Why Home Buying Makes Sense

In the midst of a protracted and increasingly jobless recovery

, one might assume that financial prudence would dictate a freeze in large purchases, with home buying near or at the bottom of the list. However, there are a number of emergent factors which point the other direction, and many investors and first-time buyers have taken note, sending prices up over the past five months. While a number of issues still plague the housing market and the economy at large, consumer confidence is beginning to rise and overall conditions have continued to improve.

One of the major problems in the national market is the continuing rise in foreclosures, which has been addressed by the executive and legislative branches of government through the FHA, the TARP program and others. In more bubble-prone regions, the market has been more sluggish to recover, but many areas are already experiencing substantial growth. Foreclosures keep a market down for the medium term, but contribute to a buyers market with more choice and affordability, even pressuring stronger markets to compete for a prospective buyer.

Several economic factors are also positively influencing the increased home sales in the summer of 2009, not least of which is the $8,000 tax credit to first-time home buyers and $6,500 credit for homeowners who buy a new residence. For low-and-middle income buyers, the credits have helped drive prices up 30% over the past year. The extension of that credit, in conjunction with the expansion for existing homeowners, can be the difference between owning and renting for some.

Another factor which has helped underpin growth across a wide section of the market is the still-attractive mortgage rates, which have remained tantalizingly close to their April lows for 15 and 30-year FYM. These rates are remarkably consistent and represent impressive value when compared to historically higher numbers. This period of low rates is also in line with the Federal Reserve's cutting of short-term rates to near-zero levels (certainly negative in real terms). While consumer and small business lending remains constricted and will for some time to come, home loans have ticked up across many metros, presenting a window for attractive buys that won't last longer than low interest rates. As monetary policy changes to adapt to the recovery and upside risks, price discrepancies between regions will begin to stabilize and many of the exceptional deals now available will begin to evaporate.

That won't be a bad thing for the larger economy, but many markets will be geared towards sellers by the time the housing tax credit and low interest rates have ended, further reinforcing long-term upward trends in home prices. Buying into the downturns has always driven recovery and helped well-positioned businesses to gain market share, and individuals should be no different. When considering a major purchase, the situation is always going to vary from person to person, but many stimulating incentives are likely to remain in place over the next year. Home buying may not be the ever-upward environment of the mid-2000s, but with more realistic risk assessment now in place for most lenders, the time to take advantage of such a buyer's market is clearly in the near term.

by: Ki Gray

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