Housing prices are lower than they have been in years. Mortgage rates are near all time lows. Housing stats are starting to pick up. The bottom on the housing market is in. Joe Smith around the corner sold his house in three days, and he had four offers (or was it four days with three offers?). Time to buy?and buy quickly! Prices will never be this low?rates will never be this low?the real estate agent said so. Buy, buy, buy!
We?re starting to hear this kind of buzz. If you?re looking to buy a home are you starting to feel the pressure to make your move during this rare ?window of opportunity?? Well, ignore the hype. The window will likely be open for a good while, so realize that time is your friend and play it for all it?s worth.
For one thing, housing sales continue to be weak. The statistical improvement we?re seeing in most markets is mostly upward bumps off a very low bottom.
More important, the profile of the typical buyer is deeply impaired. Three factors are combining that will keep a lid on the size of the potential buyer market for home for the next several years.
Credit
Credit guidelines have tightened since the housing crash. Certain programs, like sub-prime loans, no longer exist and credit requirements for nearly all programs have been stiffened. But that?s only half the problem.
The other half?probably the more significant one?is that credit profiles have deteriorated during and since the crash. Millions of people have experienced bankruptcies, foreclosures and prolonged periods of unemployment that have wreaked havoc with their credit profiles.
It?s important to realize that not nearly all of these people are ?deadbeats??many had sterling credit before the crash and had no problem getting loans of any sort.
The problem here is that these same people?who comprised a large chunk of the home buying market a few years ago?have been effectively removed from the pool of potential buyers. A bankruptcy, foreclosure or just a period of poor credit can keep a person from getting a mortgage for several years.
Equity and assets
Real estate equity has always played a big role in the housing market. In order to buy one home, buyers often need to sell their current one in order to come up with the down payment on the new one. If a homeowner has little or no equity there may be no money to make that down payment.
If the homeowner has negative equity?also known as ?underwater? mortgages?he may need to come up with cash just to close out the mortgage on his current home in addition to funds for the down payment on the new one. And the number of underwater mortgages is at record levels.
Meanwhile, an industry shift has made this situation significantly worse. No down payment loans, which were extremely popular during the boom years, are now all but gone.
Multiply little equity, no equity and negative equity positions by millions of homeowners and you have millions more potential buyers excluded from the market.
Income and employment
Just as with credit guidelines, we have an unfortunate intersection of tighter mortgage underwriting guidelines with unfortunate economic conditions.
Income and employment guidelines for mortgage buyers?which were largely ignored by lenders prior to the meltdown?are now being enforced. And no income verification loans, which represented a disturbingly high percentage of all mortgages just before the housing crash, no longer exist.
At the same time, small businesses have closed and many millions of people have faced prolonged periods of unemployment and under-employment. Far fewer potential home buyers can meet the industry requirement for income and employment stability.
If you?re looking to buy, you have plenty of time
Combine all three of the above factors, and we have a real estate market where the pool of potential buyers has shrunk by many millions. That virtually guarantees that the real estate market will be soft for the foreseeable future?and if you?re in the market to buy in home, that?s good news for you. But in order to make that work in your favor you need to avoid the growing chorus of buy-now-and-beat-the-price-increase.
- Keep your realtor on a short leash. Real estate agents are commissioned sales people?it?s their job to create a sense of urgency. The better they are at it, the bigger their paychecks. Tap their expertise, but don?t give into artificial deadlines.
- It?s a buyers market, and you?re a buyer. Simply put, you?re in the drivers seat, not the seller.
- Walk away from delusional sellers. It?s hard to believe that there are sellers who have completely missed the news on the state of the housing market, but there are. Either they believe that the home they?re selling is somehow special, or they?re too early in the process to realize that aren?t in control. What ever the cause, if it appears you?re dealing with such a seller, remove yourself from the negotiations.
- Focus on properties that have been on the market for a few months. The difference between a delusional seller and desperate ones is often the amount of the time their property has been sitting on the market. For your purposes, the longer a house has up for sale the better the chance of getting a good deal. If a house has been for sale for more than six months, it?s likely that one or more offers on it have fallen through. That?s the best kind of seller to work with.
- There?s always another property down the road. This is true even in normal markets, but in buyers markets that have lasted for years it?s even more so. Don?t fall in love with any single property. If the deal isn?t right, move on to the next one.
- For all the above reasons, you must buy below market. Many people believe they?re getting a good deal on a home because they?re buying it for substantially less than what they would have paid at the top of the market. This is categorically untrue. You should look to pay less than current market values–that?s a good deal! Given the uncertain state of the real estate market, this will be your best defense against becoming another one of its casualties.
Don?t let anyone?not home sellers, real estate agents, news articles, expert pronouncements or even well meaning family and friends?convince you that you need to move quickly to get a good deal on a house. Quite the opposite. In this market, patience will get you a far better deal than urgency. So take your time and stay in control?you just might save tens of thousands of dollars.
