Vol. 4, No. 4, April 2008
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Hitting bottom
How to tell when it’s time to buy real estate in the current economic downturn
Clearly, the demand for housing is dependent upon a few factors. Once demand increases, prices will rise. But what fuels demand? Much of it is psychological. Right now, consumers in general are not very optimistic about the future. If potential buyers think that 2009 will be a better year than this one, then demand for dwellings will likely rise.
But how can you evaluate psychology? It’s very difficult, but talking to friends, real estate agents (who aren’t trying to sell you something) and following financial programs on TV, radio or the internet could help.
The experts say that the bottom still has some ways to go.
Most economists now agree overall U.S. and local housing prices will fall through 2008 and won’t begin to rise again until next year. For example, Freddie Mac, a federal mortgage wholesaler, said recently that house prices would continue to decline through 2009. The organization’s public information office said prices nationwide would drop another 7.9 percent this year, on average, and 3.3 percent in 2009. They fell 8.9 percent in 2007.
In the Las Vegas Valley, prices have fallen even more steeply. The median home price has dipped more than 20 percent in the past year. Home sales reached their lowest point since 1997. And any gains homeowners have made in the past four years have been erased during one very bad year.
The ‘Motivated’ Seller
The down housing market is a misfortune to those caught up in it, but can be an opportunity for those in the buyer’s market. It’s clearly a chance to swing deals that haven’t been seen in five years or more.
But there are dangers as well as opportunities.
Along with plunging real estate prices came rising interest rates. And while rates have inched lower in the past few months as a result of the Federal Reserve Bank lowering the prime rate, the availability of mortgages is also falling.
Remember when you could buy a home with no money down and spend the first few years paying only the interest? No more. Mortgage lenders have gotten much tougher. Credit score requirements are going up and down payments are back in vogue.
Lenders may even require more than the traditional 20 percent down payments in markets like Las Vegas, that are especially hard-hit. In December, Fannie Mae issued a directive increasing down-payment requirements by five percentage points in declining markets. (So, if a certain type of loan allows up to 90 percent financing, buyers in some markets will have to put down 15 percent, rather than 10 percent.)
And thinking foreclosure? Be very careful. They may not be the bargain they are cracked up to be. A overabundance of foreclosures in any one neighborhood may mean that neighborhood is unstable and home values may decline much more before they rebound, if they do. In addition to suppressing values, excess foreclosures can lead to increased crime and an overall decline in communities.
Time On Your Side
The bottom line is that the bottom of the market isn’t necessarily predictable, and if it is, there’s still a lot you need to know about the specific market in which you plan to invest.
Most experts suggest taking your time when considering a home purchase. Research is essential. Before making an offer, find out when the seller bought the place, how much they paid for it and how much they owe. (A realtor should be able to provide this information, although it’s also public record.) Knowing more about their personal situation—whether they have more than one property to support, for example, also helps.
So take your time and enjoy the hunt. If you’re careful, you can be the proud owner of a “bargain” that will pay big dividends in the future.
