Slumping home prices and financial incentives may make homeownership all the more tantalizing for young newlyweds, but advisers warn that renting may be the smarter choice.
Predictions of a second major default in mortgages, followed by an even further decline in home values, plus the fact that young newlyweds are beginning their married lives in a less-than-ideal economy, may mean that such couples are better off resisting the allure of homeownership for now.
“Even if you consider in the grand scheme of things that prices are low now and that you may get a low-interest-rate mortgage, this is still a huge purchase,” said Dylan L. Ross, founder of Swan Financial Planning LLC in East Windsor, N.J. “Here’s an analogy: It’s like getting married without dating first. Things may look and sound great, but you’re getting into this big commitment.”
Generally, home prices have continued to plummet, with exceptions in several major cities, according to data from Standard and Poor’s of New York. The 20-City Composite Home Price Index, a component of the S&P/Case-Shiller Home Price Indices, fell by 18.1% this April, compared with the comparable month in 2008. The worst declines hit Phoenix and Las Vegas, which experienced home price declines of 35.3% and 32.2%, respectively.
MERELY A MIRAGE
But those deep discounts, coupled with the $8,000 federal housing tax credit for first-time buyers, are merely a mirage for most young couples, advisers said. “There are screaming buys out there, and those who are positioned properly should seize the opportunity,” said Patrick L. Doland, principal of Reason Financial Advisors Inc. in Northbrook, Ill. “Many young couples aren’t positioned to take that advantage.”
Those who are best-prepared to step into homeownership are entering the purchase with minimal credit card balances, manageable student loan debt and a large-enough income to qualify for the mortgage and shell out for the down payment on the home, advisers said. A career in an area that’s safe from the layoffs that have rocked many Americans would also be helpful.
However, that’s not the situation many advisers are seeing among their younger clients.
“People are leaving school with more debt, and the job market is unstable,” said Jeremy E. Portnoff, owner of Portnoff Financial LLC in Union, N.J. “It’s worse to lose your home because you can’t afford it, versus giving up an apartment or breaking a lease early,” he added. “If you lose your job, you can move in with mom and dad for a while.”
At age 30 and only three years into his marriage, Mr. Portnoff and his wife recently moved into a rented townhouse from their first apartment after deciding it wasn’t the right time to buy. He pointed to a combination of factors behind his decision, including the possibility that he and his wife would purchase a house, grow out of it when the couple had a family and then end up stuck with an illiquid asset.
“Buying now, you could be faced with a problem: What if the values fall further and you end up in a situation where you don’t have enough space?” Mr. Portnoff asked. Also, if the Portnoffs grew out of a two-bedroom starter house within three years of purchasing it, the equity in the home would be eaten up in sales commissions to the realtor when the time came to move to a larger house.
Instead, Mr. Portnoff said, it makes more sense to wait for the three- and four-bedroom homes to fall in value, which he believes will happen in the approaching years as more baby boomers downsize and search for smaller abodes.
Some also expect more housing market turmoil ahead, leading to even-steeper discounts for those who wait. “We have a second wave of defaults, largely from option adjustable-rate-mortgage loans from four or five years ago,” said Thom K. Hall, partner at the Financial Strategies Institute of Midvale, Utah. Those who buy now may watch the values of their homes drop another 30% — a loss for those who pounce now but a boon for those who wait.
“If we get defaults this fall, then what you’ll have is another flood of foreclosures hitting the market. That means negative pressure on all housing prices,” Mr. Hall added. He predicts better deals in 2012 and 2013.
In defense of renting, advisers point to falling rents across the country. New York is among the locales with plummeting rents: In the second quarter of 2009, the average rent for an apartment in Manhattan was $3,839, down 7.3% from the prior quarter, according to data from Prudential Douglas Elliman Real Estate and Miller Samuel Inc., both of New York.
“There’s a fallacy that you’re throwing money away if you rent,” said Marc B. Schindler, founding partner of Pivot Point Advisors LLC in Bellaire, Texas. Prospective buyers often don’t factor in the cost of maintenance fees, closing costs and taxes when they consider what they would pay per month on mortgages, compare with their rents, he noted.
“You might rent that $350,000 home for $2,000 a month,” Mr. Schindler said. “If you buy, you’re throwing away money if the house doesn’t appreciate in value.”
Finally, renting gives newlyweds time to practice budgeting and build their cash reserves instead of being swept up into the pressure of buying a house immediately.
“If you’re not practiced at budgeting, it’s easy to underestimate your expenses,” Mr. Ross said. “The only way to know is to put your budget down on paper and give yourself an accurate picture of whether you can afford it.”