Budgeting to Determine How

Life Is Making Choices You still have other options. In later articles we’ll see how to get sellers to reduce their price. We’ll look at mortgages that require nothing down, indeed, that even pay some of your closing costs! We’ll see how to rent-to-buy. And more! Nevertheless, at some point you’ll have to return to the above comparison and one way or the other, make “What’s left for me to live on” fit under, “What I must have to live on.” You might want to come back to this article several times as you go through this article learning different tips and traps when buying and make the comparison anew. Remain confident, however. Almost everyone eventually decides to go forward and buy a home, once they know the trick of how to go about getting it.

Buy in the winter months. There are good and bad times of the year to buy, and there are good markets and bad markets. If you can, probably the best time of the year to buy your home is in December, preferably during the last two weeks of the month when everyone is fussing about the holidays. Historically, there are fewer home sales between Thanksgiving and New Year’s (by a wide margin) than any other time of the year, simply because fewer buyers are out looking. Most buyers get involved with the holidays and put off home searching until after the New Year. The last few weeks of December traditionally have the poorest sales of all. Most sellers who haven’t been able to sell their homes during the summer months feel the same way and remove them from the market after Thanksgiving. Often the only sellers who keep their homes up for sale (or list them at this time) are those who are desperate to get out. And if they haven’t sold by the end of December, those sellers are very desperate, indeed. There are so few buyers at the end of the year, in fact, that “motivated” sellers will often grab at ridiculously low offers just to get out of their property. If you want to save money, that’s when you should make your offer. Buy your home in late December.

MARKETS During the very hot markets of the first years of this century, prices and sales continued to rise even at year’s end! Try to avoid buying in late spring and early summer, specifically the months of April, May, and June. Historically, 30 to 40 percent of all homes (new and resales) will be sold during those three months. They are the peak selling times. Abig reason that April, May, and June are such good sales months has to do with school schedules. The school year is ending and families with children feel it is an optimum time to make a move. Also, families tend to be more financially optimistic in the spring and more willing to take the big step involved in a home purchase. Finally, it also has to do with appearance. After the cold and/or wet winter, houses tend to look fresher and more appealing in spring. (Sellers, of course, know this and spruce up their places even more to lure buyers.) If you want to pay top dollar, join the throngs of buyers and purchase in spring and early summer. Otherwise, wait until the cold of December when you’ll usually have better prices.

What If It’s a Seller’s Market? A rising market is often called a “seller’s market.” The reason is simple: There are many more buyers than sellers. Thus, the seller can raise prices and dictate terms hence a “seller’s market.” One characteristic of a seller’s market is that homes sell very quickly. This is measured by how long they are listed for sale, before actually selling. If listed homes are selling in less than 30 days, it’s a sign of a seller’s market. Another characteristic of a seller’s market is that there will be low inventories. Inventory means how many homes are for sale and how long it would take to sell all those that are listed. Normally there will be around a six-month or longer inventory of homes in any given area. When that number dips below two or three months, it suggests a sellers market. Also check the direction of inventory change. Is the inventory growing, or falling? A falling inventory is another indicator of a seller’s market.

TIP GET THE BEST INFORMATION

To find out how quickly homes are selling and what the current inventory is your area, you should check with your local real estate board. You can contact any member agent who should be able to readily get the information for you. Or you can simply call them their number is in the phone article under “Board of Realtors®” and they should either be able to give you the information, or refer you to an agent who can get it for you. Finally, keep a lookout for prices. In a seller’s market, prices will rise. As soon as you see them going up, it may be a good idea to jump in. Never be afraid of the early days of a seller’s market. Keep in mind that even though prices may be somewhat higher today than last year, they’ll probably be even higher next year. If prices are going up, the home you buy today will be worth even more next year and, hopefully, more still the year after that. You want to catch and ride the wave.

How Do I Know When the Market Has Peaked? The Seven-Year Cycle

After there’s been a seller’s market for awhile, the news commentators on TV, the radio, and in print will sometimes begin talking about a “real estate bubble.” They will begin forecasting that the market, which may have gone up for a few years, is ready to crash. They may speak of a “real estate bubble” about to burst. Keep in mind that historically, real estate has tended to go up, and then go down, very roughly in seven-year cycles. If you’re early into seven years of up, it’s less likely the market will go “bust.” On the other hand, if you’re late into the seven-year cycle, the market may be ready to swing the other way. Here’s some things you should know about real estate turnarounds:

