Waiting for the Bottom of the South Bay Real Estate Market.

Should You Try to Time the Market?

Many buyers I meet and work with are interested in waiting to buy at the bottom of the market. It is certainly natural to want to purchase a home, perhaps the largest and most significant purchase in one's life, when you are confident that the price will not go down any further and when investment opportunities are at their highest. With the South Bay real estate market slowing down and some area housing markets getting hit on a number of fronts, including an over abundance of inventory, increasing foreclosures, higher interest rates, and more restrictive lending practices, whether to wait, and for how long, is a very important question.

The Business Cycle and Buying a Home

There are times when the economy is brisk and everyone feels confident about his or her prospects for the future. As a result, they spend money. People eat out more, buy new cars, and....

...They buy houses.

Then, for one reason or another, the economy slows down. Companies lay off employees and consumers are more careful about where they spend money, perhaps saving more than usual. As a result, the economy decelerates even further. If it slows enough, we have a recession. Although that's not the current situation in Southern California, the various pressures on the market are creating a similar situation.

During such a time, fewer people are buying homes. Even so, some homeowners find themselves in a situation where they must sell. Families grow beyond the capacity of the home, employees get relocated, and some may even find themselves unable to make their mortgage payment.

Supply and Demand

When the supply of available houses is greater than the supply of buyers, appreciation may slow and prices may even fall, as happened in the early eighties and the early to mid-nineties.

If you are lucky enough to purchase a home during a slow period, you can be reasonably certain the economy will begin to show strength again. At times, real estate values may even surge drastically.

The Reality

While the goal is always to maximize your investment by purchasing when prices are more affordable, trying to time the market is nearly impossible. Keep in mind that there are very few that get "lucky" and time the market.....most either buy on the way down, or when the housing market is on the way back up. One problem with attempting to time your purchase to the bottom of the market is that no one can accurately predict the future.

Why You Should Not Necessarily Wait

The current home buying environment generally works best for first-time buyers. People who already have a home usually need to sell it in order to buy their next one. If a "move-up" buyer wants to buy a home during a depressed market, that means they usually have to sell one during the slow market, too. If a seller wants to sell his home to take advantage of a "hot" market when prices are fairly high, they generally have to buy their next home during that same hot market.

Another benefit to homebuyers in this current market is that they have negotiating power. Unlike the early 2000s in which the frenzy of homebuying created inflated prices, bidding wars, and an unsustainable increase in price, todays market offers homebuyers the ability to negotiate price and terms and find the right home, without the same degree of competing buyers.

My advice to my clients in this market is twofold. First, it is important to consider your situation carefully. If you are planning on owning a home for a while, price fluctuations are not quite as important and you'll have the ability to ride out any downturn. In the meantime the money saved on rent over the next few years can be significant, as well as the tax breatk. Secondly, the current market offers buyers the opportunity to search for homes price well below market value and with a built in price proctection.

It tends to equal out.

Finally, the business cycle can change over time. Since 1983, we have had two fairly long expansions with only a slight recession in between each. You would not want to wait nine years to buy a home, would you? You could miss out on a substantial amount of appreciation by waiting, and end up paying much higher prices.