Apr 14 2008
Week of April 14th, 2008
Buyers: Should You Wait For The Market Bottom? In Most Cases, NO!
Excerpted/edited from MSN Real Estate
The housing market will probably continue its downward spiral through sometime in mid to late 2008 according to most forecasts and that means opportunities for buyers. But waiting for the market bottom may not be the smartest strategy. Here are 5 reasons to buy now — and 5 reasons you may want to wait.
Nationally, the latest housing headlines are far from encouraging: Foreclosures are up, home prices are down and new-home sales are at record lows. All this dismal news has many buyers sitting on the sidelines, afraid to make a move. But, economists say, waiting for the bottom may not be the smartest strategy. Realtors agree.
Calling the market low is a difficult task, and its most often spotted in the rear-view mirror. For one thing, there’s no agreement on when the U.S. real-estate market will officially touch bottom. If you believe the National Association of Realtors, it will happen later this year. Some Wall Street analysts and investment banks are much more pessimistic, but for many buyers, there’s no real need to wait for the market as a whole to officially bottom out. Real estate is local and therefore what constitutes the bottom for the country is meaningless for those looking to buy and sell homes in their own neighborhoods.
There’s risk if you buy now and there’s risk if you don’t. If you postpone your purchase and prices rise along with interest rates, you will pay more than you would today. In a flat market, you could also pay more by waiting if interest rates rise thereby decreasing your purchasing power. However, if you buy now and prices fall, you could lose money if you have to sell before the market cycles upwards again.
Prices in many markets have not yet hit their lowest point, but they aren’t that far off. And in other areas, only the pace of sales has been affected; prices have held firm or gone up. Waiting for the absolute bottom to hit before buying puts you at risk of missing it and getting caught up in a market on the upswing. Plus, for some first-time home buyers, owning simply makes better economic sense than renting.
Downturn, what downturn?
Of course, in some parts of the country, there’s no real reason to get cold feet about buying. Prices have ticked up slowly and are expected to continue that slow march for the foreseeable future. We have not seen a big downturn in our local market in the Baldwin County and Mobile County areas, thanks to a local economy that is relatively booming compared to many others. Some people read what’s going on around the country and say maybe this is not the best time to buy, but we’ve got a pretty strong market. Those headlines are coming out of Miami and Las Vegas.
“Just like the weather, there are large local variations in home prices," says Lawrence Yun, NAR chief economist. In the NAR’s annual report on metro home prices, almost half of the markets posted price increases. There are plenty of markets, including our local market, that are now starting to pick up. In these areas, this is a great time to buy, with interest rates historically low, a fairly large inventory of properties to choose from and less chance of getting caught up in a bidding war, analysts say.
Houses and neighborhoods that hold their value
There will always be some people who need to move because of job relocations, expanding families or a need for better schools. In desirable neighborhoods, there’s a price to pay for waiting. You have to ask yourself, "How greedy do I need to be? If the price goes down much more, you’ve got other people trying to buy it, even if it’s not the absolute bottom. Then, you might end up in a bidding war, erasing the savings you thought you had achieved by waiting. Even in a down market, the best houses are at least holding their value. And, the buyers are getting a fair deal too, given the much higher prices in other areas.
For some people, the value of the local public schools will play a large part in their buying decision. A well-designed house in an established area with a good public-school district will hold its value and save you money in the long run. These places don’t get hurt as much as the whole market, and they recover faster.
A sound financial move
Often, analysts say, people get so fixated on getting the lowest possible price that they forget just how little difference an extra $10,000 in the home price can mean to their monthly mortgage payment. Assuming a buyer pays $300,000 rather than $310,000 on a 5.7%, 30-year loan with $30,000 down, he’d be paying $1,575 a month rather than $1,634. Of course, the costs of the initial $10,000 add up the longer you own the home without paying off the mortgage. But, that additional $10,000 in value might be just the psychological boost some sellers need to part with their homes.
