It's a GREAT Time to Buy a House

This whole subprime mortgage meltdown (by the way, have I said I told you so lately?) has really created a couple great buying opportunities for those of us who have managed our money correctly the past several years. First, the stock market has (and may continue to have) offered some great opportunities to load up on depressed stocks -- chances to get some stocks on sale as I like to say. (I know, Kurt, that you hate that phrase, but please indulge me) Second, for a potential house buyer like myself, now's a GREAT time to be a buyer. If you have some cash, low (or no) debt, and good credit, you can get houses for a steal these days. It's really just a matter of finding the right situation for living -- that's the biggest issue for us. Once we do find something we like, we'll be able to move quickly to get it at a great deal.

While now is certainly a great time to buy a house, the question is whether it's the best time to buy. Will prices go down even more? Will they be flat for awhile? Or have we seen the worst of it? Before I state my position on the issue, I thought I'd share a few facts. First, it appears house prices will be going down for a while longer:

Homeowners trying to sell last month faced the biggest glut of homes on the market in about 16 years, as declining sales and growing problems in the mortgage market helped push home prices down for the 12th straight month.

The National Association of Realtors said sales by homeowners slipped to an annual rate of 5.75 million last month, down 0.2 percent from the revised 5.76 million pace in June. Economists surveyed by Briefing.com had forecast the sales rate would fall to 5.7 million in the latest reading.

Not only did sales slip but the number of homes for sale jumped 5.1 percent, the group said, meaning there is now a 9.6-month supply of homes for sale, up from 9.1-months in the June reading. It was the biggest supply of homes by that measure since October 1991.

"We are literally swimming in an ocean of homes for sale. In fact, at 4.59 million units, we have the most raw inventory for sale in history," he said. "Until we work through this extremely large inventory glut, we're not going to see any momentum in home prices."

Basic economics tells us that a higher supply of homes along with lower demand (not as many buyers can even get mortgages to buy the homes they want) tells us that prices will need to give. There are more price declines to come:

"These are 'PC' figures -- pre-crunch," said Larson. "The mortgage credit crunch that began very late in July and picked up steam in August will likely put more downward pressure on home sales and prices this month and into the fall."

The report comes after Friday's government reading that showed new homes selling at a better-than-expected pace. But the reports showed more weakness in prices - which have become a major concern for the U.S. economy as a whole.

Here's what I'm thinking:

1. We haven't seen the worst of it yet -- prices will be dropping more. And in my market, we're a bit worse than the national averages, so we're probably due for more drops too.

2. But how much more is the key. I'm thinking we will see drops into the spring or maybe summer of next year before prices stabilize. Then I'm expecting a year or two of flat prices. That means we have plenty of time to select the best house for us -- and get it at a great deal.

3. That said, if we found something we really loved, we'd jump on it now. After all, we plan to live there a long time, so even if we buy now and the price drops continue, we'll reap it back in three to four years. Besides, what if I'm wrong and we've seen the worst of it, and prices start to go up. In that case, we've missed a bargain.

4. Or I could be wrong and we're going to see price drops for a year or so more, maybe longer. This is why it's important for us to buy a place we really like -- so we can stay there a long time and weather the storm.

5. As a seller, the current market is a nightmare. I'm looking at some creative ways for us to unload our house once we buy a new place. I'll keep you updated on those if we get to them.

Comments

[Rhea]

I think the only way anyone should buy right now is if the buyer is perfectly content to live in (or otherwise hold on to) the purchased house indefinitely. The prices have a long way to go down and then a long way to go back up before things return to the booming market it once was.

[Ryan]

I'm in the same boat as you and looking for house prices to decline. I have a smaller house in an ok area with ok schools and am looking to upgrade to a larger house in a better area/schools sometime in the next few years. I'm in no rush though. I might even throw a for sale by owner sign out there for a year just to see what happens. No hurry for me.

