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Real estate market timing...

January 28, 2011

Is it time to buy, sell or hold real estate?

The second question, "Is now a good time to sell?" will be a little easier to answer than the first. You would have been better off to have sold at the peak of the market in 2005, but today is probably a better time to sell than it will be six months from now. There are a lot of factors that are going to drive the market higher eventually but the short term pressure seems to be toward lower prices. You should be handsomely rewarded if you can hold for the next upturn in the market without suffering from a large negative cash flow in doing that. However, if you are going to be a seller in the next year or two, you'll probably be better off selling sooner rather than later.

"Is now a good time to buy?" Now may be a time for many prospective buyers to start getting out their wallets. However, this is not an across the board recommendation and will vary depending on your individual circumstances. Consider a few different situations;

If you are an investor making a 20% downpayment on a $170,000 single family home, you will likely see a slight positive cash flow but your yield will be in the range of 1%. You can make about the same with your money in a bank CD without any risk of principal loss. For you, it may still be premature to think of investing unless you have sold other property and have money you have to reinvest. Still, it doesn't hurt to begin familiarizing yourself with the market by looking at our Bargain Hunter's list. In fact, there will likely be some properties on the list that will allow you to have a nice positive cash flow.

If you are an investor considering a cash purchase, now might be a very good time to purchase. A $170,000 purchase will likely return a yield of between 5% and 6%. That is far better than what you can get in the bank. So, if home prices decline less than 4% or 5% per year, then you will be money ahead.

The question is a little more difficult to answer if you are someone who is looking for a personal residence. Prices are declining and delaying your purchase may save you money. However, here are some other factors that you should consider;

1. The purchase of a home is seldom a purely investment related decision. People are looking for a place to raise a family, the security of knowing the landlord isn't going to force them to move or raise the rent, the ability to have the pet of their choice or to make improvements to the property to better suit their needs and etc. For people moving to a new area and for many others, it is often a choice between making one or two moves. It's hard to put a value on these benefits.

There are also some potential risks in waiting for prices to decline further;

2. Severe problems among many large lenders has caused them to eliminate some loan programs, to make loan qualification standards stricter and to raise interest rates on their non-conventional loans. This may affect your ability to get the financing that you need.

3. The Federal Reserve has lowered the Discount Rate to .25%. Most economists are not predicting significantly higher interest rates this year. However, if they are wrong (as they were with the financial crisis in August of 2008), delaying a purchase could have a significant negative impact on your purchasing power. 30 Year mortgage rates rose from 13.04% to 16.33% in a two month period in early 1980. By October 1, 1981, they had climbed to 18.45%. Also, consider that interest rates the last five years have been the lowest rates we have seen for at least the last 40 years. A 2% increase in interest rates, from 5% to 7%, will increase the principal and interest payment on a 30 year loan by 20%. You need to weigh the benefit of lower home prices against the risk of higher interest rates.

4. You should be especially sensitive to the interest rate issue if you have a home to sell. Interest rates can move rapidly. If they do, you may not have time to sell your home before rising interest rates make a move impractical.

5. Another factor for some people will the source of your downpayment. For example, if you want to purchase a $200,000 home, you will benefit if you have at least $40,000 for your down payment. This will allow you to get the best possible rates and terms on the loan for your new home. If you are relying on the equity in your current home for the downpayment on your new home and if you currently have just over $40,000 of equity, then waiting while prices decline may force you into a less desirable loan.


If you DON'T have a home to sell: Don't feel overly pressured to buy right away but keep in mind that there are two main reasons for the current foreclosure problem and one of those reasons is that borrowers gambled and lost. You would certainly be considered prudent to be shopping for a home now while you can lock in a good interest rate and be purchasing a home at a savings of approximately 45% from where home prices were in November of 2005. Be careful of gambling on lower home prices or flat interest rates.

If you DO have a home to sell: Generally, our recommendation is to sell now unless you don't mind waiting a few years for prices to recover or unless you won't realize enough money to repurchase if that is what you want to do.

Do not worry about trying to buy at the very bottom of the market: People who try to hit the bottom of the market usually miss. By the time they realize that the market is going back up, the number of homes listed for sale has declined. Not only do they miss the bottom of the market, they end up buying at a time when there are fewer homes to choose from and often end up settling for something that is not their ideal. In a few cases, they get left out of the market entirely. People who missed the bottom of the market in the 1997 to 2000 era (when the median home price was about $100,000) may still out of the market today (median home price is about $164,000).

Our firm belief is that, for most people, a real estate purchase should be viewed as along term investment. Consider this, my father is dead but my mother stills lives in the family home they purchased for $26,500. How much difference would it have made if they paid 10% over market? Hitting the bottom of the market is not nearly as important as;

1. Finding a home that meets your long term needs.
2. Finding a home you can afford without resorting to a high risk loan that has to be refinanced when rates start to adjust.

If you need to wait for prices to come down more to be able to afford the home that meets your long term needs or if you just want to go bottom fishing, then use this time to concentrate on saving money and paying off consumer loans while you watch for a home that meets your long term needs at a price you can afford.

Get preapproved by a reputable lender: That way, you will be ready to act when the timing is right for you.

For ourselves, Tracy and I have good equity in all of our homes and have taken advantage of changes in interest rates to lock in some low rates. We have positive or nearly positive cash flow coming from all of our rentals. They are nice quality homes in good neighborhoods and we keep them in nice condition. Given that, we are quite content to hold our property through declining markets.

Recent declines in home prices have caused us to seriously look for more real estate. In fact, we have purchased five more homes in the past few years. Our belief is that you buy property when you find a home you can afford that meets your long term needs and that you don't wait for the bottom of the market.


What Clients Are Saying

quotes"I have nothing but great things to say about Lloyd and his wife, Tracy. They sold my home in four days and helped us get the home that we wanted. He followed up on all details above and beyond anything I expected. He has my highest recommendation.
- John


Lloyd Leighton Realtors

Address: 1212 Highland Avenue
Yuba City, CA 95991-6115

Phone: (530) 671-6152
Fax: (530) 671-3904

Cal BRE Lic. #00951505