Featured | Jun 25, 2010 | 0 Comments

Is Now The Right Or Wrong Time To Buy A House?

Bad News Brings Opportunity . . .

I’m always monitoring the housing situation and as you know it’s been disastrous of late to say the least. Since this is an investment site, I’m looking at this from an investment perspective. If you found your dream home and don’t care about appreciation and plan to be there for 30 years, have at it.

Real estate investors should be concerned and excited at the same time. While interest rates are not going anywhere in 2010 and most likely most if not all of 2011, there’s still potential for huge downside. As you see, this can be a good or bad thing.

Let’s look at a couple of issues.

Supply & Demand

Supply isn’t in our favor. The latest existing housing report out showed that we had an 8.3 month supply of homes on the market right now—nationally. Unfortunately, this was right before a second housing report came out (new home sales) that showed the homebuyer’s tax credit had a significant effect on sales and now that it just ended, sales will slow—report showed a 33% decline in home sales.

So what’s the real supply level? Could home prices be coming down more?

Possible Backlash

One of the functions that keeps the housing market flowing is “housing turnover.” This is where a homebuyer sells his or her current home with the intent to buy another (different location, bigger home, etc).

Here’s the problem. In this market, those homeowners would have to sell their home at a significant reduction, if at all. And then they’d have to qualify for a new home. If they were forced to short sell their home, that’s out of the question for awhile.

There’s also the fact that fewer people can qualify for homes right now and constricted lending by the banks.

Buyer Sentiment

There’s a mixed bag of expectations out there. I’m seeing two main camps. First, there are some that are seeing right now as a good entry point. Second, there are those who feel the economy is bad and not going anywhere.

I forgot who said it on Bloomberg the other day, but the analyst basically said that at best we get a sideways market for a couple years, but we’re more likely to see further declines.

Rental Properties

In my opinion, buying a home right now solely as an appreciation play isn’t good. I think there’s more downside coming and really the risk verses reward doesn’t make sense. It would be better to wait and see how the market does next year.

Keep in mind, what I’m saying is very local market dependent.

The large drop in developed home prices has brought back the rental play in some markets. For example, buying a home as a rental property in my area made no sense for years. As an example, you’d have a mortgage of $3,500 for a home that would rent for possibly $2,000.

Today, it’s starting to come back though. That same home will still rent from $1,500 – $2,000 (higher end of the scales means the home might sit on the rental market for a bit). And the mortgage could be something like $1,700.

But that’s for a home above my personal “golden line” for the area. Let’s take a look at my ideal rental property as it stands today.

This property will historically rent for about $1,000 – $1,200 in the area (over last 16 years). Assuming a 10% down on the property at a 6.5% interest rate, the mortgage will be about $700. Appreciation just becomes a bonus.

The good thing about further market correction is that more homes fall below my golden line.

Where many investors went wrong over the past years was buying rental properties solely for the appreciation. They were willing to lose monthly, because it looked like they were gaining on an annual basis. Of course, we all know what happened when the bubble crashed.

It just goes to show if you stick with solid fundamental investing, it will get you through the market shifts.