From an Investor’s Standpoint, is it Time to Buy?
Is it time to buy?
It’s a question Terry Savage of the Chicago Sun-Times is asked frequently, but usually about the stock market. Lately, though, it’s a question that’s asked about real estate. Whether it’s a house or a condo or a second home, people are starting to take a second look at the real estate market.
That’s because the latest statistics are making headlines.
- September sales of existing homes were down to 6.16 million from 6.3 million in August, and down from 7.2 million in September 2005.
- The inventory of unsold homes hit 7.3 million units in September, up from 4.6 million homes listed for sale in the same month a year ago.
- Prices are falling, too, having seen the biggest drop in home prices since realtor groups began tracking the data in 1968. The median price slipped 2.2 percent to $220,000 in September following a 2.2 percent decline in August — the first time the median price has fallen since 1995.
- In September, the median price of a new home fell 9.7 percent to $217,100 from a year earlier, the largest year-over-year drop since December 1970.
So, is it time to buy?
The smart money says it’s time to buy when everyone wants to sell, or as they put it on Wall Street: when blood is running in the streets. That’s the secret of making the best of a bear market. But the housing market is remarkably different from the stock market.
Declines in stock prices are far more visible and universal during a bear market. Stocks are “fungible.” That is, 100 shares of Stock X are like any other 100 shares. But all houses — even ones in the same neighborhood, by the same builder — are slightly different.
A two-bedroom condo in the same building might have upgraded appliances or more appealing decor, so it’s hard to make price comparisons in housing.
There’s another big difference in the housing market: visibility.
Sale prices aren’t published for weeks, until closing. So it takes longer for a declining real estate market to be tallied and to run its course. Meanwhile, changes in the well-known stock indexes are tracked instantly, so emotional trends tend to gain momentum more quickly with stocks.
A generation of investors was scared out of the stock market by the 2000 crash and subsequent bear market. Many seized on low home mortgage rates and came to view real estate as the alternative for creating wealth.
Now the differences in the two types of investments will become apparent. After all, the Dow has made new highs in a short time period. It’s unlikely that real estate will make a similar rebound from its eventual low.
You have to wonder if all the bad news is already reflected in real estate prices. These are relatively good times: Unemployment is low, mortgage rates remain low, and the economy is still strong.
Yet in the upcoming months, an estimated $1 trillion in adjustable-rate mortgages (ARMs) will be re-set. Even at current low rates, monthly payments will jump for those who entered the market with low teaser rates.
Those who have interest-only mortgages could see their monthly payments rise by 50 percent. Even if the economy stays strong, those mortgage re-sets could force a lot of people to sell their homes or default.
In fact, the foreclosure rate has been rising sharply in many areas of the country. It’s been predicted that more than 1.2 million homeowners could face foreclosure this year.
Last week, Crain’s Chicago Business reported that the foreclosure rate in Chicago jumped 5 percent in September, and is now twice the national average. When you see television news stories about middle-class families being evicted, you’ll know this trend has peaked.
In short, without some extremely and unexpectedly good economic news — or a quick resurgence of inflation — the housing market has little reason to turn around, and buyers have little reason to push prices higher.
It’s a classic case of reality entering a market that has been moved to extremes by emotion. If you’re a buyer, you can sit back and pick your spot — unless, of course, you have a home to sell first.