May 20, 2008

Is Now a Good Time to Buy a House?

Has residential real estate bottomed out? Or, put another way, is this the time for home seekers to buy? My answer is yes, no, and maybe.

First, the yes: Relative bargains still exist in those certain areas where the foreclosure rate is low and are also located near good transportation links, which can be a great opportunity for today's buyer. I say "relative" because in many of these areas, prices have fallen less than 20% and are unlikely to fall much more. Why? In part, because many up-market sellers can afford to wait out the down market and simply not put their houses up for sale. And then there's the fact that in more affluent neighborhoods, few people took on risky, no-down payment, adjustable rate mortgages in the first place.

But the buying opportunities that exist aren't for everyone. With new mortgages still relatively expensive, you need to make a chunky down payment (often 20% or more) and have adequate, documentable income in order to play in this game. Many younger buyers deal with this by having a more affluent parent make a gift of part of the down payment (perhaps treating this as an advance on an eventual inheritance, to keep siblings from going ballistic), or the parents might guarantee the loan.

House photoNow for the no: In overbuilt subdivisions, such as many in Nevada (especially the Las Vegas area), Florida and California, it's far too early to buy. That's because cash-strapped builders are still dumping new houses on the market, further depressing the prices of those built in the last few years. And with foreclosure rates still rising in many of these areas, prices have further to fall.

Other places to avoid are the lower-income areas of cities and suburbs. Because so many people who could never reasonably afford to make required payments got loans in these areas, this is where the housing bubble was the worst and foreclosure rates the highest. Or, put another way, lenders in these areas will be dumping more and more distressed properties on the market, meaning that prices have only one way to go.

But, as with any advice, there are caveats, exceptions, and qualifications when predicting the direction of real estate markets, especially given the peculiarities of local micro-markets. In short, when some factors point to an improving local market and others still point down, you may be looking at a "maybe" area.

Those McMansion-type newer houses in the outer suburbs are likely suspects for "maybe" areas. In some locations, prices for these 5,000-square-foot behemoths have fallen by a third or more, which would normally indicate a buying opportunity. But the furious rise in gas prices have put this normal conclusion in doubt (except for the few houses in this category that are near good public transit). Otherwise, many buyers suddenly faced with a dauntingly expensive commute are likely to say no, meaning that prices may still drop.

Also, in upscale locales where new houses are priced to reflect their location -- on or near a golf course or near some other large amenity -- you'll want to be sure that the supervising corporation is and will remain solvent, even with a large number of houses remaining unoccupied. Otherwise, you may find yourself overlooking a water-parched rabbit patch, which will do precious little to protect your investment.

Jake Warner, guest blogger