By Amy Hoak Print Article
TOP 5 IN REAL ESTATE NETWORK, March 2009-(MCT)-The unemployment rate is creeping up and home prices keep falling: Two great reasons why it might be best to put your home buying plans on hold.
After all, your own job could be the next on the chopping block. Plus, why not wait until home prices have reached their bottom and you can safely buy knowing your new house won’t depreciate like a car coasting out of the dealership?
“It may be 2010 or 2011 before the general public believes it’s safe to go back into housing,” said Steve Fifield, president of Chicago-based Fifield Companies, a firm that builds condominium, apartment, and office buildings. “You don’t want to be the first guy to go back in.”
Keep in mind, for some Americans buying won’t even be an option due to stricter mortgage underwriting standards that require bigger down payments and higher credit scores.
But if you think you might qualify and you’re tempted to test the market, consider these reasons for staying on the sidelines instead:
1. Prices are still dropping.
Data shows that prices are still dropping in many markets. If you buy today, your home could be worth less in a year or even two.
“People don’t like to buy depreciating assets,” said David Berson, chief economist for The PMI Group. According to PMI’s most recent U.S. Market Risk Index, reported last month, the risk of lower prices two years from now has increased across the country. Half of the country’s 50 largest cities had an elevated or high probability of seeing lower house prices by the end of the third quarter of 2010, compared with the third quarter of 2008.
Other home price measures haven’t painted a rosy picture either. According to the Case-Shiller home price index, values in 20 major U.S. cities fell 18.2 percent in November, compared with November 2007. Prices are down 25 percent from their peak in 2006, according to the index.
Steep discounts in some of the hardest-hit housing markets have some people wondering if prices could be starting to bottom. But some markets saw price drops later on than others – and it could take longer for those latecomers to improve, Fifield said.
2. This sale will be on for a while.
From a pure investment standpoint, you’d probably be better off investing in stocks, said Nancy Flint-Budde, a Salem, N.Y.-based certified financial planner. In a normal market, real estate appreciates about 5 percent a year, she said. But even if prices stop falling this year, as Moody’s Economy.com is predicting, price appreciation could be weak for a while.
In fact, while some recoveries resemble a “V”-shaped pattern, this housing recovery could look like an “L” – once a bottom hits, prices will flatline, said Jay Papasan, one of the authors of the book “Your First Home.” Prices likely won’t rocket to housing-boom levels soon, as conditions are exacerbated by rising unemployment and foreclosure inventory.
The lesson: This housing sale could go on for a while, so there is no need to rush.
“Even if in December of 2009 the first stories appear that sellers aren’t lowering prices any more… you need that uptick and information showing that not only are sales increasing, but prices have stabilized and are starting to go up,” Fifield said.
3. You may not stay put.
If prices continue to drop, you might have to be in that home for longer than you thought in order for the investment to make financial sense.
In any market, it’s best to buy a home with the intention of staying there five to 10 years, said Flint-Budde. This guideline is even more important today, when you might have to absorb more price drops and weather a couple years of slow price growth.
First-time buyers must be listening to that rule of thumb: According to research from the National Association of Realtors, the typical first-time home buyer in 2008 planned to stay in their new for 10 years, up from seven years in 2007.
Brian Rayhack, for example, is renting an apartment in Chicago because he’s just not sure how long he’d be living in the city. “If I was going to be here more than five years I definitely would have bought,” he said. For the flexibility that comes with renting, it’s was worth it for him to wait.
4. Your job could be the next to go.
Maybe you’re spooked by the headlines of job cuts. Perhaps you have friends who have recently been laid off. If you think your own job might is in danger, stop right there – and stay put.
But even if you’re comfortable with your own job security, investigate how your future neighbors are faring.
Your real estate agent will tell you to pay attention to local market conditions instead of national trends. But don’t stop by only looking at neighborhood home prices; the health of the local job market is also important to consider.
Have there been many layoffs in the area recently? What are the largest employers, and are they in industries that are suffering severely? Is the local economy diversified?
“What is the state of the job market in my area, and my metro area in general? That’s going to impact overall demand,” said Richard Moody, chief economist with Mission Residential. At the very least, get a sense of what the local inventory situation is like, relative to demand, to anticipate the pressures on prices over the coming months or years, he added.
It’s best to get a broad picture of the housing market, rather than simply asking yourself “can I afford it or not?” Moody said.
5. Your cash reserves will be eaten up.
Given the recession and the fragile economy today, even if you feel confident about your job, it’s wise to have a cushion to land on in the event you get hit with a financial broadside, a divorce or a major health bill, for instance. If your down payment would deplete your rainy day fund, keep saving for a while before house hunting.
“Even if you feel like you’re secure in your job, it’s much smarter to have five or six months of expenses to have aside. A reserve is a wise thing in this economy today,” Papasan said.
© 2009, MarketWatch.com Inc.
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