Home prices for the month of November were up 13.7 percent from a year earlier, the largest 12-month increase in nearly eight years, according to the S&P/Case-Shiller Home Price Index. Las Vegas and San Francisco saw the biggest individual gains, rising 27.3 percent and 23.2 percent respectively, from 2012 to 2013. Month-to-month prices were down a nominal 0.1 percent nationally from October to November. Your choice to buy or rent may ultimately be influenced by the policies adopted by the Federal Reserve for 2014. Keep the following in mind as you decide to buy or rent this year:
Fed Tapering Of QE3
The U.S. central bank announced in December that it would begin to taper its $85 billion monthly asset-purchase program by $10 billion in January, and another $10 billion during each of the Federal Open Market Committee(FOMC) meetings this year. That would bring the program to an end just before Christmas 2014.
Housing prices have continually trended upward since the Federal Reserve began purchasing $40 billion per month in mortgage-backed securities and $45 billion in U.S. Treasurys in September 2012, according to the S&P Dow Jones Indices. The rise in prices helped many homeowners regain lost equity and get themselves above water.
There were 6.4 million underwater mortgages in the U.S. at the end of Q3 2013, down nearly 800,000 from Q2, according to data by CoreLogic. The cessation of QE3 is likely to keep home prices on the decline month-to-month. Though home values were up 8.5 percent from August 2012 to 2013, they were still 9.4 percent below their peak in early 2007, according to the Federal Housing Finance Agency.
Buyers can wait at least until summer to see exactly how QE tapering affects the market. The longer you wait, the better bargain you could potentially get.
Interest Rates Rising
The Federal Reserve announced it would keep the federal funds rate at historic lows as it tapers QE3 down to zero. But Jeff Taylor of Digital Risk, a mortgage services and risk analytics firm, told Housing Wire that interest rates will rise naturally throughout the year as a result of increasing treasury yields.
The average 30-year rate is 4.53 percent as of Jan. 6, up from 3.34 one year earlier, according to Freddie Mac. But even if the national average for a 30-year fixed mortgage jumps above 5 percent, it’s still significantly lower than rates were prior to 2007.
This may be the last year potential home buyers will be able to lock in a rate that, relatively speaking, is still considered low in the grand scheme of things.
Low Initial Investments
Despite tougher credit requirements in the post-recession mortgage market, many first-time buyers are getting their homes with little money down. The National Association of Realtors found that 48 percent of said buyers financed via FHA or VA programs that required only a 3.5 percent down payment.
Lower down payments make buying versus renting more of a no-brainer. But conventional wisdom still says put down as much as possible to get the best rate and lower your monthly payment. Whether you need to withdraw funds from your 401(k) or inquire about the J.G. Wentworth annuity payment-purchase program, finding ways to put down as much equity upfront as possible is still a sound financial strategy.
The decision to rent or buy also comes down to the individual situation. Those who plan on keeping the same job for years may wish to buy, while everyone else should consider keeping their options open and renting.