Instead of talking just about prices, I would like to point out that it is actually your purchasing power that is most important. Your purchasing power (assuming you will be obtaining a mortgage to finance the home) is a combination of home prices and interest rates. Right now interest rates are being held low by activities of the fed. The fed will not and actually cannot hold the rates as low as they are now for much longer. What does this mean for you? For every $100,000 you borrow at 5%, your cost if $536.82. At 6% your cost is $599.55. The difference is 11%. Ignoring your down payment, translated that means that a home priced at $200,000 today would cost you the same as a home priced at $178,000 if the interest rate climbs 1%.
Now on to pricing. 2011 is expected to have about the same or somewhat more downward pressure due to distressed home sales (foreclosures and short sales). From November 2009 to November 2010 (the latest data we have) the average home's price in the Eugene area fell 8.2%. The median price fell 9.9%. I expect similar things for 2011.
What that says to me is that your purchasing power will be flat if interest rates go up only 1% next year. Your
purchase power will decline if interest rates go up more than 1%. So what does the magic crystal ball predict about interest rates? Well, I don't have one, but I do know that the average interest rate for the past 38 years is 9.04% at a cost of about 1.5 points. Today you can get a rate of 4.75% (up from 4.25% several months ago) at no points. The assuredness of today's rates versus the unpredictability of tomorrow's rates? If you are in the market for a home, sooner looks better (or at least more sure) than later.
Fannie Mae and the other foreclosures and short sales are defining the market. They are not priced to anticipate future prices at all. A typical foreclosed home (but bear in mind each bank behaves individually) will start dropping in price every month until sold. The price is what will move the home now.
Buying a foreclosed home, which is more likely to have suffered some damage than a short sale home), is similar to a purchase from a regular owner, except for two things: banks will often exert significant time pressure and will require you to use an addendum written by the bank's attorneys which will be more favorable to the bank than a regular sale.
The risks are the same as buying a regular home. Have a professional home inspection performed, even if you buy a brand new home. In a regular sale the owner will have filled out a 4-page property disclosure which I have found to be generally worthless. Homeowners are on average no more expert about their home than a regular driver is an expert mechanic. In a foreclosure the bank is exempt from the disclosures.
Houses are selling slowly, and this is what determines fair market value. So remember to factor in
interest rates unless you are an all cash buyer. This may be the best time to buy a home for the next decade or longer.
Dohn Riley, Hybrid Real Estate
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