NOW is a Great Time to Buy!

You hear this all the time from real estate agents: "Now is a GREAT time to buy!" And I am sure that most of the time, you dismiss these claims as simply hype or optimism (or as Paul Volker said "irrational exuberance"!).
This blog I would like to explain why I truly think the next six to nine months will be the best time to buy a home that we will see for awhile.

1) Prices have stabilized in most price ranges in our area. Since early 2010, median selling prices for homes in Morgan Hill, Gilroy and San Martin have pretty much been flat month to month. Locally we are at the bottom. In Silicon Valley, prices have begun to rise once again , even with the December 2010 small price decline included. Even the most pessimistic economic forecasters are predicting small real estate price declines nation-wide ranging between 5% and 7% in the first half of 2011 and then beginning a slow, but steady increase. The key to home prices remains the employment picture which, while murky, is showing signs of improvement. Statewide unemployment is running 10.7%, down from 10.9% in November. In Silicon Valley, some firms cannot find qualified employees in certain critical fields. San Benito County continues to trend behind these averages.

2) Mortgage rates have begun their inevitable rise. Fixed rate, 30 year, mortgage rates are bouncing along just below 5% for conforming loans (below $417,000) , up from lows in late 2010 at or below 4%. Rates are expected to continue to rise as the Federal reserve winds down their long-term securities purchase (Quantitative Easing II) in June 2011. if the economy continues to improve, expect the Fed to raise overnight bank rates beginning in the second half of 2011.

3) Buying is less expensive than renting. Trulia has published data showing that in 72% of the largest 50 real estate markets, buying a home is now less expensive than renting. Locally, a 3 bedroom, 2 bath home with a small back yard will rent for approximately $1800 to $2100 per month. Renters insurance will add a small amount. You can purchase a similar home for less than $400,000 today. That purchase will entail a mortgage of 4.75%, property taxes and insurance which will include $2088 per month for mortgage principle and interest, taxes of $400 / month and $75 per month for insurance. The total is $2563 of which approximately 25% is tax deductible netting a monthly cost of $1922 per month cost.

4) California real estate appreciation rates are positive and some of the best in the nation. Forbes magazine has just published a study that shows San Jose has the best potential for appreciation in the major markets nationwide. Other Ca communities also were in the top ten locations showing good appreciation. Forbes estimates property value appreciation for San Jose in 2011 will be 3% and will average 2% annually for the next 3 years.

5) Inflation is beginning to be seen in commodity prices and may follow to consumer prices, including real estate. Commodities such as oil, copper, wheat, corn, tungsten and others are at or near historic high prices driven by demand by China, India, Brazil and other countries. It is just a matter of time before this price pressure impacts consumer prices. The beginnings of inflation are being seen today in European countries as well as China and Brazil. The unrest in the Middle East, along with increased demand in China and India, is driving oil futures higher. Expect oil to top $100 a barrel by summer. The Fed's QEII securities purchase has flooded the markets with cash. Once inflation rears its head, the Fed will have no choice but to raise interest rates.

6) Foreclosures will peak in 2011. RealtyTrac has projected a record 3.8 Million properties will be in some part of the foreclosure process in 2011. However, once these properties are processed and sold, the number of delinquent home loans is expected to gradually decline. In California, the number of foreclosures have already shown a decline from the peak in 2009. Statewide foreclosures in 2010 were down 14% from 2009. While some of the nationwide foreclosure decline (4.7% nationwide) can be attributed to the "robo-signing" curtailment of foreclosure processes, California is not a judicial foreclosure state and only a minimum of foreclosures were delayed in late 2010. If foreclosures do peak in 2011, inventory of these homes will decline late in the year and a large source of price pressure holding prices down will be removed.

7) Cash buyers are coming back into the market. Whether the property is a duplex, a single family residence or a rural ranch, we have a significant number of "ALL CASH" buyers purchasing properties lately.

8) Expensive homes are selling. High-priced residences in Woodside, Portola Valley and other exclusive areas in Silicon Valley have seen sales increase. This segment of the market has historically been a leading indicator and is sometimes referred to as the "smart money".

9) The early "short-sale sellers" can now re-enter the market. Many of the earliest sellers who utilized short-sales to release themselves from their mortgage burdens have completed the period where their credit scores were negatively impacted. These former owners can start to re-enter the housing market if they can qualify for a loan under today's more stringent lender guidelines.