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Five Trends to Watch in Real Estate

Friday, June 4, 2010

Home sales are surging. Don’t be left behind.

As a buyer, there are five trends you want to watch as you shop for your new home. The last one, though, is personal.

  1. Prices
  2. Sales
  3. Interest Rates
  4. Jobs
  5. Showings

Prices

In the Merrimack Valley and Southern New Hampshire, home prices have stabilized and are even ticking up. New homes are coming on the market all the time and they’re being priced more aggressively. The buyers, however, aren’t biting at the aggressively priced homes.

The buy side of the market is still of the mindset that foreclosures or other “distressed” properties are a bargain. As new buyers enter the market and face the reality of homes that require “too much work,” they’re starting to move up-market and considering more realistically-priced homes.

Buyers who are looking for a “deal” on real estate will find them harder to come by going into the Fall selling season.

Sales

Single-family home sales are brisk in this area. Not counting condos and multi-families, 34 single-family homes closed in the month of May in Methuen alone. Andover had 24 closings, North Andover had 19, Haverhill had 34, Lawrence saw 22, and Lowell recorded 39. North of the border in New Hampshire, Salem saw 14 closings of single-families, Portsmouth had 22 sales, and Nashua enjoyed an incredible 47 sales.

Across the nation, Lawrence Yun, Chief Economist for the National Assoc. of Realtors® (Bio) says that in the short-term, sales will decline as the effect of the home-buyer tax credit wears off but over the long-term, sales should increase as the market returns to a more normal equilibrium.

There is no question that the real estate market in the Merrimack Valley and Southern New Hampshire is alive and well. To see so many single-family homes change hands in a one-month period should encourage buyers and sellers alike to take advantage of this traffic.

Interest Rates

The market anticipated rates moving higher as the government wrapped up its purchases of bonds at the end of the first quarter. This buying program was part of the economic stimulus package that was designed to keep interest rates low. As luck would have it, the European economies ran into difficulty. The trouble in Europe has sent bond buyers scurrying to the safety of U.S. bonds.

Yields (or rates) move inversely to the price of bonds. As bond prices rise, yields go down. Uncle Sam was driving demand for bonds as part of its stimulus program. That demand kept prices high, and yields low. When the Treasury stopped buying, European investors stepped in to fill the void.

Interest rates are expected to stay low for as long as there is weakness in the European economies.

Jobs

According to The Boston Globe (Business Updates), the unemployment rate in Massachusetts moved lower to 9.2% in April from 9.3 percent in March and 9.5 percent in February. While still on the high side, the trend towards lower unemployment is becoming clear.

More people with jobs – and money in their pockets – means higher demand for everything from washers and dryers to cars and real estate. Clearly, the economy is on the mend: 90% of the people in Massachusetts alone have a job and the means to buy a home if that’s what’s important to them.

More jobs means more competition for buyers in the real estate market. Buyers should be on the lookout for bidding wars on the more realistically-priced homes on the market and be prepared to offer their highest and best bids on the home of their dreams.

Showings

If you’re working with a good Realtor® and they’ve shown you 6-10 homes that meet your requirements and you’re still not satisfied, you might be in danger of being priced out of the market (Is it Really a Seller’s Market?). There’s not a single buyer out there that doesn’t want to “fall in love” with a home. But, if you’re not feeling the love in the price range that you’re comfortable with, you might find yourself having to stretch a bit.

Don’t be afraid of stretching today in order to live the life you love for the next 10-20 years or more! Today’s investment in real estate can bring years of pleasure in the future.

Buyers will do well to consider that they’re locking in a lifestyle at today’s dollars and interest rates that will seem trivial only five years from now (How to Take the Risk Out of Buying a Home).

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How to Take the Risk Out of Buying a Home

Thursday, April 1, 2010

Not owning a home is risky behavior

There are far too many buyers sitting on the fence about buying a home. It’s understandable. Home prices peaked in the 2nd quarter of 2006 and have dropped over 30% since then! Who wants to buy something and watch its value plummet like that? However, buying a home is unlike buying anything else. A home is one of life’s necessities like food, water, and clothes on your back. You will always need shelter. Buying shelter today takes the risk out of buying it later.

Prices go up and down at the same time

Buyers understand that ALL home prices move up or down pretty much the same from one house to the next. That’s why they focus on “the market.” They’re always asking, “What’s the market doing? Where are prices heading?” They know that the overall market for shelter is what’s important. What they FEAR is whether they’re paying too much. They’re worried about a profit when it comes time to sell.

