450,000. With a down payment of $50,000 on that home, the monthly mortgage costs at 3.89 per cent would be almost $2,400 including taxes without maintenance. If interest rates rise to five per cent, the monthly mortgage cost rises to $2,800 including taxes without maintenance.
5. What happens when all those vacant condos and the ones under construction are listed?
Builders have overbuilt and investors have bought condos on the promise of ever-increasing prices. The result -- thousands of vacant condos in Vancouver and Toronto. When the ones currently under construction are ready for sale, their values will drop. Waived fees and massive incentives won't induce buyers to buy. When the carrying costs become too high leading to mounting losses, those units will be dumped. Condo prices will drop and the domino effect will lower single family home prices as well.
So what should you do to secure your future?
If you are a renter, you are paying less to live there than if you bought that property.
You can save money and accumulate wealth faster than many home owners -- especially when real estate flat lines or declines. As cities are forced to increase their taxes, home owners may not be able to afford property taxes. A falling housing market and increases in mortgage rates will put many homeowners under water. Homeowners will find their once-liquid asset turning into a millstone.
If you are retiring, have a healthy retirement fund and are debt-free: then a declining real estate market may not bother you.
Stay in your home and don't sell. In a few years the market will come back and you will be able to cash out. Trying to "time the market" rarely works, even for the experts.
If you are retiring, or have retired and are planning to downsize, now may be the best time to sell.
Buyers may still be willing to pay your asking price, because how long will hungry buyers really wait on the sideline for prices to drop?
If you are still working and are doing well, hold on! Are you well on your way to paying off your mortgage? Do you have enough money to retire comfortably and maintain your current lifestyle? Will you be OK if a decline possible flat-line in home prices happens in the next decade?
Then, do not risk what you are doing by trying to time the market. Savvy experts have tried and lost millions.
Then there's the homeowner who faces monstrous challenges: too much money owing on real estate, too much consumer debt, and little or no retirement planning. Downsizing to a more affordable home or selling to pay off all those debts and renting may be the best course of action for you now.
If you are a first time buyer, save like crazy.
Be ready to have cash on hand to buy those marvelous deals that will start to pop up everywhere as the markets decline.