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Tuesday, January 29, 2008

Buyer's Remorse? Pitfalls of Trying to Time the Housing Market

With the intensifying of what was already a buyer’s market, it is only natural for recent buyers to second-guess whether they should have waited. My advice as a professional realtor? Not to look back, for the following four reasons.

One. Peter Lynch, the stock market guru, is famous for opining that it is impossible to time the stock market. The same is true for real estate. Real estate bears sounding the alarm about over-valuation first started cropping up in . . . 2002. Buyers who heeded their advice and waited would have witnessed prices climb another 30%-50% the next three years -- still well above where they are since the current correction.

Real estate "bottoms" are just as difficult to call. Most real estate experts predicted – wrongly – that prices would start to rebound in the second half of 2007. Then, the sub-prime mortgage crisis hit in August.

It’s worth noting that a great deal of market commentators could be characterized as "retroactive bears," who whispered their warnings so quietly that no one took note. Or, they made so many, often contradictory predictions that sooner or later they were bound to be right about something, sometime (think, Jim Cramer’s stock picks on "Mad Money").

Second. Buying a home is different from practically any other purchase. If you buy 100 shares of Google at $600, then it subsequently goes down to $500, you might be inclined to kick yourself for not having waited. After all, every 100 shares of Google stock is identical to every other 100 shares (the definition of "fungible").

By contrast, homes are unique. While it’s true that the average house comes on the market every seven years, some homes change hands much less frequently, perhaps once every generation (or two).

In my own family’s case, it certainly would have been nice to pay 2008 prices for the home we purchased in 2005. However, we bought when we did because that’s when the home we really wanted came up for sale. We are only the fourth owner of our 1956 home; hopefully, the next owner will have to wait until sometime after 2022, when our youngest goes to college, for their chance.

Three. Living in limbo. Just as it’s said that no one washes a rental car, it’s also true that nobody re-tiles the bathroom in an apartment (or house) that they don’t own.

So much of what makes a house into a home is what buyers do to customize it to their tastes and lifestyle after they close. Painting, carpeting, buying furniture, minor (or major) remodeling projects – for many buyers, getting title is more accurately the "end of the beginning" than the "beginning of the end."

Waiting for the market to cool off – or rebound – delays all of that. Depending on one’s circumstances, it can also mean delaying getting children settled in their "permanent" school; acclimating to a new neighborhood; or simply stagnating in a too-small home that one’s family has clearly outgrown (see "upsizing," below).

In one’s mid-20’s, moving often involves little more than buying beer and pizza for friends while everyone loads a borrowed trailer. By contrast, moving a family may involve weeks of packing and unpacking, a professional mover, and other logistics.

Fourth. The economic upside of a down market. More than two-thirds of Americans own their own home. So buying a new home typically means selling their current one. For buyers who are upsizing, a real estate bear market can actually work in their favor.

Here’s how: say that buyers who own a $300,000 are now looking for a $500,000 home. Due to market conditions, their $300,000 house may have to be discounted 10%, to $270,000. However, 10% off of a $500,000 home reduces it to $450,000. The $50,000 they’ve saved more than offsets the $30,000 they "lost" (in fact, in most parts of the country, anyone who’s owned at least three years is still likely to realize a gain on their 2007 sale).

Of course, the math cuts the other way for people who are downsizing. Waiting to buy, regardless of market conditions, also makes sense for anyone who has a short-term horizon -- in real estate, typically defined as less than 3 years; buyers who are new to an area and don’t have their geographic bearings yet; and anyone who is so financially stretched that they can’t weather a down market, job loss, etc. – or can’t qualify for a mortgage in the first place (the non-sub-prime kind).

For everyone else, though, trying to time the market is likely to be an exercise in futility. The best time to buy is when you find the home you’re looking for at a price you can afford.