Dealing with the Fearful Buyer in this Crazy Market

Like many of you, I've been finding some buyers to be pulling back from their searches because of their perceptions of this financial environment, so when I received the email below, I developed an answer that I hope will encourage him.

> Ed, thanks for all the information you're sending. That listing is
> indeed great, and in normal circumstances I'd jump at it. But you saw
> the market again this week. Crazy is no longer an apt description, as
> crazy things are more predictable. And when Greenspan is shell-shocked,
> well, who am I to be confident? Obviously this can affect everything,
> from interest rates to prices to... oh, the list can go on. Anyway, I
> think I should continue to play this cool for a while, as the stakes are
> too high. The houses are great, the opportunity is probably beginning to
> be real, but fear is cheap for the little guy. Thanks, Dave

Hi, Dave,

I received your email a couple of days ago and have been pondering exactly how to respond ever since. So I did some research and put some thought into the matter. Here’ my response:

Firstly, I want you to know I feel your pain. This financial situation is quite unnerving and it is not for me, of course, to suggest what you should do with your money in these precarious times. However, there are some positive things you might want to consider when it comes to buying real estate at this moment.

Home prices in DC appear to have bottomed out. (See the September Real Estate Report pasted below my signature.) Though prices are low, as we approach Thanksgiving and Christmas, the slowest home sale period of the year, many home sellers see what you’re seeing and many are becoming desperate. I’m not suggesting that their desperation should become your windfall, but the point is that there are good deals to be had now and over the next few weeks and months.

As the old adage says, buy when prices are low.

The single largest expense in purchasing a home these days is the cost of a mortgage. According to Freddie Mac's nationwide survey, a week after posting the biggest one week increase since April 1987, mortgage rates staged the largest one week drop since May 1995, last week hitting to 5-week low. The company reported a reduction in the average interest on a 30-year fixed loan to 6.04 percent from 6.46 percent last week and a slide in the 15-year fixed rate to 5.72 percent from 6.14 percent. Interest on adjustable-rate mortgages slipped to 6.06 percent from 6.14 percent for five-year ARMs. There are tentative signs that the credit freeze is beginning to thaw, as evidenced by a drop in 1-month and 3-month LIBOR of over 100 basis points in the past week. This is what sparked this reversal in mortgage rates. And today, the Federal Reserve reduced their benchmark lending rate by one-half of a percent. How that translates into mortgage rates has yet to be determined.

These are still historically low rates hovering around 6 percent. (My first home purchase was at 8.5 percent many years ago.) If you hold off for a few months, we have no idea what the rates will be.

So despite these financial market fluctuations, buying real estate now is still a good investment. Historically on average, values increase 4 to 6 percent per year, though rises in values from 1999 to 2006 in this market were significantly and unusually higher.

And real estate provides more advantages than stocks: You get to live, sleep and eat in a home.

Try having friends over for dinner on your stock certificate.

If you have some time one afternoon next week, perhaps we can sit down over some coffee and talk about this a bit further. Meanwhile, feel free to call or email me with your thoughts and concerns. I look forward to hearing from you.

Sincerely,
Ed