They were a wonderful young couple – stars in their eyes, hope oozing from every pore and excited about purchasing a home they could call their own. After meeting with them for a number of weekends, looking at countless properties (many of which they loved), and watching them, week after week, make no decision to write an offer on any of them, I finally commented,

“It doesn’t appear to me that you are willing to buy a home at this time.”

“We’re confused,” they admitted. “We’ve seen some gorgeous houses that are everything we want, BUT … we have some serious questions.” “Let’s talk,” I said, and, over coffee at the local Starbucks, listened as they shared three fundamental concerns.

Since I deal with home buyers on a regular basis, I frequently hear the same three queries. They may be framed differently by each person, but at core, they all are asking the same three questions.

Question #1: “I’m hearing that home prices may continue to fall – why should I purchase a home now?”

It’s a great question with more to it than initially meets the eye. I bought an old car a number of years ago – I thought I got a fantastic bargain until I suddenly realized that the ongoing maintenance bills were killing me. The initial price might have been very low, but the overall cost of ownership was extremely high. Many home buyers miss this critical fact:

Price is not the only consideration – total cost of ownership, in fact, is more important than the initial price.

As an example, a buyer purchasing a home for $375,000 with 20% down will have a mortgage of $300,000. If they lock in at a rate of 4% fixed for 30 years, monthly payments will be $1,432.25 and the total cost of the loan will be $515,610.00.*

For the sake of this argument, let’s assume the market falls 5% over the next 12 months. If the buyers hold off buying for a year, their price would be $356,250 ($18,750 lower). Their loan would be $285,000 and, if rates stay the same, their payment would be lower … by only $71.62 a month ($1,360.63). However, if rates rise by only a single percentage point, the monthly payment increases to $1,529.94 – $97.69 more per month than if they’d bought at the current price of $375,000. While this may not seem like much of a difference initially, over the life of the loan they’d end up paying $550,778.40 – $35,168.00 MORE that they’d pay by buying now.

And … this scenario DOES NOT include the cost of renting for an additional year or income tax deduction savings.

So how likely is it that rates may change in the near future?

John Dutra with RPM Mortgage provides some insight: “Although Federal Reserve Chairman Ben Bernanke insists that rates may remain stable for some time, the Fed has also confirmed a rise in rates if inflation becomes an issue. Current rates are coupled to world-wide economic factors – specifically what is going on in Europe’s Euro-zone.” Dutra adds, “Should Greece become stable and Europe manage to stabilize the Euro, the result in America will be an increase in the American Consumer Confidence. If that soars, ultimately rates will go up.”

The reality is, we honestly don’t know where we’ll be in a year.

You could do what some are trying to do and second guess the market, but I’ve seen so many buyers try that and fail. And there is always a price tag associated with that failure – sometimes a hefty one.

Recommendations:

· Don’t try to “second guess” or “time” the market. Even seasoned investors get it wrong. Frequently.

· Meet with a lender who can help you run projections based on your personal data – they can help you estimate projected monthly payments, factor in income tax savings and more. You’ll have some real data with which to make your decision.

Question #2: “If I buy now, when can I expect to see appreciation?”

Historically, buyers didn’t purchase homes because of the potential for appreciation in value. Freedom from tyrannical landlords was at the top of the list. The idea that fueled the immigration fires for many moving to the United States was the thought that you could actually own a piece of America – and with that concept came the ideals of freedom to do with your property as you wished. Later on, as an additional benefit, the government included tax interest deductions.

Appreciation was never the primary goal: if it occurred, it was a bonus, not the ‘raison d'être.’

Additionally, historic rates of appreciation were often very low. Somewhere in our history, however, probably beginning the middle of last century, the idea of appreciation began to foment in our nation’s consciousness. As we headed into the 21st century, the perception that, “If you buy it, appreciation will come” was firmly cemented into most homeowner’s minds. With the rampant price escalations of 2003-2006, potential appreciation predominated almost everyone’s thinking and became the primary reason to buy a home. Ill-prepared buyers purchased out of fear that, “If we don’t get in now, we’ll miss the boat.” Amateur “investors” looked at potential short-term gains and leapt in hoping to score big.

Spiraling home values changed the way we thought about appreciation and not in a good way: it set the stage for the housing collapse that began mid-2006.

An increase in the value of your property might make you feel more secure or add depth to your balance sheets. Unfortunately, appreciation really only matters when you (1) sell, (2) refinance or (3) add an equity line of credit. The greater your equity at the point of sale, the greater your options. Additionally, banks like to see at least 20% equity in your home when you refinance or add a line of credit.