And for many home buyers in several markets, there’s extra incentive in the form of rapidly rising rents. In many areas, rents are getting close to or surpassing a mortgage payment. And the mortgage-interest deduction on your taxes is a huge help for those who need a write-off. Moreover, if you’ve lived in your house for many years and built up some equity, you can weather selling in this kind of market and finding another home. That’s especially true if you are moving from a boom market that is only now beginning to bust, to another area where prices are lower.
You have to know when to hold ‘em
Of course, there are some people who are better off waiting in this market: people who bought their current home in the past couple of years. In this short period of time, the value of the home hasn’t gone up enough to compensate for the agent’s commission and other selling costs. These days five is considered by many to be the magic number when it comes to buying and selling: If you’ve been in your house five years and plan to move to a place where you will stay at least another five, you’re probably OK.
However, there are a few notable exceptions. There are some markets around the country where prices are still sliding, jobs are being lost and foreclosures are making it hard for people to sell their homes, such as economically depressed Detroit. There is still too much uncertainty in boom-and-bust markets such as Phoenix; Las Vegas; San Diego; and Miami and Tampa, Fla., making it harder for people to sell their homes without taking a price cut. The people buying right now are really the people who have an urgent need to move. And it probably goes without saying that you shouldn’t buy if your job security looks a little uncertain in the near future.
How to get the best deal
If you’re ready to buy, try to make the best deal you can in a neighborhood that is holding its own, analysts say. Call your local realtor first—they are the most knowledgeable about the local market. Or you can check real-estate Web sites such as Realtor.com and Trulia.com or go through the real-estate sales data published in your local newspaper to see what houses are going for in your area.
When you have zeroed in on a neighborhood, work with an experienced realtor to go over the fundamentals: How much inventory is out there? How have prices in that neighborhood fared historically and over the past year or two? This will give you a feel for the overall direction of the neighborhood.
Once you’ve bought, don’t get discouraged if prices don’t begin to jump back up immediately. Many are predicting this down market to remain until sometime later in 2008. But ultimately, the market will come back up, even those markets that are taking a beating.
Over the long term, home prices in this country have tended to rise. But, they do fluctuate over time. It’s impossible to time the market. Still, you won’t realize any appreciation unless you’re a property owner. We’re coming out of a period of extreme appreciation. In many areas of the country, homeowners who bought two to three years ago and then sold did very well. But, this is not the norm. Your home purchase decision should not be based on the anticipation of continued appreciation at the recent rate. And, in most cases, it’s not a good idea to buy for the short-term.
5 REASONS TO BUY NOW
1. Prices in the neighborhood you are interested in are relatively stable. Either they are holding their own or increasing, or the pace of decline is slowing significantly. If you have to move and don’t like apartments, the small penalty you pay for missing the bottom may not mean much.
2. You plan to stay in the home for more than five years. If you can stick it out that long before selling, economists say you’ll probably ride out any downturn and come out ahead on price.
3. Your rent rivals a mortgage payment. If you can afford to buy, it can give you one bonus that renting can’t: the mortgage-interest deduction on your taxes.
4. You’ve found the right house in the right area for you. The schools are great. You love the area and know it would be hard to find another house like the one you have your eye on. In a better market, you would most likely have much more competition for that home.
5. You’ve built equity in your house and are moving to a place where homes are cheaper. In your new market, your money will go a lot further.
5 REASONS TO BUY LATER
1. You’ve lived in your house less than two years. Chances are you haven’t had enough time to accumulate equity in your home. Indeed, you may have negative equity, if you live in many areas such as California, Florida, Arizona or Nevada.
2. Your job security is uncertain. If your company or business is in distress, it’s probably better to stay put until the smoke clears.
3. You don’t plan to stay in your next house at least five years. While it’s not important to buy at the exact bottom of the market, it is important to stay long enough to ride it out completely.
4. You don’t have good credit or a decent down payment. Do you have a job and income you can document? As a result of the subprime lending crisis, lenders are much more careful about whom they’re giving their money to.
5. You have an existing home to sell in a neighborhood where prices are dropping precipitously or where the number of foreclosures is spiking. In this climate, you’re probably better off waiting out the storm.