Is now the time to buy real estate?
In March 2007 the average price for a new house in the United States was $329,400. By Jan. 2009, the average price had plunged to $245,200. In March 2010, that price had climbed to $258,600. So, is now the time to buy real estate?
As always, the correct answer is “it depends.” It depends on one’s personal situation, the local market and financing. Whether a buyer is someone in search of a new home or an investor seeking opportunity the fundamentals, something that got way out of kilter during the past few years, still apply.
For those seeking appreciation in value, the first rule of thumb is to buy the least expensive house in the most expensive neighborhood. This advice is based in the principle of regression/progression, which states that the value of real estate is negatively or positively affected by surrounding properties. A superior property will tend to “pull up” the value of the inferior property and vice versa. Consequently, the property which will be pulled up most is the worst house, which is presumably the least expensive. So, the buyer concerned about a good investment would want to buy the worst house in the neighborhood, not the best house. By the way, the best house in the neighborhood is often the one that is considered to be overbuilt for the area.
Financing plays a critical role in real estate. What that means is that the lender is going into partnership with the buyer. Except that the real estate financing world changed so much over the past 30 years that the so-called lender was really a broker who was placing money for the real lender. But who was the real lender when mortgage loans got bundled up and sold in all kinds of non-traditional ways? And, would there be a real estate lending market as we know it if mortgage loans were not relatively liquid? From this writer’s perspective, the residential mortgage market became incredibly skewed by federal government policies, especially as related to Fannie Mae and other quasi-government lenders in the secondary market. In any event, the current situation is such that financing is more difficult to come by. Nevertheless, it is not too difficult for qualified buyers. As of this writing, FHA mortgage interest rates are hovering around 5 percent. Buyers should shop for interest rates. A good place to begin is the bankrate.com Web site. By the way, in 1934, when the Federal Housing Administration got up and running, its interest rate was 5 percent. The rate dropped to as low as 4.5 percent in 1953. In the 1980s, interest rates went into orbit. On Sept. 4, 1981, the FHA interest rate on a single-family home mortgage was 17.5 percent. That meant that the principal and interest payment on a $75,000 mortgage was $1,099.
Supply and demand in the local market should be the primary factor in the decision to buy real estate. While it is true that some of the biggest average price drops occurred more in certain areas of the country than others, it is also true that there are neighborhoods in those regions that have held their values very well. One way to determine the supply and demand of local real estate is to learn about the average number of days it takes a house to sell. In hot real estate markets, it is not uncommon to see listed residential properties receive an offer in less than 30 days. Anything over 100 days on the market indicates that sales are slow, and that for whatever reason there is less demand for those properties.
In the early ‘90s, I wrote a real estate advice book titled “Two Hours of Real Estate – One minute at a time.” Looking back, I find that some of the things I mentioned then remain true today when deciding whether or not now is a good time to buy real estate. One thing was that a lender should never make a loan on real estate that cannot be reached by lunch time. It harkens to the number of real estate loans made by out-of-state lenders in the 1980s, but the wisdom still holds true. Find out which lenders are making loans in your area and go talk to them or to the mortgage broker as the case may be. They know a lot about the market and probably have an opinion about whether it has bottomed out.
Finally, the good analysis of any property means sitting on the curb across the street and simply observing the property. Yes, that is impossible to do. But it emphasizes the point that the property should be inspected, especially at different times of the day. It is also a good idea to talk to the neighbors.
In summary, there are probably quite a few places where the real estate market has bottomed, thus making it a good time to buy. The bottoming-out is not uniform across the country, however, so it will take some digging for purchasers to understand the local market.
Who knows? Five years from now someone may be saying, “I remember when I could have purchased that property for only $258,600.”
Phil Hardwick is coordinator of capacity development at the John C. Stennis Institute of Government. Contact him at email@example.com.
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