April 23, 2008 in Real Estate

Time to buy? Contrasting views

The housing market’s tumble has left many people wondering if it’s time to snap up bargains or if it’s still better to stay on the sidelines. Two experts on opposite sides of the spectrum give their best advice to would-be buyers.

Danielle Lynn Babb, Ph.D., is an author, entrepreneur and real estate consultant. A California native, she has appeared frequently on national television and radio. She is the author of several books, including “Finding Foreclosures: An Insiders Guide to Cashin’ In on this Hidden Market,” and “Real Estate v. 2.0.”

Warren R. Bland, Ph.D., is a professor of geography at California State University, Northridge, and has traveled doing geographical research across North America. Bland has also authored books on the topic, including “Retire in Style: 60 Outstanding Places Across the USA and Canada.”

Time to buy? The opposing views
Go for it Stay put
Buy soon if you have good credit and plan to stay in a home a few years. Don’t buy yet. Prices will likely drop much further and deals will get even sweeter.
Over the long run minor price differences won’t make much difference. The mortgage crisis, rising inventories and recession threats will bring a lower equilibrium.
Lock in a low rate today and you’ll reap the benefits for years to come. It took four years to recover from the last housing slump — we’re facing a few more years of pain.
Dr. Dani Babb: ‘Go for it’

With all the uncertainty in the housing market, buyers have been staying away in droves.

While the reaction may be understandable, it’s not necessarily smart.

Some buyers should be taking advantage of the situation — not sitting on the sidelines and waiting for prices to fall even more, says Babb, real estate analyst. It’s not necessarily a wise decision. If you’ve got good credit, a plan to stay in the new home for a few years and your dream house in your sights, snap it up.

“If you’re renting right now, there’s a really good chance your mortgage won’t be much more than your rent in many areas,” says Babb. “You’ll get a tax break, and if you stay a few years, you’ll see it start to appreciate as well.”

While we may not have seen the market bottom out just yet, that’s not significant for people who plan on staying in a home for the long haul. “There is a chance that more foreclosures will put downward pressure on prices,” she says. “But if you’re going to be holding that property for more than five years, another $10,000 or even $20,000 drop isn’t going to matter much.” The market will recover, and your house will appreciate.

You’ve also got selection on your side. Homebuilders are offering steep discounts and posh upgrades on brand-new digs. Fixer-uppers and foreclosed properties are selling for a song. Eager sellers are offering incentives from all-expenses paid tropical vacations to brand-new cars to help move their property.

Babb argues that the stricter lending requirements may be a boon for buyers as well. While a prospective buyer might look at the housing market today and worry that an exotic loan might leave them in foreclosure a few years from now, Babb says it’s far less likely. You may not get a loan for that million-dollar home, but it’s probably because you couldn’t have paid for it, anyway. “Tighter lending standards are a good thing overall, because it helps make certain that a borrower really can afford the home,” she says.

Unlike the hot market of a few years ago, where buyers had to put in offers — often above the selling price — just days after a house appeared on the market, buyers today are in the driver’s seat. You can take your time finding a house, visit it a few times and do necessary research before putting in an offer. And you’ll likely be able to haggle with the seller to drop the price, do repairs or pay for closing costs.

Finally, Babb notes that interest rates remain at low levels, which means lower monthly mortgage payments. “As rates drop, those who qualify will find it even less expensive to buy the home of their dreams.” Lock in a low rate today and you’ll reap the benefits for years to come.

While Babb is bullish on buying, she adds a few caveats. “If you want to buy a property and flip it in six months, now is not the time to get back in the market,” she says. “And if you’ve got a low credit score or are cash-poor, I’d recommend staying away from homes.” She also recommends staying away from neighborhoods that have many foreclosures and areas that have sustained significant job losses during the past few years.

Since the market won’t likely recover overnight, people who aren’t quite ready to buy still have options. Spend the next few months polishing your credentials and get in the market. “Improve your credit score, build up your savings, and go for it,” she says.

Dr. Warren Bland: ‘Resist temptation to buy’

Bland says that when it comes to the housing slump, we’ve only seen the tip of the iceberg.

If you think the housing slump is bad now, just wait. Bland says it’s about to get much, much worse. Unless you’ve got no choice, plan to stay put. Prices will likely drop much further and the deals will get even sweeter.

Bland says it’s useful to start with a big-picture view: Home prices in some areas doubled or even tripled during the boom during the past several years. Prices have started to drop, but they’re still high, he says. “A year or two ago, prices had reached wildly unsustainable levels, and a lot of it was fueled by speculation and funny-money loans,” he says. “Prices may have dropped 10 percent or even 25 percent in some cases, but I think they can still drop another 20 (percent) to 40 percent, depending on the market.”

As the credit market shrinks, so does the universe of potential buyers who have the means to pay high prices. Spiking prices on food, gasoline and heating oil have taken their toll on consumers. They’re worried about recession and losing their jobs, which Bland argues will further dampen demand. “I’m certain we’re still nearer to the top of the market than the bottom,” he says. “If I had any flexibility, I would resist the temptation to buy now.”

The high housing inventories in many markets suggest a significant imbalance between buyers and sellers, according to Bland. Sellers are looking at the prices their neighbors got a year or two ago to justify their prices.

Buyers, meanwhile, see those prices and wait on the sidelines. As bad economic news piles up, they feel little sense of urgency.

While any one of these factors might have an effect on housing prices, all of these in combination may end up being devastating for sellers.

“The mortgage crisis, the swelling inventories, and the threat of recession are combining to create a ‘perfect storm’ that moves us to a new, lower equilibrium,” he says.

Bland points out history is on buyers’ side. It took about four years to recover from the previous housing slump in the late 1980s and early 1990s — which he says suggests there will be a few more years of pain in this downturn before prices begin to stabilize.

Many buyers recognize that it’s even more important than ever for a house to be a good investment.

“The traditional pension is disappearing, and with the debt burdens that most people are carrying, it’s increasingly difficult for people to save for retirement,” he says. “A house is a big asset that can potentially yield cash at retirement through downsizing, relocating to someplace cheaper or taking out cash to invest it.”

Bland says he’s confident that good things will come to those who wait before buying, but he says there are risks. “Interest rates may go up in the future,” he cautions. “And depending how much they go up, that can at least partially undo the advantage of lower prices.”

Overall, he says, don’t buy simply because you feel the market may be close to the bottom. “Consider whether or not you’d be happy with your home if you saw 20 percent or more of your equity vanish,” he says. “I would definitely urge patience.”