Jan's Journal

The housing market will continue its downward spiral, forecasts say, 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.

By Melinda Fulmer, MSN Real Estate

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.

Calling the market low is a difficult task, and it's 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. Investment bank Merrill Lynch is much more pessimistic, predicting that U.S. home prices will drop another 15% this year and 10% in 2009, with perhaps even more depreciation in 2010.

But for many buyers, there's no real need to wait for the market as a whole to officially bottom out, says Delores Conway, director of the Casden Forecast at the University of Southern California's Lusk Center for Real Estate. "Real estate is local," Conway says, and therefore what constitutes the bottom for the country is meaningless for those looking to buy and sell homes in their own neighborhoods.

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 downturn in our market," says Marianne Ackerman, of The Property Shop in Glenwood Springs, Colo.

Indeed, prices in this small community outside Aspen have been nudging up 5% a year unchecked for several years, thanks to a shortage of property suitable for development and a booming tourism market.

This appreciation prompted longtime Glenwood Springs resident Marianne Virgili -- who also heads the town's chamber of commerce -- to buy a parcel of land now, without the slightest bit of hesitation. "Prices are rising, so the best time to get in is now," Virgili says. She plans to start building a home on her lot in the spring.

Other markets that experienced healthy price increases in the latest quarterly sales data from the National Association of Realtors are Farmington, N.M.; Reading and Pittsburgh, Pa.; Columbia, S.C.; San Jose, Calif.; and Fargo and Bismarck, N.D.

"Just like the weather, there are large local variations in home prices," says Lawrence Yun, NAR chief economist. Yun says that in his examination of last quarter's metro home prices, two-thirds of the markets posted price increases.

Realtor Tom Rhodes in Dallas says that he has seen sales slow a bit, but that prices in his market haven't dropped as they have elsewhere. "Some people read what's going on around the country and say maybe this is not the best time to buy," he says. But, "we've got a pretty strong market. Those headlines are coming out of Miami and Las Vegas."

There are plenty of markets in Texas, Kansas, Arkansas and the Midwest that are now starting to tick up. In these areas, this might be 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?" says James Gaines, research economist with Texas A&M's Real Estate Center. "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.
Caren Saiet, a Los Angeles agent with Coldwell Banker Residential Brokerage, says that even in a down market, the best houses are at least holding their value. One of her listings -- a two-bedroom Craftsman with a large, professionally landscaped lot, in the gentrifying Highland Park section of Los Angeles -- has four offers and will likely fetch several thousands more than the $499,000 asking price that the seller paid for it 14 months ago. "We are in a really good position," she says. And, she notes, the buyer is getting a fair deal too, given the much higher prices in neighboring 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," Gaines says.

Schools were the biggest consideration for Michael Daniels, who recently purchased a home in Charlotte, N.C. The 34-year-old health-care manager and his family had outgrown their existing home, but wanted to stay in the same school district. After studying the market for months, Daniels and his wife recently decided to act, when the house they were eyeing dropped in price from $425,000 to $379,000.

"(The sellers) had had four contingency offers that had gone bad," Daniels says. When he agreed to buy the house without the contingency of selling his own house first, the price was whittled down a bit more.

Buying before selling seemed a bit risky to Daniels, especially in January. But as it turned out, getting his house out there early paid off. It took only one day to get the right offer. And thanks to some updates he had put in himself, he received 42% more than he paid for it six years ago. "The buyers walked in and said, 'This looks like a good value.' It wasn't underpriced, but priced to reflect the market," says RE/MAX agent Jack Gustafson, who listed the Daniels house.

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 first-time home buyers in markets such as Los Angeles, there's extra incentive in the form of rapidly rising rents. Los Angeles rents have climbed 25% since 2003, to an average $1,617, according to data firm RealFacts.

In areas such as Los Angeles and Philadelphia, 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, Conway says.

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, such as Los Angeles, 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, Gaines thinks that five is 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.

Gaines and Conway say there is still too much uncertainty in boom-and-bust markets such as Phoenix; Las Vegas; San Diego; and Miami and Tampa, Fla. In San Diego, for instance, prices fell 2.6% in October alone, according to Standard & Poor's Case-Schiller Home Price Index. And agents there are saying those price drops have continued to snowball since that survey was done.

In Phoenix, there is a 10-month supply of houses on the market, 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," says Mike Mendoza of Keller Williams Realty in Phoenix.
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. Check real-estate Web sites such as Realtor.com, Trulia.com and Zillow.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 real-estate agent to go over the fundamentals: How much inventory is out there? How many of the listings are foreclosures? 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.

If there are a lot of foreclosures continuing to pop up, prices might fall further than you'd like in the short term. That may not be an issue if you plan to stay put for a while, but it could limit your options if you need to sell or refinance your mortgage.
Once you've bought, don't get discouraged if prices don't begin to jump back up immediately. Many, including Gaines and Conway, are predicting this down market to remain in a trough for a while, rather than bouncing back up.

"I think it will go down, hit bottom and slink along the bottom before it comes back up," Gaines says.

But ultimately, the market will come back up, he notes, even those markets in California that are taking a beating. "Does anybody really believe that California won't come back again, and with a vengeance?" he says with a chuckle.

5 REASONS TO BUY
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 HOLD OFF
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.

Jan Fiore, Realtor

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