Throughout the past 5-6 years there have been tremendous market swings in local and national real estate. This led to a great concern to prospective buyers. With prices dropping more than 50% in many markets, buyers have learned to focus very heavily on what they’re paying for a home. The strategy has been to avoid the risk of losing money from possible depreciation with an eye on buying at or near the bottom of the market. Most buyers consider themselves to be knowledgeable as to what they should pay for a home, yet this knowledge is based on severely deficient data.
That said, there are two approaches that will minimize the risk of buyers paying too much and maximize purchasing benefits. Use the approaches listed below to make an informed decision with respect to any real estate purchase:
1. Analyze key market indicators to determine the best time to buy or to purchase at the bottom of the market. Keep in mind, that without a review of these indicators, the only way to calculate the bottom of the market is to identify it after it happens. This means you’ve paid too much and might have lost the opportunity to choose from the best selection.
- Sales Activity (Demand)- Determine how many properties sold last year as compared to the year before. If sales are increasing, prices are likely to increase as well. If sales are declining, prices may continue to decline.
- Listing Activity (Supply)- If the number of homes for sale in your area is increasing using the same year-over-year comparison as above, prices are likely to drop to absorb the additional inventory. If the inventory is dropping, it may not be long before prices increase.
- Month’s Supply of homes for sale (Absorption)- The standard is usually around six months for average priced homes. This number increases as you move into the higher price ranges. If the supply is over the 6 month’s average, prices may continue to drop.
- Average Sales Price (Value)– Compare prices last year with a year earlier. If prices have dropped, they may continue to drop in the future. If prices have stabilized or have started to increase, an increase in the future may be at hand.
When you review the data above, you may find answers that are conflicting. Additionally, there may be specific economic indicators, like foreclosures, that could have an impact on future prices. All of this information must be reviewed and compared before an informed decision can be made.
2. Once the indicators above have been analyzed and the risk of buying now or waiting has been assessed, the next question that must be answered is: “What are the emotional benefits of buying now, versus the emotional drawbacks to waiting to buy. The answer to this question will help you determine what is best for you based on your personal situation. After all, the primary reason anyone buys anything, is because of the intrinsic value the purchase provides.