In today’s Real Estate market we can all get lost trying to figure out whether it’s a good time to sell or buy. Economic woes, plunging home prices, forecasters, and Realtors have conflicting/confusing opinions about the best time to take advantage of the market. As a buyer, how does one determine when it is the best opportunity to get a great deal?

Economic Woes

Let’s start with the economic forecasters, ARE WE IN A RECESSION OR NOT?   As of the first quarter of 2008, the GDP  had increased 1% as reported by the Bureau of Economic Analysis reducing the chances of a recession. Orawin Velz Ph. D. stated, “There’s a good possibility we’ll avoid a significant recession this year, and see much stronger growth by early next year”. The UCLA Anderson forecast affirms the prognostication and goes on to give an 18 month timeline before housing prices stop moving downward and begin rising. However, for the average consumer, it feels like we are in a recession.  Food and Oil prices are rising faster than most Americans can keep up with. Consumers are afraid to spend and the government has not yet created any legislation to give the average consumer immediate relief.  Qualified buyers are refraining from purchasing hoping they will find more price reductions on homes, meanwhile, sellers are losing more and more equity due to the rise in foreclosures and bank owned properties that are selling at lower prices.

Mortgage rate stability

The Fed has lowered interest rates, but most of us are not seeing those discounts in mortgage rates like in 2004-2005. Congress is considering a measure that would give lenders further incentive to modify loans for at-risk borrowers if lenders agree to lower the balances in order to reduce foreclosures and further price skids. FHA increased their lending limits from a maximum of 362,790 to 729,750 (set to expire on December 29^th, 2008), and is waiving its “anti-flipping” rule to stimulate the real estate market. If it is true we have avoided a recession, the Federal Reserve is unlikely to lower interest rates further. However, to stave of inflation it may have no choice but to tighten credit and increase interest rates. Home prices will also drop, at least for another 6-12 months, depending on the area before the skidding stops. What you need to keep in mind is the fact that interest rates may not stay as low as they are today. If you consider this example;

Purchase price $400,000, 3% deposit, 6.08% interest rate mortgage w/out tax and insurance         

$2346.25 monthly

20% discount  $320,000, everything else same                                                                                 

$1,877.00 monthly, price drop savings $469.25 

Increase interest rate 1%- purchase price $320,000, 3% deposit, 7.08% interest rate                                               

$2,081.80 monthly, price drop/interest rate increase savings $264.65

While I am not a qualified mortgage broker the example is to illustrate how an increase in the interest rate would lower the amount that you would be expecting to save by waiting for home prices to lower even more.  

Buyers: Buying a home might get a little easier as prices dip a little bit lower. There is an ample amount of supply out there. You don’t have to be afraid of diving in if you find your dream home. Use the market to your advantage and have your agent negotiate a lower price and more favorable terms. REO’s or foreclosures  have lowered their prices to sell the home faster and now sellers are starting to follow the trend. Remember do your homework and look at comparables as an indicator of a good or bad investment. The rule I use with my clients; a home sold for $600,000 3 years ago, now is on the market for $465,000. The area is selling for about the same amount for equal value homes, try to purchase the home as close to $400,000 as possible. Sure, the market will dip and your price will absorb some of the additional equity loss. However, when the market rebounds your home will have an easier time accruing equity. That’s the name of the game right now; BUYING PROPERTIES THAT WILL EARN EQUITY THE FIRST YEAR THE MARKET TURNS AROUND!

Sellers:  What ever the reason for your sell, it’s a win, win situation as long as you are buying another property. Consider it as delayed gratification. You sell and lose equity right now, but your purchase will make up for your loss. In my experience, sellers who are trying to hold onto every penny possible have a harder time getting into the purchase side where they can make their money back. Consider this example;

You bought your home for $250,000 five years ago and now it’s only worth $450,000 (in 2005 it was worth $590,000). When you sell it you stand to make $75,000 from the sale after fees, commission, price reductions, and paying off mortgages and equity lines of credit.

Your new purchase will cost $400,000 (in 2005 it was worth $650,000) and has a pool. Your mortgage payment, taxes, insurance, and deposits will increase slightly, however, in 5-10 years from now you stand to make a good amount of equity back.

Most sellers get caught up on the amount they should be making based on 2005 prices instead of today’s prices.

In closing, buyers and sellers should consider a few things; 1. There will not be an indicator that tells you when prices have hit rock bottom. Sure the media will continue to report on the negative parts of the market, however keep in mind those reports are for counties, states, regions, and the country overall. Most of the news articles or reports rarely single out specific cities. By the time they start reporting on the overall markets bouncing back, you have already lost some great deals. 2. Don’t get caught looking in the rearview mirror waiting for lower prices to buy or what you should have sold your home for at the peak of the market. Living in the past will blind your future. If you find a deal make it happen, but do not settle there’s enough supply to get the right home.  3. I believe buying and selling has a lot to do with preparation. Do your homework and use your resources. Most Realtors like myself, can provide you free consultations to help you decipher your current standing and how to achieve your goal/dream.

Always remember “Where attention goes, energy flows, and results will show” -Herb T. Ecker-