Market Trends and Timing Your Purchase

In my last post I promised to discuss current market trends and whether they make it a good time to buy. This is a difficult question to answer, but I will try my best.

One of the reasons this is difficult to answer is due to market variations in different areas. In some areas this might be the best time in years to buy, while in other markets it may be the worst. To say what is best in your area involves analysis of the local market cycle.

The market usually follows a cyclical behavior over an 8 to 1o year period. This cycle goes from being a Seller's market (characterized by short time on the market, low inventory levels, multiple offers, sales prices higher than the listing price...) to a Buyer's Market (long time on the market, expired listings, lots of inventory, sellers take huge discounts and offer creative financing). Many analysts break the market cycle down even further to different phases of a buyer's market or seller's market. For purposes of this post I will limit my discussion to the more general cycle.

The best time to buy would be just before the trend changes from being a buyer's market to a seller's market. This would be the bottom of the cycle when prices are lowest. At this time you can find some really great deals where seller's are desperate to get rid of their homes.

The market cycles are affected by many things, but a major factor is employment. Areas in economic decline offer incentives to businesses. Operating expenses become too high in areas where economic conditions are thriving. This motivates large businesses to set up facilities in "emerging markets". When the business moves in it brings alot of employees. These employees need some place to live. Then they also need someplace to buy things for their houses so Home Depot and Wal-Mart open new stores. They also need someplace to eat, so McDonalds, Benihana's and Olive Garden (to name a few) open restaurants. They need medical care, insurance, legal services, and each doctor/lawyer/insurance salesman needs goods and services as well. When the existing housing is not enough to hold the influx of employees, developers and contractors move in.

When the businesses just start to move in is when the market has hit bottom and then the influx of homebuyers/renters causes prices to increase. This is when it starts to become a seller's market.

Then housing prices increase and the economy begins to thrive. The city and county start increasing taxes on business, and other areas become more attractive to businesses. The market then takes a downturn as businesses move out. Unemployment increases and people can't afford to go out to eat as much. Benihana's and Olive Garden close their doors... you see where this is going.

When you see businesses move out and unemployment increase it usually signals the beginning of a buyer's market.

Now that I have given a brief explanation of the market cycles, I have to tell you that right now there are other economic factors that are distorting the normal market cycle. In the past decade, due to low interest rates and low affordablity of housing, lenders were having trouble making loans. So they started creating new loan programs that enabled anyone with a pulse to buy a home. No down-payment, interest-only, Adjustable Rate Mortgages, negative amortization, option ARMs... all were offered to less than qualified homebuyers. This is what is called sub-prime lending.

Sub-prime lending was a quick fix when appreciation was in the double digits. Lenders figured there would be equity soon enough. People were able to refinance out of the riskier products once they had some equity (if they realized they should). But then the market peaked in many of the hot areas because salaries were not keeping up with the cost of housing. Prices had only reached this high level due to the lending practices, but the market couldn't sustain the phenomenal rate of growth. Eventually it brought on a market slowdown and prices stopped increasing.

Most homeowners had little or no equity at this time. Then adjustable mortgages started adjusting from low teaser rates to something more in line with the borrowers credit score and the current market rates. Some peoples mortgage payments doubled or tripled overnight. This caused a wave of foreclosures. Foreclosures today are at an all-time high. Now the availability of foreclosures and bank owned property is driving the prices way down. It is very difficult for a seller to compete when the foreclosures are so readily available and buyers are sitting on the fence waiting to see what will happen next.

Now the Federal Reserve is taking pity on the banks and loosening the lender's reserve requirements to keep the banks from going under. Banks are able to hold onto more REOs and wait for the market to pick up rather than having to dump all the non-performing assets at bargain basement prices. This is helping to prevent the bottom from falling out of the market, but it also means it will be a long time before the market can pick up again.

Another factor to consider in making your decision to buy is the current interest rate. I will discuss interest rates in another post to keep this post from getting too long.

There are still markets out there where prices are increasing and there are places where prices are dropping. Nobody wants to buy a house today and find out a year later that it is worth less than what they owe on it. But history shows that the general trend of real estate prices will outpace inflation by far in the long run. If you are planning to live in your home for 10 years or more it is likely that the value will double over that period. You can wait until you are sure that the market has bottomed out before you buy, but there's a good chance that you will miss it and prices will rise again before you can act.

In my market (Southern California) we are well into a buyer's market that came very abruptly (caused mostly by sub-prime lending practices). I don't think we have hit bottom yet, but the bottom may be drawn out and bumpy due to the government attempts to keep the economy on its feet. In the end, everyone must make their own decision when to buy based on what is going on in their own life as much as on the current market. You have to live somewhere, and you have to pay for it now or later. Many successful people attribute their success to taking action rather than suffering from paralysis of analysis.