Buying in a Bad Real Estate Market
By Steve Gillman
It's been a bad real estate market in many ways for years
now (this is being written in June of 2010). As a result many
people are hesitating to buy a home. Fortunately there are ways
to protect yourself and still purchase that house. If these tips
are coming too late for your current situation, at least remember
them for next time you buy.
At the end of the biggest real estate bubble in our lives
- my wife and I bought a home (May 2006). We had been renting
in Tucson, Arizona, and we decided to move to Canon City, Colorado.
Although we had never been there the weather statistics and photos
we saw on the internet convinced us it was a good place to live.
One day we got in the car and drove the 800 miles in about twelve
hours or so, and the next day we bought a house.
We paid the full asking price, closing in the first week of
June - arguably within a few weeks of the top of the real estate
market. Then, in February of 2009 we decided to move to a bigger
home, despite my suspicion that prices would fall another 5 percent
or more before the bottom. Our first Canon City home sold in
May for 11% more than we originally paid for it - not bad for
buying at the top and selling near the bottom. The rest of the
story follows, and contains some lessons about bad real estate
markets and how to buy in them.
Our Little House
In 2006 we bought one of the cheapest ready-to-live-in homes
in town. We didn't want a home that could fall in value too much,
but also didn't want a fixer-upper. With about $2,000 worth of
minor improvements we had added while we were there, our $65,000
house sold for $72,500 after three years when real estate prices
continued to fall.
That gets us to lesson number one: The lower end of
the market never loses as much in value as the high end.
Our experience indicates that the cheapest homes may not go down
at all even as prices drop on other homes. It makes sense. Buyers
don't need to live in a big house with fine cabinets, but they
need to live somewhere, so the market for lower-priced homes
has more support in a bad real estate market.
Bad real estate markets often comes with bad economic times,
so there may be even more people looking for the small cheap
homes. Just about anyone can afford a home like that one we had.
It cost less to buy it than renting a two-bedroom apartment after
all. Another possible lesson is to clean the house up and leave
some furniture in it when selling it - we think that helped a
bit.
Buying as Prices Fall
Who can predict when a bad real estate market is going to
get better? Not me, but in early 2009 I guessed that in our little
town in Colorado, prices would fall another 5 percent or more.
Now, why would we buy a home that cost more than twice as much
as the first one we bought when we anticipated prices falling
even further? We liked it, and we had to live somewhere.
Really it was a decision based on many things. The house suited
us perfectly, was cheap to heat and maintain (it was newer than
the other), and we didn't plan to move for many years. Due to
the latter factor we were less worried than before about where
values went short-term. But what really made us feel good about
our decision was the loan we got. It has a 4.5 percent fixed
interest rate, and it's a 30-year mortgage. If we waited for
good times, we might have faced a higher rate of interest.
Suppose we saved seven or eight thousand dollars on the price
of a home by waiting. If interest rates had ticked up to 6.5
or 7 percent during that time, we could easily pay twenty thousand
dollars more over the course of the loan. In other words, why
wait when we could afford the house we were looking at, and had
no guarantee that we would save a penny by waiting for a better
price?
That is lesson number two then: The cost of home ownership
is not just in the price of the house. Our home won't
need major repairs for years, it is very energy efficient (it
already saved us $200 in the first year versus the other home),it's
in a town with very low property taxes and insurance rates, and
with very low payments thanks to the interest rate on that loan.
Besides, the bottom may already be here - who knows? In any case,
if you are careful, buying a home during a bad real estate market
can be a good idea.
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