Why are all housing markets local?

All markets march to the beat of their own drummer as determined by a unique mix of demand and supply issues. Housing appreciation rates will vary significantly from one market to the next - and even within a single market – depending on demand, supply constraints, topography, consumer preferences and other factors.

Because of the unique local nature of individual housing markets, the possibility that there will be any nationwide decline in home values is very remote, a point that the Federal Reserve Board Chairman, the nation’s chief monetary policy maker, has repeatedly made in recent months when questioned about whether there is a housing bubble.

Consumers could see a few super-hot markets cool in the near future, with values leveling off or even declining a bit. But even in markets where home prices might stabilize or decline somewhat, the vast majority of homeowners will escape unfazed because values increase over time, and most homeowners are in the market for the long term – not a short-term gain.

As a first-time buyer, Should I wait to see if prices will drop?

No. If you continue to wait, you may never be able to afford to get into the housing market. Even as home prices are currently moderating – or even falling in some areas – rents continue to climb. The best way to build household wealth is to own a home. Once you become a home owner, you are able to take advantage of the generous tax deductions that homeownership offers, and you begin to build equity in your property.

As your property builds in equity, you can use those gains to sell your starter home and afford to move into a bigger house. With so many homes on the market to choose from, your best strategy may be to scale back expectations for your dream starter-home. Instead of trying to buy a 2,000 square foot home, consider shopping for a smaller home. Remember, the sooner you make the jump from renter to home owner, the quicker you begin to create and build up wealth for your family. After a few years, you will be able to leverage this investment and buy a larger house.

If I wait to buy a home, won't prices go even lower?

Timing the market isn't a great idea. All the market fundamentals show that now is a good time to buy – prices are down, interest rates are affordable, there are lots of homes to choose from and you can bargain with sellers.

If you try to wait and time the market until it hits rock bottom, you are likely to lose out. Just as no one can accurately predict the peaks and valleys of the stock market (name one person who sold their tech portfolio in April of 2000), the same holds true for housing.

If you sit on the fence and wait for the absolute best deal, you could end up literally waiting for years. And most likely, your guess on market timing would be wrong. But if you choose to buy now, you will not only be in the driver’s seat during the buying process, you will also reap the gains of price appreciation once you become a home owner. Remember, those who purchased homes in the early 1990s during the last big economic and housing downturn came out as big winners.

Is it better to wait until the economic picture is clearer so my house will appreciate?

No. The fact is, the economy is still solid. After expanding rapidly over the past couple of years, economic growth is moderating – and this is actually good for housing. Most economists predict that overall GDP growth will average about 2.5 percent for the rest of the year. That means that job growth will continue to move forward at a pace that should not trigger higher inflation rates or higher interest rates.

This period of moderate economic growth, job creation and low inflation, coupled with a true buyer’s market where there are plenty of homes to choose from, makes this an ideal time to purchase a new home.

Isn't it better to "play it safe" and keep renting until things are more certain?

No. The best way to “play it safe” is to actually buy a home. And here’s why. Studies show that owning a home is the best way to build household wealth. The sooner a person owns a home, the faster they begin to build up equity and wealth. When you buy a home, you are also purchasing price stability, knowing that you will pay the same monthly payment for the life of your 30-year mortgage.

Now consider the current rental market. During the past few years, many rental units have been converted to condos. As a result, there are fewer apartment rentals on the market. While home prices have been moderating, rents have been going up. Each year, your rent can easily go up a minimum of 5 percent to 10 percent. Where is the economic security in knowing that it is possible your rent could surge 30 percent in three years? You don’t receive any tax benefits from paying rent, nor do you accumulate any price appreciation, as you would if you owned a home of your own.

All of the economic fundamentals show that this is a good time to buy a home and that there is upward pressure on rental apartments. The real risk isn’t in buying a home, it’s continuing to rent.

Should I invest my money in the stock market or use it to buy a home?

Buy a home. Thanks to the concept of “leveraging,” purchasing a home is by far the best long-term investment. Leveraging means putting down a small amount of money to earn a big return.

For example, say you use that $10,000 to purchase a $150,000 home, and the house appreciates five percent during the first year. That means after one year, the house would be worth $157,500 – a gain of $7,500. Your annual return on your $10,000 investment would be a whopping 75 percent.

By contrast, putting the same $10,000 in the stock market and posting a similar 5 percent gain would only net a $500 return on investment.

And as a home owner, your savings continue to grow in two ways. Every year, a greater portion of your monthly mortgage payment goes to the principal, reducing the overall loan amount. Second, your home appreciates over time, making it one of the very best financial investments. Not only is homeownership a stepping stone to a future of financial security, it also helps to build neighborhoods and strengthen communities. It is truly the cornerstone of the American way of life, and the fulfillment of the American dream.

Should I wait until interest rates go down further?

No. Interest rates are currently extremely favorable for buyers. In fact, they are hovering near 30-year lows. But waiting to time the market is a dangerous – and losing - game. Even those who follow the market for a living can’t figure out when interest rates will bottom out. If they could, they would all be multi-millionaires. Because interest rates are near historic lows, it is much more likely that they will head higher in the future as opposed to moving even lower.

And home prices don’t necessarily move in unison with interest rates. So, if you decided to roll the dice and wait to purchase a home, and the price were to actually drop $10,000 from where it is today, you could still end up losing money. How? If interest rates were to move up a half-a-point during this period, the savings on the reduced home price would be more than offset by the higher monthly payment you would be making over the life of the loan.

In short, the smartest and safest time to buy is now. We know that interest rates are low today. We know that home prices are down. We know that there are plenty of homes on the market to choose from. We know that sellers are willing to bargain. And we know that builders are willing to offer attractive incentives to get your business. Any or all of these favorable variables could change for the worse six months from today.

Should I wait to sell my home until I can get the same price my neighbor's home sold for?

No. It’s always better to trade up in a buyer’s market, like the one we are in now. While the value of your house has fallen, the price of higher-end homes has also dropped. Your home value is now down 10 percent to $270,000. But don’t forget that in today’s buyer’s market, higher priced homes are also dropping in price.

But for argument’s sake, let’s say that a $500,000 move-up home has also dropped 10 percent in value and now sells at $450,000. If you sold your home today for $270,000 and purchased the larger house for $450,000, the difference in price would be $180,000. But if you waited to recoup the 10 percent value on your home and sold it at $300,000, chances are that same move-up home would also move up in price to at least $500,000. That’s a $200,000 price difference between the two homes.

So by selling today, you would actually save $20,000. And most likely, by jumping into the market today your savings would be even greater because consumers have much more bargaining power when shopping for higher-end homes in a buyer’s market.