A Look at the Real Estate Market: Time To Buy?

by Silicon Valley Blogger on 2008-04-2614

Home buying: when should we step into the market? Too many are still wary.

Shouldn’t we be thinking about buying when everything is tanking? Unfortunately, the uncertain economic climate isn’t encouraging too many people to play contrarian right now. Many people aren’t quite ready to step up and buy just yet because they are afraid of “catching a falling knife”, which is what most investors concern themselves with when trying to determine when it’s best to get back into the market.

Unlike buying into a slumping stock market, purchasing into a deteriorating real estate market is trickier. It takes a lot of guts for one to sink a significant amount of money into something with a hefty price tag that fluctuates in value, plus sign up for half a lifetime’s worth of large payments to this end. With that huge price tag being a moving target, house buying these days has become a stressful activity that rivals the nail-biting effects of going on margin in a volatile stock market. [There are similarities here, given the leverage factor in both situations!]

So just how dicey is the real estate market in the eyes of average citizens out there?

Taking the pulse of the populace, an AOL Money and Finance Poll conducted earlier this month through phone interviews with around 1,000 people yielded these results:

  • Close to 30% of homeowners worry their home will lose value over the next two years.
  • But 40% think prices will rise.
  • One in seven mortgage holders fear they won’t be able to make their monthly payments on time over the next six months. That’s 14%!
  • 60% said they definitely won’t buy a home in the next two years, up from 53% who said so in a similar poll 2 years ago.
  • Only 11% are certain or very likely to buy soon, down from 15% two years ago.
  • 10% have adjustable rate mortgages; it was double that two years ago.
  • Those expecting to buy soon are worrying the most. Of that group 43% frets that their home’s value will drop in the next two years, compared with 25% of those not expecting to buy anytime soon.
  • 59% think now is a good time to buy.
  • 50% think this is a very tough time for first-time buyers.
  • Almost 2/3 of respondents think it’s harder for first-home buyers than it was five years ago.
  • 50% think homes are still overpriced.
  • 10% think homes are underpriced, particularly in the Midwest.
  • 35% think homes are just right.

It sure seems that most people feel that the real estate market still has room to readjust further in the coming months or years, as evidenced by the following chart:

home prices, real estate market

Mixed Thoughts On The Real Estate Market

So how ugly is this real estate market? Reports have stated that “foreclosures have soared to record highs, mortgage rates have increased, sales of existing and new homes have fallen and home values have dropped.”

With such an ugly market, I can see how this can awake confusion and mixed emotions among homeowners and wannabe homeowners alike.

real estate market, real estate cycle

My thoughts? There are many and varied, but I’ll share a few with you (but mind you, I’m no expert):

If you own a house and you want to sell — too late, you’re stuck. Sit on it until the tide turns then sell when things get better if you still feel like unloading. Unless you can’t wait out this property cycle and feel like you’re in over your head. If so, you’ll need to consult with a real estate attorney or CPA and have them help you assess your situation.

If you want to buy — ask yourself why you want to buy. Do you really have to? Are all the planets lining up to answer your American Dream? Then go ahead and you may find that this is a great time to do it, to realize that pride of home ownership. You’ll note that this market downturn is precisely the time when opportunities begin to reveal themselves. If you’re thinking about buying a home and looking to maximize your investment in the real estate market, then now is the time to prepare and capitalize on this window of opportunity. Beef up your savings for that down payment, begin checking out neighborhood home valuations and maybe even start connecting with real estate professionals who may be of assistance to you.

But if you’re after the best returns on your money, you may want to think twice about owning a house since it’s been shown that renting a home while shoveling your money into stocks instead of a house could make you richer in the long run. Though I’m sure not everyone will agree 😉 .

This doesn’t change the fact that the real estate market offers great prospects now that it’s deflating, but before you do anything with your money and your assets, it’s wise to take a step back and carefully assess your financial goals with reference to home ownership.

Image Credit: Appraisal Scoop

Copyright © 2008 The Digerati Life. All Rights Reserved.

{ 12 comments… read them below or add one }

Four Pillars April 26, 2008 at 3:09 pm

Trying to time the RE market is pretty tough.

If you wait until things are more stable (ie prices are going up) then you will pay more for your house than if you buy when things look their darkest.


John Hunter April 26, 2008 at 3:21 pm

I could see buying now with the right deal but I wouldn’t be worried about waiting. You can get great deals when there is panic in any market. The panic (or euphoria – on the other side) can also be very difficult to time. I think the odds of a decline general in real estate still are high. If that is true waiting should be fine. The hard part is knowing when it is finally time to buy.

Sarasota Real Estate April 26, 2008 at 5:13 pm

Remember that real estate is somewhat local. They are related but you really need to analyze each area on its own.

I know in Sarasota that prices have declined around 30%-40% over the last 3 years. Prices went way beyond what people can afford and now they are back to normal again for the most part.