Buyers whose primary goal is potential appreciation are buying for the wrong reason and could easily become disillusioned by the current market. In fact, they could, by focusing on the wrong things, miss out on one of the best buying opportunities in the past century.

Soap box aside, let’s try to answer the actual question of, “When will the market begin to appreciate?” To be brutally honest, no one really knows. Our initial projections showed parity in 2014, however, we’re now pushing this date back, perhaps to 2016.

And no one knows what 2012 will bring - 2011 had some nasty surprises including:

· Mid-term elections and the resulting change of power in the House,

· Japan’s earthquake and ensuing tsunami,

· The Arab uprisings,

· The shocks in oil pricing,

· Europe’s Sovereign debt crisis,

· Greece’s collapse and default,

· Our own debt ceiling debacle,

· The downgrading of USA’s long-term debt,

· Ensuing volatility in the stock market,

· Threats to remove the interest deduction,

· Increased protests locally and abroad.

These events and their fallout threw all projections to the wind and redefined uncertainty. Factor in the impending 2012 presidential election and there are enough issues in the queue to keep unrest simmering and the prospects of appreciation in check for quite a while to come.

If potential appreciation is one of your core reasons for buying, you could be waiting a very long time.

Recommendations:

· Remove potential appreciation from your list of reasons to purchase.

· Examine the remaining reasons to buy: security, the ability to do with your own home as you wish, income tax advantages and so on.

· Sit down and write out a “Pros and Cons” sheet that will help you make your decision – it would be a good idea to sit down with a Realtor and/or lender to get their help with the list.

Question #3: “Is it better to rent or buy?”

Time Magazine named their 2011 Person of the Year “The Protestor” making this past year “The Year of the Protestor.” It could easily have been called “The Year of Confusion.” With all of the chaos coupled with the uncertainty of the real estate market for the past few years, many in 2011 opted to sell their existing home and ride out the uncertainty. There are no shortage of reasons for this:

· Fear of losing more equity,

· Drastic income reductions making debt service difficult,

· Job loss or uncertainty about future job prospects,

· Adjusting rates making increasingly high payments untenable,

· Deferred maintenance due to lack of funds spiraling out of control,

· Trying to second guess the market.

Many have bailed, concluding that current market risks outweigh any projected benefits. Some, tired of maintaining their properties, have sold, relishing a return to rental homes where landlords get to deal with issues, not themselves.

An entirely different group, however, previously unable to buy because of sky-high prices, view current depressed prices and unbelievably low interest rates as opportunity knocking! They’ve grown weary of standing on the sidelines watching everyone else buy. They can’t wait to get their own home, and they are lining up in droves to get their slice of the American dream in 2012.

So which is better, owning or renting? It TOTALLY depends on WHY you are buying.

Looking for short term gains or quick profit? Don’t bother. That’s how we ended up in this mess to begin with. With any luck, we’ve learned enough not to go back there again. And if you have to commit financial suicide to make the monthly payments, it’s not worth it – too many things could go wrong, including losing your health. If, however, you want to be free of rentals with their restrictions and petulant landlords, the ability to paint your home any color you wish, renovate to your heart’s content, own the dog of your dreams, benefit from the significant income tax deductions and benefit from long-term upside potential AND … you can afford it …

Then you qualify to own.

Additionally, national studies show significant social benefits accompanying homeownership. I’d recommend you read the study, but in general, those who own their own home (when compared to renters):

· Live in areas with lower crime rates,

· Have higher academic potential,

· Are perceived to be happier,

· Tend to be in better health,

· Are perceived as having more focus and purpose.

Lastly, and this is the icing on the cake, it’s becoming possible in many area for it to cost less to own than it does to rent. While this also should not be the primary goal of owning, it is definitely a benefit worth pursuing.

Recommendations:

· As suggested above, write out a list of Pros and Cons – make sure you have all the facts before making a decision.

· Meet with a lender to get pre-approved – you will get the information you need to make informed decisions. You won’t know if you really can afford to buy until you’ve had a lender look at everything and provide you with all your options.

The young couple? Proud owners! In fact, as I checked in on them the other day, they were wondering why it took them so long to decide. Although it took them a while, in the end, after reviewing all the data, they made the plunge ...

And are VERY glad they did.

*NOTE: all numbers are approximate and are not a guarantee or promise of any kind. See your lender for information specific to your situation.