The ONLY time home prices matter
is when you no longer need to OWN shelter.

Deciding what to do with the proceeds of a sale

For the most part of your home-owning life, you’re going to move from one home to the next. You’ll exchange one form of shelter for another. Relocate from one area to another. Deciding what to do with the proceeds from the sale of your current home is elementary: You’re just going to plow them into the next home.

So, if you know that all home prices move up and down more or less in tandem, does it really matter where prices are when you sell? If you sell low, you’re going to buy your replacement home low. If you sell high, you’re going to buy your replacement home high. There’s no material difference. Read Here’s a Quick Way to Know When to Buy and When to Sell.

BUT! When you finally move back in with the kids or begin to downsize, THAT’S when you need to consider the proceeds of a home sale. The equity that’s left over should provide a good portion of your nest egg.

The study shows that equity is king

The Wharton School of Business at the University of Philadelphia just released a White Paper entitled “Drowning or Hedging? The Risks and Rewards of Owning a Home.” In it, they studied graduate students who were considering whether they should buy a house while they were attending school. The students knew that they’d be short-term owners in the Philadelphia area and that once school was over, they’d be relocating to a new job or going back home.

The study showed that the students were much better off buying a home as soon as they were able. When they did this, they “locked in” the cost of shelter. The students took away the volatility of the rental market since there is no way to know which way rents were headed. And, since the cost of rent varied tremendously from one location to the next and the students didn’t know where they’d end up, there was no way to “hedge” against sticker shock in their new location.

But, since home prices everywhere move up or down more or less in tandem, the equity they were building helped cushion the burden for the next stage in their lives.

Equity is king. Beware of leverage. Leverage is borrowing to own a home. When you’re over-leveraged with exotic loan programs or you’ve drained every last bit of equity out of your home with second and third mortgages, you’ve left yourself vulnerable to the market forces of homeownership. You’ve seen this with the current crisis in the housing market.

Building equity today minimizes risk tomorrow

The Wharton Study shows that it’s actually less risky to own a home than to not own one. Not “locking in” the cost of shelter is foolish with home prices as low as they are and with interest rates at all-time lows (Read about the cost of money and Great Rates). Throw in some government incentives in the form of tax credits for current homeowners and first time buyers and it’s a no-brainer if you’re in a position to act.

Sitting on the sidelines is not an option for those who wish to minimize the risk of homeownership.

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Here’s a Quick Way to Know When to Buy and When to Sell

Thursday, December 31, 2009

Time IN the market, not TIMING the market

This one’s a “freebie” for primary homeowners who know in their guts that real estate is a good investment. And, they’re right. Problem is, when they’ve built their equity and it’s time to sell, they have a decision to make: What to do with all that equity. Most folks want to move. This one’s for them.

For the investors out there, you’re not sitting on a house long enough to have to worry about when to buy and when to sell. You buy, rehab, and sell – QUICKLY! For an investor, it’s the number of deals per year that counts; not how much of a killing you’ll make on one lonely house.

Consider the following chart. It’s simplistic but simple is good. It helps you get your head around the concept.

You’re in the middle. You bought your house for $100K. It was the most you could afford at the time. Still, you would have preferred the bigger house but it would’ve cost you $200K. You were $100K short so you bought as much as you could afford at the time: Your $100,000 dollar house.

Trading Up – The Effect of Price Changes
% Up/Down Current House Bigger House Difference
+10% $133K $266K $133K
+10% $121K $242K $121K
+10% $110K $220K $110K
Bought here $100K $200K $100K
-10% $90K $180K $90K
-10% $81K $162K $81K
-10% $73K $146K $73K

The chart shows 10% price increases over some period of time. Call it a year. Pretend that each year, prices increase or decrease by 10%.

Study the Difference column. Did you notice how your dream house got further and further away the more your own house increased in value? When you first bought, you were only $100K away from owning that nice, big house. Three years later, you’re $133K away. Not good if you’re looking to trade up.

On the other hand, as your own house dropped in value, so did the big one! Three years later, your dream house is only $73K away. MUCH more affordable.

  1. If you’re trading up, falling prices is what you want.
  2. If you’re trading down, rising prices are for you.

Trading down? Same chart, flip the numbers. The difference becomes your profit.