The trouble we have now are the foreclosures. People who maxed out the equity in their homes when theymarket was at its peak and those who paid high prices at the peak are very upside down now. Many of those people are walking away from their homes. The added supply will drag the market down a little more. It is a snowball effect. The more it gets dragged down the more people will walk away. I think what will happen is that you will get those with lots of money like hedge funds and private equity funds coming in to buy up large blocks of real estate at a discount. this will buoy the market.

Remember the contrarian investors – they seek opportunities to profit from situations when the crowd mentality leads to unreasonable valuations for assets, either on the upside or the downside.

Sellers in 2005 timed it just right. Will we be saying in 2012, “I wish I bought a home in 2008?”

Mr Credit Card April 26, 2008 at 6:37 pm

At the end of the day, one can only buy what they can afford. In the last few years, houses were more affordable because of cheap financing.

Right now, even though the Fed has cut rates on numerous occasions, the 30 year rate is still about 6% or more. Which means that mortgage rates have actually not changed.

House prices have also increased not just from low rates, but from buying from folks who would have never gotten any credit before.

Even so called real estate pros will trouble getting financing unless they have superb credit.

That unfortunately leaves house prices with the risk of further downside simply to readjust to levels before the above factors came into play.

But having said that, there will always be buyers who really want to own a home, start a family and can afford the price, and get financing.

Mary Pope-Handy April 26, 2008 at 6:47 pm

While the national real estate statistics are interesting, they aren’t helpful when buyers or sellers are considering a real estate transaction. Real estate is local, and it’s the local numbers that count.

Even locally, there are lots of micro markets. Comparing south San Jose to Sunnyvale is no good. Even within a particular city or area, it’s vitally important to asses the hyper local market (ideally track within a mile or two, using a similar sized home on a similar sized lot with the same school district).

So the question for a Silicon Valley home buyer is not whether it’s a good time to buy a home in the U.S. or in California, but whether it’s a good time to buy in a very particular portion of the market, in a very particular price point. The answer will be different from Gilroy to Saratoga.

The other thing that should be mentioned is that home buyers usually buy two things, not one. Most purchasers are also getting a loan. They really “buy” a loan. What does it cost? What did it cost a year ago? What will it cost a year or two into the future?

If someone’s contemplating buying a home now, it is critical to also consider the cost of borrowing the loan and how that impacts the monthly payment.

There are ratios at play here. If home prices continue to decline, but interest rates continue to rise, at some point it would be a lost opportunity if the consumer waited.

No one knows what exactly will happen with pricing or with interest rates, but there’s a good case to be made for buying in many areas now before the cost of the loan rises further.

J.D. Fournier April 28, 2008 at 6:22 am

I have to disagree with your conclusions. I recently wrote on the subject: here. If you are both selling and buying, especially staying in the same area this is a great time to buy. Now this may not be true for everyone, like someone who recently purchased their home, but for the rest who have been in their house for 5 years or more, this a perfect opportunity. Yes you will get less than maybe 1 or 2 years ago, but you will also find some great bargains that will more than make it up. This is a great time to upsize, as more expensive houses have fallen more in terms of dollars.

Unfortunately you can’t dollar cost average into buying a house (can through a REIT), but still you can take this dip to move up in house.

The Personal Financier April 28, 2008 at 10:35 am

If the market still seems scary one can always increase exposure steadily through real estate companies, Reit funds or just any company with a high investment in real estate.

I believe geography play a critical role here as well.

David May 1, 2008 at 1:01 pm

I think we will find a bottom at some point during the year. Residential REIT’s are already off their lows.

Rebecca Levinson May 7, 2008 at 12:23 pm

Good examination. I would ask the advice of a local real estate expert and study what the market is doing locally if I were a real estate buyer now. It doesn’t matter what a city like Las Vegas is doing, how many foreclosures they have, how their prices are dropping, if I am buying a house in Lake Geneva, WI- a resort town with a year round population of 7k and a.k.a “Chicago’s playground”.

I would then take into consideration my personal and financial needs and goals. Will I be in the house for awhile? Will it be a first time purchase, a move-up, an investment? Is it because of a job transfer, a better commute, better schools for my children?

And finally, overall will a purchase now improve my lifestyle?

I don’t think any of the masses or the public opinion polls can make that kind of decision for me.

Craig June 9, 2008 at 4:52 pm

My wife and I recently bought a house in Washington (Seattle) after moving from the UK.

We found out that WA still has one of the better markets in the US (for now anyways), but we found that coming from the UK you get a lot more for your money over here, even if this is one of the “stronger” states in terms of the market.

We don’t plan on selling for a few years so we’re pretty confident we’ll make money in the long term.

The one thing we made sure not to do was get a 100% mortgage with a variable rate. Instead we saved for a decent down payment and chose a fixed rate.

California Refinance December 3, 2008 at 7:21 pm

People have been buying like crazy around here! The RE market is hotter or as hot as it was back in 2003. Funny that even in times of hard to qualify loans that people still find a way to buy!

We will see how this new FHA downpayment will effect the market.

MarbellaPropertyGuy February 12, 2009 at 9:14 pm

I’d buy if I had the money to buy. But with the economy like this I can’t even get a loan to buy these homes for such great deals.

Leave a Comment