Are You Getting a Good Deal?
A few years ago the real estate market was in very good condition. Prices were rising at extraordinary rates. Interest rates were low, so these properties were still affordable even at higher prices. Lots of people were selling and lots of people were buying.
Many people were skeptical about this boom in prices, referring to it as a bubble and asking when it would burst. Indeed, it did burst. Prices began to come down.
While prices were coming down, many people were reluctant to believe that values were coming down as well. What used to be an appreciating product in most markets was now a depreciating product in most markets. Real estate was losing value almost at the rate that an automobile would lose value.
The slow acknowledgment of this changed market was to a large degree for practical purposes. Many buyers had used 100% financing and could not afford to sell at the lower prices. Many buyers had used adjustable rate, interest only, and other financing methods designed to keep their payments low, but with all intentions of either refinancing or selling in a few years as the value of their properties increased. No matter how these owners resisted, they could not stop the receding tide; prices and values were coming down.
There were and there still are buyers who have dared to come out into this new market. They believe that it is a good time, if not an excellent time to buy. Their philosophy is based on the simple adage "Buy low, Sell high". But low and high are relative terms.
If the average value of particular homes in a given neighborhood were $400,000 4 years ago and today those same homes average $325,000, then absolutely they are much lower now than four years ago. But are they a good deal?
Typically value is set by what willing buyers are willing to pay to willing sellers for their product. In the recent real estate market, it could be argued that many of the sellers have been reluctant sellers, forced to sell because of affordability concerns. However, there have been so many of this type of seller, that they have become the norm.
If a good deal were defined as a purchase which provides immediate equity, a bad deal one which provides negative equity and a normal deal as one that provides zero immediate equity, then one would need to know where their purchase fell relative to this basic scale. In the above example, if a buyer purchased a home for $325,000 today, then it would be a normal deal, regardless of the fact that it is substantially lower than 4 years ago. This buyer could not turn around and sell the same house for a higher amount nor could he get any equity out of it since there would be none.
The price of real estate typically will appreciate over time, so it is natural to think that if prices had been established up to a certain number, that anything lower and in the future would be a good deal. Over the long term this may be the case, however over a short term this may not be true. And the short term may be the more critical determinant, because, in general, people do not stay in the same house for a long period of time, but may actually sell about every 5 years. It should also be remembered that in the recent rapid appreciation period of a few years ago that most real estate pundits believed that the value of real estate was inflated so one should be careful about comparing a deal of today to an inflated figure of yesterday.
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