First, give credit where credit is due: I’m a real estate guy, business owner and investor. I’m NOT an attorney, and I’m NOT a financial advisor. Second, keep in mind that I’m writing this post on my blog, which is read by real estate people, business owners and those interested in the economy and success in business from all over the place, not just my town of West Lafayette, IN.
That said, I think now is an AWESOME time to buy, depending on a few factors. Here are crucial factors to consider:
Are you in a market where prices have taken a significant beating in the last year?
If so, you can expect continued declines in price. I see nothing in place to protect against additional price declines. Foreclosures in these areas are actually positioned to increase, not level off. Add significant inflation over the next several years, and you’re looking at significant dips in asset values.
If you are in an area that has NOT experienced massive price drops, like West Lafayette, IN (the town where I work), the rules are generally different. In West Lafayette for example, we did not have a price bubble to begin with, so prices are not set to correct in the same fashion. Inflation will work it’s negative magic on asset prices here as well, but you shouldn’t see anywhere near the moves in price that you’re seeing all over the news.
Are you looking to “move up”?
“Moving up” refers to selling a less expensive home and moving into a higher priced home. Many people fear taking a hit on their home sale and opt to sit this one out. The truth is that if you’re smart, you can look and buy carefully and end up on top, or at least make a lateral move…into a nicer home at a terrific price.
Again, if you’re in an area expecting significant price drops, it doesn’t work the same. But if you’re in a more or less stable area, moving up can be very advantageous at this juncture. Even if your worst fears are realized and you lose some money on your home sale, if you buy carefully you can more than recoup that loss on your purchase.
Example: I helped a client recently sell their first home. They lost $10k in equity on the sale. It’s a tough market. They moved into a terrific new home that they love. They got the home at well below appraised value and because of other terms in the deal, they have a payment that is only slightly higher for a home that gives them twice the space. Their equity position is $20k higher than before the deal. So they lost $10k. So what? They made $30k, for a $20k gain.
Is it important to you to buy a home anytime in the next several years?
Have you looked at interest rates lately? They are phenomenally low. This is one of those issues where I think the government is doing a very stupid thing, but the point is that rates are low. That means money is cheap. It can be a very good thing to take advantage of it. If you’re in a position to buy a home in a good area with reasonable prices, low rates can make your home very affordable. If you wait, higher rates are coming. It’s inevitable. Even if prices go down more, higher rates can affect your payment sufficiently as to wipe out any or all of that additional buying power.
Is price the most important thing to you?
I would submit that real estate is a good thing to own. Not a very revolutionary idea, I know, but I believe in it. Owning a home is NOT always a good idea, but if you’re a good candidate for homeownership, and you’re in a fairly price stable area, it’s a great time to buy.
Inflation is real. The $15k tax credit you get when you buy a house in 2009 will come from dollars that the government creates out of thin air. It’s unsustainable financial policy, pure and simple. But that said, it’s the direction we’re going. When this stimulus fails to help and only makes things worse, guess what we’re going to be talking about in 2010? That’s right, another stimulus package.
Here’s my take on it. I disagree. But if Uncle Sam is going to give me a check, I’m going to take it! Inflation will make the value of your home go down over the next several years, and this will be a condition that affects ALL US homeowners. If your home is not increasing in price to match inflation, your home is losing value. But I argue, strongly, that appreciation is highly overrated. It is ONE of many ways that real estate benefits it’s owners.
Real estate has been flat for hundreds of years in many areas of the world. In the US, we’ve become addicted to looking at our homes as piggy banks. The truth is that your personal home is not an asset, period, whether it’s appreciating or not. It’s a home. Shelter is a necessary expense. Buying a home is for the financial stable, prudent person who wants to stay put for a good while and benefit from tax advantages and enjoy owning his own place. Buy for a good price that you can afford. You have to live somewhere. If rates hit double digits again (I contend that they WILL soon), then your buying power will be cut in half. At that point, renting may be your ONLY option, and that’s not a good thing. If inflation takes hold like I think it will and governments raise property taxes on non-owner occupied real estate to make up revenues, rents will increase significantly as well. Suddenly a fixed payment on a home of your own will look very attractive but might not any longer be within reach.
Depending on your situation and your goals, now is a great time to buy a home. Whatever happens with the economy, you need to live somewhere and an affordable place is always a good thing.
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