When Real Estate Bubbles Form and Burst  

Real estate very rarely “explodes” upward in value or “crashes” downward. In other words, there are seldom any true “bubbles.” When prices go up, they tend to go up over time as each price increase builds on the last. When they turn down, many sellers convert their properties to rentals, take their homes off the market, or make other arrangements. Rather than crash, the market tends to slow down and prices slowly drift lower.   The media tends to exaggerate the market’s direction, whether up or down. If the market has been high for awhile, expect the media to construct a “bubble” that it will say is ready to burst. If it’s been low for a time, expect the media to see “trends” of upward movement. Just because the media announces it, that doesn’t make it true.   Look at the affordability index for the country and your state. The National Association of Realtors (www.realtor.org ) offers a national affordability index. It tells you how much house the median income family can afford. Whenever the index is over 100, it usually means housing is still fairly affordable, no matter what the media says. When it’s below 100, watch out. Housing may have become unaffordable and the market likely will be forced to slow down. Also check newspapers, which usually report affordability indices for your state and local area.   Check interest rates. The real estate market is very interest rate sensitive.

The reason is that most people get large mortgages, and interest rates affect their monthly payments. When interest rates are low or dropping, it means more people will be able to afford bigger mortgages, and consequently, more expensive houses, causing prices to rise. When interest rates are rising, the opposite is true. The real estate market rarely turns down when interest rates are falling. It rarely maintains high levels of sales when interest rates are rising.   Be aware of housing shortages. Some parts of the country, for example, Southern California, have experienced large influxes of people. However, at the same time, housing starts have been low. The result is a housing shortage. You can usually tell when there’s a housing shortage in your area because rental rates will be going up at the same time as interest rates decline. When interest rates decline, tenants buy and become owners, usually causing a flood of rentals that cause rental rates to drop. When rental rates stay up during low interest times, it indicates a housing shortage, which should eventually lead to increasing prices.   Watch for the “seven-year” cycle. While a very rough gauge, real estate tends to move up, and down, in seven-year cycles.

What If It Turns Into a“Buyer’s Market?”

A buyer’s market occurs when there are more sellers than buyers. It’s characterized by buyer’s being able to dictate terms and price to sellers. If homes are taking longer and longer to sell (often six months or more), it’s indicative of a buyer’s market. If the inventory (the number of listed but unsold homes) is six months or more and increasing, it’s also indicative of a buyer’s market. Again, check with your local real estate board for statistics in your area. If you buy when prices are going down, a buyer’s market, you may initially think you’re getting a great deal. However, later on you may find you can’t sell for what you paid. (Millions of Americans found themselves in this unfortunate position during the real estate recession of the mid 1990s.) You may discover that after commission and closing costs, it will cost money out of pocket to sell!

TRAP DON’T GET “UPSIDE DOWN”

This is real estate jargon that means that it will cost you more to sell your house (after paying off your mortgage, closing costs, and commission) than your house is worth. The trouble with a declining real estate market is that you don’t know, and no one can tell you, how far it will fall before it reaches bottom and rebounds. If you buy on the way down, you will lose. Therefore, if the market is declining; instead of buying, you may want to rent, at least temporarily. While renting doesn’t offer all the benefits of ownership, it does allow you to move out gracefully without having to sell at a loss.

Should I Rent Instead of Buy in a Falling Market?

In a falling market there is negative price appreciation. Then the costs of home ownership often more than exceed the benefits. In a down market, you can often rent a home for far less than it costs monthly to buy that same home. (In some areas, a house that costs an owner $2000 a month for mortgage payment, taxes, insurance,

and maintenance can be rented for just about half to three-fourths of that amount $1000 to $1500.) In short, unless your property appreciates (increases annually in value), from a strictly dollars-and-sense perspective, you may be better off renting temporarily until the market turns around and prices turn up.

What Should I Do Right Now? Today, instead of deciding to buy or not to buy, take a few moments to analyze the market. Check with your local real estate board, as noted above, about inventories and how quickly homes are selling. Check out home affordability. Look at interest rates. Learn about housing shortages. Investigate the market before you make your move. Don’t let personal factors influence your investment decision. For many of us, our purchase decision is made strictly with regard to our personal situation, without considering the market. For example:

Reasons to Buy Without Considering the Market  

You’ve finally saved up enough money for a down payment.   You need a bigger house to accommodate a growing family.   You’ve moved into an area because of a job change and want a place to live.   You’ve received an increase in salary and can now afford bigger home payments. All of these are excellent reasons to buy a house, but it could be a mistake to act only on them. None of these reasons takes into consideration the housing market. Buying a home is not like buying a refrigerator or even a car. You expect those items to decline in value as you use and enjoy them. But a home is also an investment, probably your biggest. You should look forward to your home going up in value over time. Therefore, beyond your personal motivation for buying, you must also consider the market.