Is this a godd time to buy a home?

by Barry Habib
CEO, MBS Highway
http://www.mbshighway.com/home

No...it's potentially the best time to buy a home. Affordability stands at the most attractive levels on record. Affordability is the combination of home price and cost to finance.
In the chart below, courtesy of the brilliant John Burns from John Burns Real Estate Consulting, notice the horizontal red line. It delineates an overpriced vs. underpriced market by taking into account the aforementioned variables.
Back in the late '90's, affordability levels became very attractive. Real Estate was very underpriced. This led to a booming Real Estate market in the years that followed. But as humans typically do, the market was pushed to the opposite extreme. Homes became overpriced, interest rates were at significantly higher levels, and the Real Estate market was in trouble. You'll notice that in 2006 and 2007 affordability was at a very high level, but people kept buying homes even though they were overpriced. We all know what has happened since - prices tumbled around many parts of the country and Real Estate was out of favor.

But us humans overdid it again, and have taken things to the extreme, this time to the downside. The selling in Real Estate was overdone and the drop in prices exaggerated. Combine this with record low interest rates, and you have an incredible buying opportunity in front of us.

As the chart illustrates, 2013 marks the most opportune time to purchase Real Estate on record...even better than the late '90's. The future projections anticipate a rise in interest rates of 1% and home price appreciation of 24% over the next three years. Even with this assumption, affordability will remain at attractive levels and the Real Estate market will still be underpriced. This depicts tremendous upside opportunity, especially for those who have made recent purchases or intend to purchase in the near future.

Sometimes we need to put things in perspective by using some historic examples. Consider this - back in 1980, the median home price was $93,000 according to the United States Census Bureau. This figure is inflation adjusted to use the dollar equivalent of the year 2000. As of March of 2013, the existing median home price is $184,300. Taxes and Insurance on a home back in 1980 were about $150 per month cheaper than they are today. But, interest rates back then were about 13.5%, compared to today's 3.5%. The total payment for principal, interest, taxes, and insurance at an 80% loan to value today is still $50 per month less than it would have been over 30 years ago. Add inflation since the year 2000 into the mix, and the cost of a home today day is a small fraction of what it was back then.

And owning is less expensive then renting in many markets today. Back at the height of the Real Estate bubble, renting was a much better and cost effective option, but people bought anyway. This suggests that Real Estate prices will continue to move higher.
We all know that the basic laws of economics include supply vs. demand to determine price. A common theme in today's Real Estate market is that inventory levels are low, while demand is increasing. In this environment, prices have almost nowhere to go but up.
Contributing to the demand is a resurgence of household formations vs. household creations. An example of a household formation is a couple leaving their individual parent's homes and starting their own household, or perhaps a couple getting divorced, where now they need two separate residences instead of one. Household creations are new homes being constructed for sale into the marketplace.
2011 marked the first time that household formations outpaced household creations since 2003. And the trend is expected to continue through 2016. When applying the basic laws of economics, this suggests that demand will outpace supply for the next few years, and as a result, causing home prices to continue to rise. So is this a good time to buy a home?

Barry Habib
CEO, MBS Highway
http://www.mbshighway.com/home