Are You Crazy To Buy in a Declining Market?

Across the nation, there seems to be at least a flutter of debate about the state of the housing market.  Is the market still declining?  Have we hit the bottom?  Are we near the bottom?  Are we on the brink of a resurgent housing market?  Or have we begun the dreaded double-dip in home values? After years of steep price declines from coast-to-coast, is it finally time for what has gone down to at last go up?

In my opinion, the jury is still out on all these questions.  It’s a fool’s best to try and time the market – there are too many variables at work to know with anything close to reasonable certainty that prices will soon be on the rise.  Even though prices have been declining steadily for several years – it could be that prices will just keep on dropping and dropping.  Yes, it’s true that some metro areas – even beleaguered Detroit – are showing signs of “stabilization” and increasing prices and sales volume.  It may be that in your area, the pendulum has swung solidly in favor of an uptick – but if you ask me, the long-term trends are still headed in the direction of a gradual decline.

It’s clear that in most of the country, it’s still a buyer’s market.  This means that there is an excess supply of homes for sale – it’s a buyer’s market because there are relatively few buyers out there.  Despite record-low interest rates, an abundance of homes to choose from, and very high levels of affordability – buyers are still staying away in droves.  What’s up with that?

I think there are two very good reasons for this.  One key reason is that consumers lack confidence in their income.  The national unemployment rate remains pegged around 9% – and as everyone knows, this is a smoke-and-mirrors number and includes only people still looking for work, but excludes millions of people who have given up the hunt.  Many people who have kept their jobs have seen stagnant wages, cuts in hours and benefits, and mandatory furloughs.  In this kind of jobs marketplace, many would-be homebuyers simply lack the confidence in their incomes to commit to a decades-long payment plan on a house.

The other key factor keeping buyers out of the market is the fact that buyers are perceiving this as a declining market.  A good question is, why would you buy a property now when it’s very likely that it will be worth less next year, and possibly for many years to come?

Obviously, for a lot of people out there, the answer is that they shouldn’t be buying a house right now – which explains why so many would-be buyers remain stuck on the fence.  So here’s another new question:  given that the collective wisdom – validated by the abject weakness in the housing market – indicates you should not be buying a house right now – are you crazy to buy in a market like this?

I believe the answer is a solid YES – for many people.  So why did I myself buy a house earlier this year?  Am I crazy?

The jury is still out on that one, too.  🙂

However I did have my reasons, and they are pretty solid, too.  Here is what made me decide to buy in my declining market:

1) I found a house I really loved.  Good location, great lot, nicely updated, great schools, close to shopping, the beach, restaurants.  This is the kind of house that a lot of other people would love, too – a relatively easy house to unload if ever the need should arise

2) After plopping down my 20%, the payment was reasonable – in fact, after my mortgage interest and property tax deduction, my after-tax monthly PITI payment are the same or less than it would cost me to rent the same or similar home.  This means that should I need to move for whatever reason, I should be able to rent the house out to someone else and have the rent cover the mortgage payment.

3) It’s a home I can live in for the long haul.  I really expect this is a home I’ll pass down to my kids.  Given that I expect to hold onto this house for a very long time, I don’t really care so much that it will be worth next year, or in five years.  I care more about how much I can rent it out for (see point #2, above).

There’s another factor that was weighing in on my decision as well, but it wasn’t a driving factor.  I do worry about the medium-term prospect for inflation.  There has been no shortage of scholarly opinion that thanks to the aggressive “quantitative easing” on the part of the Federal Reserve (that’s “printing money” to the rest of us), that inflation will be picking up considerably in future years.  If inflation should pick up – and it almost has to – then the real value of the mortgage debt will drop correspondingly, and the value of the real estate I own will also rise, meaning that I will have a very good hedge against such inflation.

In short, I don’t think I’m crazy to have bought a house in this market.  But I do think there are lots of crazy people out there.  Here are some crazy reasons people have for buying a house:

1) Mortgage rates are really low.  This is a crazy reason –prices are usually low when rates are high; when rates are low, prices usually go up.  The fact that prices are dropping even as rates stay low should give any sane person pause.

2) We have hit the bottom of the market, prices will be going up soon.  This is a little crazy too – while in some markets prices may have leveled off, there is little likelihood that prices will soon be going up, and there is considerable risk that prices will continue to go down.

If you are contemplating buying a house, and either (or both!) of these two reasons are primary motivating factors for you, I invite you to think again.  Don’t get sucked up in the hype – whatever house you buy, make sure it’s one you feel comfortable holding onto for the long haul – ten years or more.  Given the high cost of sale associated with real estate, it could easily be that long before you could sell at a break-even point.