Trading Down – The Effect of Price Changes
% Up/Down Current House Smaller House Profit
+10% $266K $133K $133K
+10% $242K $121K $121K
+10% $220K $110K $110K
Bought here $200K $100K $100K
-10% $180K $90K $90K
-10% $162K $81K $81K
-10% $146K $73K $73K

If prices haven’t moved since you bought your big $200,000 dollar house and you sold it to buy the smaller one, you’d make $100K on the deal. If you waited three years and prices went up, you’d make even more: $133K. If, on the other hand, prices dropped over three years, you’d only make $73K. But, a profit is a profit, after all.

This is very powerful knowledge. Be careful with it. These are generalities. There are many other variables to consider. Chief among them are interest rates or the “cost of money.” This was discussed at great length in Great Rates. You must also consider what your dreams are and what your current cost of living is. If you’re dreaming of a big house, go out and buy it! Life’s too short. If you need to downsize, stop paying bills you don’t have to. Buy that smaller house! Life’s too short.

Knowing when to buy and when to sell trips up many homeowners. It needn’t be overly complicated. Waiting for the absolute top and the absolute bottom of the market will trip you up. You could lose money and get hurt when you’re frozen by indecision. If the full-time professionals can’t get it right, you don’t stand a chance (Read Can’t Predict the Bottom). Instead, getting it “almost right” can be just as good.

It’s been said that more is lost by indecision than by the wrong decision. This is true in buying and selling real estate, too. Waiting to make your purchase and missing an opportunity, or holding on too long and losing money can be disasterous.

A Quick Way to Know When to Buy and When to SellConsider the face of a clock. Anything from 11 o’clock to 1 o’clock is the top of the market. Anything from 5 o’clock to 7 o’clock represents the bottom of the market. Don’t worry about hitting the exact top at 12 o’clock or the exact bottom at 6 o’clock. Be happy with buying your dream anywhere in the 11-1 o’clock or 5-7 o’clock ranges and you won’t get hurt. Where do YOU think prices are in the current cycle? Why? Leave a comment below.

Who Else Wants to Buy Real Estate as an Investment?

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Who Else Wants to Buy Real Estate as an Investment?

Tuesday, December 22, 2009

There are any number of places you can invest your money: Stocks, bonds, gold, mutual funds, and collectible artwork are just a few that come to mind. None of these are as emotional as investing in real estate. Everyone needs a roof over their head. And everyone can relate – on a very personal level – to the intrinsic value of a home. In the end, though, when you’re making an investment, it always comes down to buying low and selling high.

Today marks the beginning of an amazing series of articles that will give you the tools you need to make a wise investment in real estate. Topics to be covered over the next couple of weeks include:

  1. Do You Know Why Location is So Important?
  2. Analyze the Layout of a House Like a Realtor®
  3. Here’s a Quick Way to Know When to Buy and When to Sell
  4. The Secret of Sure-Fire Sweat Equity
  5. The Magic Number in Negotiations
  6. How to Flip a House Like an Investor

Buying Real Estate Low and Selling High

Buy and Hold

Real estate has always been a great investment. Over time, home prices have steadily increased even though there have been fluctuations and corrections now and then. In the classic “buy and hold” strategy, an investor buys a house during a down cycle and sells it when prices have strengthened overall.

This can be tricky but it’s not impossible. When it comes to buying and selling, you have to be right TWO times: You have to know when to buy and you have to know when to sell. You also have to know which house to bet on.

When you’re looking at which house to buy, it’s important to consider factors that you can’t change: The neighborhood and the layout of the house. Everything else, really, is a matter of maintenance or further investment.

Sweat Equity

This strategy takes a lot more work and a lot more money but it is the SUREST way to a positive return on your investment because YOU control all the variables.

With this strategy, you’ll learn how to negotiate like a pro. You’ll also learn how to approach a property like an investor. You’ll analyze the property, determine where the flaws are, and calculate what it’ll take to renovate the project to full market value.

Finally, you’ll SELL your investment to realize your profit.

Investing in real estate is not something designed for your primary residence. Your primary residence is more suited to the “buy and hold” strategy where you’ll cash out when the property no longer meets your needs. At that point, you’ll have another decision to make: what to do with the proceeds: Buy another house or bequeath the proceeds to your heirs. This is a topic for another time but you’re encouraged to ask questions by posting a comment in the box below.

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