Are you in the home buying market right now? Are you feeling the pressure to move quickly? What are your thoughts about that?
Kevin:
I would love to buy a house one day, and learning that it is best to pray and wait for the “sign” that it is the right time to do this. While I hate paying rent each month, it is surely nice to be able to pick up the phone and call the landlord when something breaks (lol). On the other hand, as much rent as I have paid during my 52 years – I could have had several houses by now.
Too many times, what looks good on paper is not right for you. Just because the media says it is the right time to buy a house is not the reason to do so.
Thanks for the article 🙂
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Hi Angela – “Just because the media says it is the right time to buy a house is not the reason to do so.”–a big, fat AMEN to that! I think that the media and the “experts” tend to heard us in certain directions and that’s why we need to be aware of the facts so we can make intelligent choices.
As you said, being able to call the landlord to fix things is a big adantage that the tenant has that the homeowner doesn’t. Another is that it’s easier for a tenant to pick up and follow a job than it is for a homeowner. It’s not to say that renting is the better choice for all, but more that there is no one size fits all. If home repairs will be an issue, homeownership is probably not the best choice.
I do think that now probably is a good time to buy a home–as long as you can get a REAL deal on it–but again it also depends on personal circumstances. If you aren’t ready or in a position to do so, then now isn’t the right time no matter what’s happening in the market. But as I wrote in the post, now is one of those times when you have plenty of time!
Hey, Kevin. You definitely make a lot of good points about this, especially about what is a ‘good deal’. You need to compare it to the current market, not what it was at the height of the housing boom. It’s possible, the home value may never hit that same level again!
I’ve seen a lot of discussions about whether or not it makes sense to own a home. There are lots of other expenses that go along with it aside from the mortgage!
It’s going to be interesting to see what housing trends continue, too. Average home sizes seem to be on the decrease, so that may signal the desire for people to want to build smaller. It is possible that unnecessarily large houses could be going the way of the Hummer?
Chris – Hopefully we’ve hit a turning point. For a long time houses were getting bigger, and so was the debt on them. As the saying goes, “a tree can’t grow to the sky”. Sooner or later that dynamic had to reverse and it finally did.
A lot of people may not see it this way, but I think the pull back in prices ultimately will prove to be a healthy development. Lower house prices means lower house payments and that’s a major plus.
I’m relatively close to retirement age, so I’m thinking about selling my house with the yard to buy a condo in a highrise. (Always dreamed of living in one). I came across one I liked about 4 months ago but it was high priced, beautiful, but high priced. I just saw it last night on the MLS reduced by 23%. I’ve now set up an appointment to give it a look-see. You are correct Kevin, patience is definitely a virtue when it comes to real estate right now.
Norman – Your idea makes abundant sense to me (swap the house for a condo). Houses aren’t the castles we make them to be, in fact that’s how we can get in trouble with them. The point is, there are different types of homes that will work best at different times of life. House in the suburbs, apartment in the city, condo at retirement, tent in the woods–they all have their place in the right time. (Just kidding about the last one of course).
Yeah, look at the units that have been sitting on the market for a while and when you find one you like don’t be afraid to play hardball. Today, we have to insulate ourselves as best we can from potential price declines. The best time to do that it when yuo buy.
Kevin — I think that a lot of people feel that ‘now’ is the only time to do things. Delaying gratification for many is a difficult thing, but you’re most certainly correct that time if our friend.
Plus, it’s also a matter of finding out what’s right for you. I’ve known many people who think that when you rent, you’re throwing your money away. And others believe that owning a house is like slapping a ball-and-chain around your ankle. Like anything else, there are pros and cons — and since you’re the one that’s paying, it’s ultimately your decision anyway. It’s just a good idea to make a well-informed decision, whatever it may be!
Chris – That’s another reason why we need to get beyond the sense/state of urgency in doing anything. Real estate has been operating with an artificial sense of urgency for a very long time–that at least partially explains why people bought houses they couldn’t afford at ridiculously inflated prices. Good sense leaves the room when urgency takes over. And there’s certainly no urgency on housing right now.
Hi Kevin, as you know I’m a renter. I totally agree with your list on why you should take your time buying a house. My in-laws made a lowball offer on a place in NC in 2009, and they were shocked when it was accepted. Now that selling prices have fallen below that level, they are having some buyer’s remorse about getting such a big place.
I would also add to your list that people who are in financial distress are unlikely to be keeping up maintenance on their homes like they should. You should make an allowance in the price for having to do extra work to fix up the place.
Hi Jennifer – A renter is a very good position to be in right now!
You raise a good point about deferred maintenance. It makes a very strong case for hiring your own (not a realtor’s) home inspector, and sending him in with a fine tooth comb. It all means bargaining power, or a chance to bail on a property with expensive repairs.
There may be a game of hot potato going on as employment problems force people to sell what they can no longer afford to fix.