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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.
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 - perhaps because of a layoff in the family.
In the business cycle of real estate,
there are buyers' markets and sellers' markets...and some markets in
between. It is all based on supply and/or demand.
One problem with attempting to time your
purchase to the business cycle is that even experts have problems
accurately predicting the future economy. Even when they can, the real
estate market does not necessarily move in tandem with the stock market
or the economy as a whole.
Part of the reason is interest rates.
When the economy is doing well, interest
rates are generally higher. The result is that fewer people can afford
houses. When the economy slows down, interest rates fall, the
"affordability index" moves up and more people can afford houses.
As you can see, this cycle does not move
"in sync" with the rest of the economy. It is also influenced by how
many people have jobs, whether they are well-paying jobs, and consumer
outlook for the future. All these factors make it difficult to know, in
advance, whether the housing market is going to boom or bust.
What makes most sense is the "buy and
hold" strategy. Buy a home you expect to remain in for at least seven
years or more.
Even if you could "time the market," that
strategy would most benefit first-time buyers.
You see, people who already have a home
usually need to sell it in order to come up with the down payment for
their next home. Even if they don't, they would have to carry the debt
and obligations on two homes at the same time. This can create
financial hardship, even when you rent out the previous home. There are
maintenance costs, renters don't always make their payments on time, the
rent may not cover the mortgage and other costs, and sometimes the
property may be vacant.
>So if you are a move-up buyer and want
to purchase your next home during a depressed market, you generally have
to sell your current home during that same depressed market. If you
want to sell during a boom, then you also have to purchase during the
same boom.
It tends to equal out.
Finally, suppose you are a first-time
buyer and wait think the end of a boom is near? If you guess wrong, are
you going to wait...and wait...and wait...till the next depressed
market? If so, you could miss out on loads of depreciation...
...and that is assuming you guess right
about your market timing. In 1996, when the home market was struggling,
who would have predicted what the next seven years would bring?
One should consult with a qualified real
estate professional
prior to implementing any real estate strategies.
If
you are a mortgage, insurance, financial or tax planning professional
receiving this newsletter, please call our office and introduce yourself
to us. We are always seeking to grow our referral network and
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