Friday, 12 December 2008

Should I buy a home now or wait?

The economic crisis sweeping the globe has prompted many into selling their equities and postponing the decision to buy a home. Warren Buffet has recently stated that now is the time to buy. He has the means to buy anything that he wants and is active on the bargain trail. With markets of all sorts lower than they have been for years, now is the time to pick up bargains. If you are able to buy a home now, there has never been a better time. Once the recovery begins, home prices are likely to rise rapidly. A lot of people will be lamenting the fact that they didn't buy in 2008 when prices were low. There is no doubt that the economic crisis will end. The only question is when.

It doesn't really matter when you buy a home. The long term returns will make up for the difference in the purchase price. John Carpol bought a home in a good location in 1987 for $76,000. The market had just started rising and within a year the value had doubled. By 1993 the house was worth about $350,000. Another property slump followed, and for the next few years the value hovered between $250,000 to $300,000. In early 2001 prices began rising quite steeply and the value of the home quickly rose to $1,500,000. Once again prices have dropped by about 20%. But the return on the original $7,600 investment (the deposit) has been phenomenal - even at current low prices.

The property market is cyclical. Prices of homes rise and fall. After many years of booming property prices the latest drop has been triggered by a number of events in the wider economy. In spite of the cyclical nature of house prices, the long term trend is always up. Property is seen as a long term investment where the return on investment can be very significant.

The current downturn has transformed the property market from a "sellers' market" to a "buyers' market". Under booming conditions, home sellers have the option of holding out for the best price. In a buyers' market, the buyer has a distinct advantage and is often in a strong position to negotiate more favourable terms.

The problem is to identify when the market has bottomed out, and once the next property boom begins (as it inevitably will) the waiters once again be taken by surprise. Home prices have become more affordable than they have been for many years. Under these conditions, many wait before taking the plunge. People do not want to pay more than is necessary for a house and believe that by waiting they may be able to get a better deal.

The mainproblem with waiting is that the only way to know when the market has bottomed out is when prices begin rising. Once the market turns around, prices can increase very quickly and you could end up paying much more than under current market conditions.

From my experience of previous home price cycles I have learned that the best time to buy is during a falling market. I was working as an estate agent in Johannesburg in 1979. Home prices were low, and a general pessimistic outlook led many people to wait and see. About midway through the year, the climate changed. Home prices began rising by the day. A strong sellers' market emerged and there was strong competition amongst buyers! By the end of the year prices had more than doubled. Many of those that waited ended up paying much more.

It is important to remember that you are not buying a house, but a home. Your home is your castle. It is a place where you centre your life and raise a family. A home that you buy is yours to keep. You are free to change, improve or even rebuild it.

Renting is a poor alternative. Rents have a tendency to increase annually and sooner or later the owner of the property will want to sell or move in. Any money spent on renting is gone forever, while money paid into a home loan increases your equity in the property.

The main criteria in the buying decision should be you and your family's needs. The best time for newly-weds to buy is when they begin their new life together. If you are expanding your family and need additional accommodation, or looking to down-size for a retirement home then now is the ideal time. The only constraint is affordability. Are the mortgage repayments affordable? Will you still be able to cover the payments if interest rates rise?

The property market is still falling. This provides leverage for the buyer in any property negotiations. The seller knows this and you should be able to buy the house of your dreams for a song. Waiting may put you in line for even bigger bargains, but you may just miss the boat.

Buying a home is an investment, but the main value lies in the use that you will get from it. Investment value is only realised when you sell. But as the value of your home increases you may be able to use some of the equity in your home. The investment aspect of buying a home should be a secondary and not the primary reason for buying. If buying for investment purposes, then a second or third home are good options. Don't expect a quick profit under current market conditions. The down-turn could last anything from six months to five years or more.

Buy now. Prices may still drop, but over the long term you cannot lose. In the short term who knows when the market will turn-around making property expensive again?

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