Market timing becomes increasingly relevant the more cash you put down… but acting now or holding off depends upon your price point and strategy.
When making all cash or substantive cash offers:
On the low end (i.e. $200k – $600k-ish), smart money is flowing into select REO’s, in select markets, as vehicles to tie cash to hard assets. These homes are trading at or below their intrinsic value, and are generating ROI upwards of 7% as rental properties. Marking a profound sea change, investors are quietly buying up lower-end properties to get in on the upcoming wave of rental income inflation due to foreclosure displacement.
In the $750k-$2m range… if you are paying cash, then I believe you can lower your cost basis by waiting for prices to soften.
In the $2m+ range… pricing seems to march in just one direction for the type of land “they’re just not building any more of…” The rates available for loans > $700k+ are downright unattractive, so people buying now are moving largely in cash. But hey, the fact is transactions are happening.
When making a down payment of 20% or less, market timing may be less important than you think:
If you can afford to make payments on a respective home for 10+ years, and if you would like to live in it for 10+ years (or can otherwise afford to rent it out)… then now is as good a time as any to buy a home… crazy housing market notwithstanding.
From an affordability perspective, you are better off buying now with today’s low rates than hoping for prices to come down further… because your monthly payment is way more sensitive to rate than price. Here is what I mean:
Let’s say you put down 30% (i.e. more conservative than 20%) on a $900k house with a loan of 6%… your principal and interest payment is: $3,777.
Now, let’s say instead, you waited to buy this same house until its price decreased by 10%… to $810k. But by this time, the rate increases to, say, 8%. After putting down 30%… your principal and interest payment is: $4,160.
So while you save $90k by waiting for prices to drop… a 2% increase in interest will cost $138k over 30 years. And if you do end up selling the home in 10 years, you would have saved $90k by waiting for prices to drop but lost $46k in interest expense… not to mention at least a few good years of appreciation, the tax write-off, and peace of mind of associated with owning your own home.
Bottom line: It is always a stretch and never comfortable to pull the trigger on a first home. But if you don’t put your money to work for you, it is hard to get ahead, regardless of how much you earn.