I saw this on Zillow (I think) and was going to edit it down to be more applicable to our area but it is so good I did not want to chop up her work.
In the kitchen, it's common wisdom that you don't try to catch a falling knife. But in real estate markets that have recently seen double-digit declines, many buyers are anxious to catch the equivalent of a falling house.
They're betting they can buy property at or near its cyclical bottom by scoping out distressed but fundamentally desirable neighborhoods, floating lowball offers and focusing on bank-owned homes.
It's easy to understand why, given the property values in some of the nation's hardest-hit real estate markets. Home prices in the five worst-performing major metropolitan areas -- Las Vegas, Miami, Phoenix, San Francisco and San Diego -- are down more than 40 percent from their peaks, according to the S&P/Case-Shiller Home Prices Indices. With interest rates for government-backed mortgages at record lows, monthly payments for owner-occupants are at their most affordable levels in years.
Nonetheless, economists and veteran real estate investors say market timing is a risky proposition.
"The odds of you timing the bottom perfectly are pretty low," says Rick Sharga, vice president of marketing at RealtyTrac, a foreclosure data provider. "If you're that good, you should be playing the stock market every day."
Although the current buyer's market may look attractive, rising unemployment rates and persistently high foreclosure rates add pressure on the battered housing sector. Housing Predictor, a forecasting Web site, predicts that 25 housing markets, from Las Vegas to Seattle, will see declines between 14 percent and 27 percent this year.
Sharga sees little reason for prospective owner-occupants in most markets to back away from buying an affordable property. Prices could drop further, he says, but the worst has probably passed. Additionally, historically low mortgage rates and tax incentives for new buyers probably won't last much longer.
Still, real estate is the ultimate local commodity, and some markets will be closer to bottom than others, so prospective buyers looking to protect themselves against further price declines need to consider local economic conditions. Before finalizing a purchase, real estate experts advise that price-sensitive buyers check these five critical factors.
Look for positive indicators: Rising prices are the most obvious indicator of a market recovery, but they’re also evidence that the cycle has already passed its low point. In still-declining markets, however, you can still find other positive indicators. David Kendall, a Realtor in Oakland, Calif., says he's encouraged to see a rise in sales volumes in some hard-hit ZIP codes, indicating that buyers are comfortable with current prices. Other potential turnaround signs include a drop in the number of days that homes sit on the market and an uptick in competitive bidding for compellingly priced properties.
Be aware of "shadow inventory": Banks often don't want to put their entire real estate inventory on the market at once. Doing so can depress prices, particularly in neighborhoods that have not yet seen a high number of foreclosure sales. Because of several factors -- including the recently expired moratorium on home repossessions and anticipation around new federal mortgage assistance programs -- banks have been allowing such "shadow inventory" to build up, says Chris Matty, marketing director at ForeclosurePoint, which publishes foreclosure data. "There's a huge pool of inventory and distressed homes that have not made it to the market yet," he says. "But eventually that has to come."
It could be coming soon. More than 800,000 properties received foreclosure filings in the first quarter of 2009, an increase of 9 percent from the previous quarter and 25 percent from the same period a year ago, according to RealtyTrac.
Assess affordability: Falling real estate prices and interest rates have made owning a home now much more affordable compared with a few years ago. Affordability reached a three-year high in February, when the median-priced existing single-family house sold for $164,600, according to the National Association of Realtors.
However, affordability isn't spread equally across geographies. Homes in Indianapolis are within reach for most families living there, but dwellings in New York City are not. And expensive regions with high job losses -- such as California, where the unemployment rate exceeds 11 percent -- face heightened risk regarding affordability.
Kendall advises buyers -- even in markets with high affordability levels -- to pay attention also to the price ranges at which purchases are occurring. If sales are closing only at the lower end of the market, then pricier homes in the most desirable neighborhoods could still fall further.
Consider your plans for the property: In the current property market, owner-occupants can enjoy significant advantages over investors. Recently, creditworthy owner-occupants have locked in 30-year mortgages at fixed interest rates around 5 percent -- close to a generational low. Those who have not owned a principal residence for the past three years may also receive an $8,000 tax credit on a home purchase.
Such incentives are particularly attractive to buyers planning to stay in their home for many years. "If you're looking for a long-term hold, you're talking about locking in the lowest rates anyone's ever seen," says Matty. Buyers looking for a second home or rental property, though, need to focus more on price and potential return-on-investment because those low rates aren't available to them. Additionally, they're often competing with owner-occupants who can secure much lower monthly payments.
Markdowns don't matter, fundamentals do: In some of the nation's most battered real estate markets, such as California's Central Valley or South Florida, it's common to see homes selling for well below half their peak value. Those offerings may seem compelling, but often they're not. The issue, says Sharga, is that many pricey homes were built in regions that did not have enough residents who could afford them. The fact that values have dropped may be less an indication of abundant bargains than of widespread overpricing a few years back.
Just as prices overshot on the upside a few years ago, they can overcorrect on the downside. Mark Boud, owner of consulting firm Real Estate Economics, predicts just such a phenomenon. Although he believes housing is undervalued currently by an average of 10 percent nationwide, he still expects prices to fall another 4 percent over the next 12 months due to job losses. That said, Boud still contends conditions are favorable for homebuyers who plan to hold for a long time, saying, "We've overcorrected on a national basis, and that eventually translates into appreciation."
The above by Joanna Glasner- and it is really good.
No comments:
Post a Comment