The economy has stagnated, and a recession looks likely – if we’re not already in one. Is now the time to buy?
That depends. The real estate industry is plagued by relentless optimism. In other words, it’s always a good time to buy a house. But what if we roll back the clock to 1988 when homeowners in Southern California and the Northeast woke up to find that their homes were worth roughly half of what they’d been worth the week before?
The truth is, it is a good time to buy real estate if you buy the right house, on the right terms, and at the right price.
Here are a few things to consider when buying a home during a recession.
Shop the market.
To successfully shop your local real estate market, you first have to understand what’s going on. The only way to get the full picture is to spend time driving and walking around the area and working with a qualified real estate agents who has been helping homeowners in the neighborhood buy and sell for several years.
Driving and walking around the neighborhood will give you a good idea of the type of housing stock the neighborhood offers and the general condition in which the homes are kept up. A buyer’s agent can show you many more homes for sale than you’ll find on your own. In addition, he or she can look up how much homes have sold for, and how quickly.
If you find a home that’s for sale by owner, your buyer’s agent fee (approximately 2.5 to 3 percent of the sales price) can usually be negotiated into the final price. Many FSBOs are delighted to pay a half-commission to a buyer’s agent, since they save the other half. And you’ll have someone on your side who can provide you with all the information you need to make the best offer.
Buy below your means.
In a boom-boom economy, many agents advise their buyers to buy at the very end of what they can afford. The reasoning is that you’ll be making more money as the years go on and the house payment will be smaller relative to your income.
It’s good logic except we’re in a down market and new studies show that more homeowners are using their home equity like a piggy bank. As soon as equity gets built up, the homeowners do a cash-out refinance or tap the equity with a home equity loan.
Buy buying less than you can afford, perhaps even qualifying on one income instead of two, you’re lowering your living expenses and, hopefully, the pressure to keep a job.
Consider a fixer-upper.
Although few people feel capable of tackling a house that needs work, it can be an excellent way to get into a better neighborhood or build in value.
Home buyers typically don’t have the time, patience or financial resources to complete a home improvement project. And, most don’t care to live in a home that needs work while they save up the money to make the necessary repairs and renovations.
That’s why fixer-upper homes generally take longer to sell and also why they can be an excellent way to make money – especially in a down market.
When you’re shopping in a hot market, during boom times, you’ll see plenty of homes being sold in a bidding war. The final purchase price could be as high as 30 percent above the listing price – or more!
In a bidding war situation, it’s easy to overpay for a home. But it happens to home buyers who haven’t done their homework.
Ask your agent to pull “comps,” the sales price of homes similar to the ones in which you’re interested that have recently sold. Study them and discuss how each home’s differences might have affected the sales price. Then, come up with an opening offer that takes the comps into consideration, as well as what you know about the house.
Plan to stay at least 3 to 5 years.
In a poor economy, home appreciation can stall. And since the costs of sale often equal as much as 10 percent of the sales price (including the commission and transfer taxes, not to mention your home loan payoff), it will take some time before your home appreciation equals the cost of sale.
In other words, if you sell before three to five years, it’s entirely possible that you will lose money on the sale. So plan to stay at least three to five years in the next home you buy.
Lower your expectations.
In the last 1990s, it seemed that people were making money in real estate without even trying. New home and town home buyers would put down their deposit, and by the time the home was built, the value had risen 20 to 50 percent.
The stock market couldn’t sustain its lofty numbers, and caved in on itself. Will the same thing happen in the real estate market? It’s entirely possible that prices will level off and we won’t see much appreciation over the next year or two.
The best thing to do is lower your expectations of what you can afford, and how profitable your purchase will be. Then, if your home sees greater-than-average appreciation, it’s icing on the cake.
Published: Aug 6, 2001