If you’ve been thinking of buying a home, now is the time, especially if Congress passes the First-Time Homebuyer Act, which would allow low- and middle-income earners who haven’t owned a home for at least three years to get a $15,000 tax credit when they purchase a primary residence and live there for at least four years.
Participants must make no more than 160 percent of the local median income; which for a Ukiah household is about $50,000, so the eligible household income would be about $80,000. Eligible properties must cost no more than 110 percent of the local median purchase price, which is about $500,000 in Ukiah, so eligible homes could not cost more than about $550,000. With an income of $80,000, good credit, and little to no debt, you could qualify for a loan of about $400,000 (and that’s with no down payment). If the bill passes, it would be retroactive.
Not only is this a good time to buy because of pending legislation, but also because in my opinion, interest rates will be going up in the not-too-distant future. Of course, I’ve been saying this for five years, but this time I think I’m finally right.
Just like everything else in the economy, interest rates are influenced by the market forces of supply and demand. Although the government manipulates interest rates, the market still puts pressure on rates and that pressure is building. At this point, I think the Federal Reserve (the manipulators) are reaching the limit on holding long-term rates down.
You can think of interest as the cost of renting money. When there is a lot of money available to borrowers, interest rates drop. When there is less money available because the market shifts, interest rates rise.
Inflation is probably the biggest single driver of interest rates. Inflation is the decrease in the purchasing power of money, reflected in a general increase in the prices of goods and services (as defined by Investopedia). As inflation increases, so do interest rates. This happens because lenders want compensation for the decrease in purchasing power of the money they will be paid in the future when borrowers repay their loans.
The Consumer Price Index (CPI) is the most common measure of inflation; it compares the cost of several consumer goods and services to a fixed base period. The CPI does not always reflect how an individual product is doing because the index is made up of so many. CPI has been inching up, yet the cost of housing has skyrocketed.
For example, according to Jeff Ward at Mendo Mill, the cost of lumber has tripled. Other essential home-building materials have also risen sharply. This inflation is making it more expensive to build housing. Although these increases are not fully reflected in local housing prices yet, home prices are definitely on the rise.
The cost of goods is not the only upward pressure on home prices. In fact, it’s not even the most significant. The current shortage of skilled labor (or any labor) in the Ukiah Valley is forcing wages up and making it far more expensive to build houses. Again, supply and demand. Less available labor means it is more expensive. Less labor means contractors cannot build, or even renovate, houses so the cost of housing increases. I wanted to put in a pool with all the trimmings in my backyard and I was willing to pay to have the job done right. I cannot get a contractor to return my call because they have so much business pouring in.
So, if you can find a house to buy in your price range right now, jump at it. With the proposed tax credit, the cost to buy will barely be more than the cost to rent and the benefits of home ownership far outweigh those of renting. Of course, the tax credit may not pass, so don’t go out and spend money you don’t have.
If you have questions about property management or real estate, please contact me at rselzer@selzerrealty.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery.
Dick Selzer is a real estate broker who has been in the business for more than 45 years.