There is a lot of talk in the real estate market about now being the time to buy; we've been hearing that for years. To dig deeper into the issue of when is the right time to buy, the question needs to be expanded to be specific to each buyer. When is the right time for you to buy?
Nationally prices have begun to stabilize. According to the Standard & Poor's/Case-Shiller Index, 16 of the 20 cities in tracks have not lost value this year. But just because prices are stabilizing does not mean that they will soon rise. Since history is a great indicator of future behavior, let's look at the real estate bubble from the 1980s- adjusted for inflation, it took the Index until 2000 to return to its 1989 peak. That real estate decline was not nearly as big as the decline we just had, so it is safe to assume that it is going to take 10 years or more for some of the markets to return to their 2005 peaks.
According to Harvard's Joint Center, 11 million homeowners have negative equity. Knowing that, you need to be reasonable about the feasibility of waiting for the market to rebound before you sell. Do you have ten years to wait? Do you want to put off a planned move because of your negative equity? No one can make that decision for you, but sometimes it is just best to take your lumps so you can move on to the next stage of your life. You need to understand the opportunity cost of waiting for the market to improve.
Before you say that is easier said than done, I have seen it work. I had a client whose home sold for 50% of what he paid for it five years earlier. As painful as that loss was, accepting it meant he could be transferred for his job to a city he liked much better. Even better, he no longer stresses about what he is going to do about his house. He took his loss and moved on.
Even if you take a loss on a home you sell, you could very well make it up on the next home you buy. Interest rates are at historic lows, so chances are that your new mortgage will have better terms than your current mortgage. With prices stabilizing you've got a good chance that your new home won't lose equity.
If you are a renter, the decision to buy should include consideration of the price-rent ratio, which is the cost to purchase a proprety divided by the annual rent. It measures how much the buyer is paying for each dollar of rent she receives. Historically speaking, 15 is the average ratio. Any number over 18 indicates the market is overpriced and a number under 12 indicates it is a good time to buy.
No one- not your parents, friends, reporters or even your real estate agent- can decide whether you should buy or sell. Since the privilege of making that decision is all yours, make sure you take into account not just the money but also your life goals.
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