The most common question I receive is, “Do you think the housing market has hit bottom yet?”. While I am pausing to pull together my answer the person will normally add, “I am thinking about buying a house but if it is going to come down more I want to wait.”
Historically, the recognition of a peak or bottom happens about 9 months after the fact. So the first and immediate challenge will be to define the moment the bottom of the market will occur. The next challenge is much like turning the roulette wheel. While the wheel is spinning and the buyer is waiting for the deal, Mr. Bernanke and team are hard at work adjusting interest rates in order to contain inflation while gas prices are climbing and jobs are being lost. Remember, for every 1/2 point increase in mortgage interest rate the buyer can reduce their purchasing power by $25,000 by changing debt-to-income ratios or simply the difference in interest over a 30-year mortgage.
I understand why buyers are hesitant to buy a home just in time to see the value drop before the boxes are unpacked. With the average home buyer staying in the home an average of 7 years before moving again, the real bet is whether or not the next cycle of appreciation will happen while the buyer occupies the home. When I am working with a buyer, I show them the historical trends for the neighborhood they are interested in. For example, looking at Mountain View and comparing average sales price from June 2005 to June 2008 there has actually been about a 3% appreciation in average sales price. This is not the market you can come in with a 10% below market offer and expect to get the home. Mountain View did not have a high percentage of sub prime loans made in the area and therefore has not seen the slide down on prices. Mountain View also has good schools and a good commute to the tech world.
On the other hand, Blossom Valley is a neighborhood of San Jose which has been hit hard by the sub-prime fallout with nearly 20% of the homes in the area facing foreclosure. The average sales price from June 2005 to June 2008 dropped nearly 16%.
If you wait another six months to buy in Mountain View, you will most likely pay more in both sales price and through the interest rate on your home. In Blossom Valley, another section of sub-prime loans adjusted in May of 2008 and we expect to see more fall out as we move into the fall. If your placing an offer on a home in Blossom Valley, you may very well be able to offer 10% under list price and get the home. This is a bet against the future value.
So you might ask, why buy in Blossom Valley now? The first point is that the size of home and yard you can buy for your money in Blossom Valley is significantly larger than in Mountain View. The average sales price in Mountain View is about $1 million and the average sales price in Blossom Valley is $580,000. Bottom line affordability comes into play for many families. I have lived in or near Blossom Valley for the last 10 years. It is a great neighborhood and there are deals to be had. Even if there is another 5-10% drop in Blossom Valley, many more families are able to buy a home in this area than in another more expensive area that has not seen much of a change. So the bottom of the market concept is very relative to the neighborhood a buyer is wanting to live in.
Finally, hypothetically speaking let us say that tonight on the evening news the anchor comes on and states, “The housing market hits bottom! Experts say…”. My prediction is that tomorrow, prices all over the area will immediately jump up. So unless you bought a home today, you missed the bottom of the market.
When I am talking to a buyer who has 10-20% to put down on a home, has a good credit score, is not overwhelmed with debt, I tell them that I can find them a deal in this market. I show them why waiting may not be in their best interest. I explain how buying a home is not simply an investment but a lifestyle. It is peace of mind. It is security for a family. It is a very deep thread of the American Dream. I also explain why I personally don’t like paying someone else’s mortgage through renting when I can afford to buy a home and can receive the positive reward of tax breaks and a long term investment. I explain to current home owners how this is a great market to reset their appreciation curve by sizing up now instead of waiting for the market to rebound.
When I am talking with a buyer who has little money in the savings, has some credit dings on their report, and have several credit cards with high balances, I tell them to wait. Those buyer’s do not get good interest rates and have limited affordability in today’s stricter lending arena. I offer them with resources that can help them improve their credit score, decrease their debt, and move toward buying a home. I don’t want to see anyone miss this opportunity. For the Bay Area it has been over 30 years since we have seen this many houses for sale with low interest rates. The last buyer’s market in 1992 -ish, interest rates were 8.25%. The buyer’s market previous to that in 1982-ish was 16.5%.
Has the housing market hit bottom? I don’t know. Is it a great time to buy? Depends on your specific circumstances. Are there deals to be had? ABSOLUTELY! Pick a neighborhood, interview agents,study the trends, get your ducks in order, and start shopping. Remember, the more activity in the market (demand), the sooner housing inventory will decrease (supply) and prices will start to appreciate. Once you buy a house, tell your friends to buy a house and support your own housing cycle in appreciation.
Call me if you want to talk about certain neighborhood trends. I offer a no-obligation, hassle-free consultation.