[Minimum Wage]

Wait until October when a lot of ARMs will reset - might be a fire sale in the fall.

On the other hand, if you can't buy a house, prepare to pay through the nose - rents here are projected to rise 8.5 percent this year and an additional 6 percent next year.

[Anne]

If I had enough cash for a decent down payment, I would seriously consider buying a rental property. The rental market should see a good rise as a corollary to increased foreclosures.

[Lord]

I think it may take two or three years of decline and remain flat for another five, but if a recession hit, rates would drop and prices would firm sooner.

[Kevin]

I don't understand the "Great time to buy" argument. If it is a great time to buy, wouldn't that also make it a horrible time to sell (meaning you won't get as much for your current home)? Of course, it's different when you are going from renting to buying.

[Ryan]

Kevin,

Not if you are moving to a larger house.

[FMF]

Kevin --

1. What Ryan said.

2. We don't HAVE to sell in order to buy. We have 3-4 options available besides selling that can work for us.

[Bronco]

"Great time" will only be known in hindsight. You may be right (very unlikely), but we will have to check back in 12 months.

[Kevin]

FMF - Ok, I get that you may not have to sell, but how many people are actually able to have 2 homes?

Ryan or FMF - Please explain how buying a bigger house disproves my argument. Your smaller house is still going to be worth less than what it was 3 years ago, for example.

[FMF]

Kevin --

If all homes are down 20% and I own a $200k home and buy a $300k home, I "lose" $40k on my home ($200k * 20%) but "gain" $60k ($300k * 20%) versus what the $300k home sold for a few months ago. If I both buy and sell, I'm "up" $20k.

I know the numbers have a lot of other factors that influence them, but you can see the general principle at work in this example.

[Kevin]

OK, I guess I understand the argument a little better now. Just hope that house prices don't drop another 10% after you're in your $300k home or there goes your "net".

I guess I'm just of the mindset that changing homes is such a big, long-term investment that the main factor should be based on whether or not a family actually needs that much space to justify the hassle. Timing the market isn't something I'll be worried about when I am ready to upgrade.

[Lazy Man]

It seems to me that with mortgage rates a percentage point above where they were a year or two ago, that cheaper price isn't really all the much cheaper. I got a 5.875 30-year fixed with no points in 2004. I think I'm looking at around 6.5% if I were to look today.

I haven't done the exact math and it will vary from person to person, but it might not be quite as great as it appears.

And I don't mind the "I told you so"... everyone knew it was going to happen anyway. This is far from a shocker.

[Victor]

Boy, this sure does sound like someone's timing the housing market. Hmmm... You're not supposed to time the stock market but timing the housing market is perfectly ok.

Very interesting.

[FMF]

Kevin --

We're not going to buy a home we hate just because we can get a good deal on it. We're looking to move closer to work/church, to a better school district, etc. -- all the issues people normally consider when moving.

As far as the price going down more once we buy, that's a possibility. That's why I mentioned it in my post.

Lazy Man --

We won't have much of a mortgage and won't have it for very long, so rates aren't a prime consideration for us.

And, belive it or not, I took a lot of heat a year or so ago from borrowers who defended bad loans and told me why they were really good loans. Haven't heard much from those people lately. :-)

Victor --

Ha! Interesting comment. Maybe I should write a post on it.

I think the stock market and housing market are different. And for me personally, I view buying a house as a purchase, not an investment. For example, I time my car purchases, vacations, etc. to get the best prices I can for what I want, why not do the same with a house?

[Ryan]

Lazy man,

Good call on getting the fixed rate mortgage. It makes sense getting an ARM only when fixed rates are high. When fixed rates are low, we are at the bottom of the rate cycle and rates only have one way to go - up.

[Waiting]

I agree with Kevin. I'm also not going to buy a house I hate just because it seems like a good deal. It's so exciting to see these prices drop. It's true that one person's misfortune is another's fortune. If we just wait awhile longer nice affordable homes with good interest rates will be handed out.