Don't worry about missing the bottom in houses

by Philip Brewer on 26 March 2009 7 comments
Photo: Philip Brewer

I've recently heard from several people who want to buy a house and are thinking that now may be the time.  In particular, they're worried that waiting might cause them to "miss the bottom" and lose the chance to get a great house cheap.  In housing (unlike, for example, the stock market) you don't need to worry about that.

It's a real issue in the stock market.  One reason that people recommend keeping your money in the market through downturns is that, when the market does turn up, it tends to turn up sharply.  More than one study has shown that having your money out of the market for just a few days a year--if they're the few days with the biggest gains--can cut your total return by half or more.

This is not, however, true for houses.  There is absolutely no need to try to catch the bottom in the market for houses, because of all those individual sellers out there.

Take a house that has been sitting on the market for years, with the owners cutting their asking price repeatedly--from what they hoped to make to what their realtor said they could make to just enough to break even to just enough to cover the mortgage to just enough that the sales price plus all their savings could cover the mortgage--but the house still hasn't sold.  When you make an offer on this house, the owner is going to take it unless the bank won't let him.  He's going to take it even if the market has "hit bottom;" even if his neighbors' houses have started selling; even if there are rumors that some buyers aren't low-balling every offer.  He's been waiting too long to risk letting a firm offer slip through his fingers.

Of course, for any particular house you can miss your chance to buy.  Once someone else makes an offer for that house you won't be able to get it with a low-ball offer.  But there will still be all those other houses out there that the owners have been trying to sell for years.

Don't worry about catching the bottom.  Even a year or two after the bottom there will still be houses that haven't sold, and they'll still be available for rock-bottom prices.  It's completely different from the stock market.
 

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Guest's picture

Besides, just because prices are low does not mean that you can afford them. Never buy something early "Because it's a great deal". Only buy when you are ready, then look for a good deal.

Thanks,
Nate

Guest's picture

I always hate to see people convincing themselves to time the market and potentially buying at a time that is not right for them. Trying to make sure that you don't "miss out" on an opportunity has often sent well-intentioned people into some pretty unfortunate situations down the road.

Keep up the good work!

Guest's picture

My family and I bought our home in the summer of 2006 (a period that many experts consider to be the peak of the housing boom).

We waited a few years until we were financially stable and able to comfortably afford the home no matter what housing prices did.

I am still happy with our decision to buy even though our home has likely lost value since we purchased it.

Buy your home when you're ready is a lot more important than buying at the bottom and not being able to comfortably afford the home!

Xin Lu's picture
Xin Lu

a home is very different than a stock in that you live in it.  If you bought a home and it makes you happy when you live in it and it makes financial sense then I think anytime is ok.  I am still waiting until it is cheaper than rent here in the Bay Area.  Otherwise, we're packing up and moving.

Guest's picture
Kelja

I sold a house and condo way back in 2001 thinking the Real estate market was too 'frothy'. As it turns out, I was right but my timing sucked. However, I believe prices are turning back to at least 2001 levels and probably below that.

My wife & I would dearly love to own our own place. We are sick of renting but will have to wait a bit. I live in North San Diego county near the coast -- probably some of the priciest homes in the country! We've seen some drops in pricing but nowhere near other areas, especially inland.

The government is desperate to restart the housing bubble. They are keeping interest rates artificially low and the Fed is buying up treasuries for the same reason. As unemployment rises and qualifying for home loans become more stringent, there will be a smaller pool of would-be buyers. Less demand, more inventory = lower prices.

I expect housing prices to drop further. I think when pricing gets close to rental parity we'll be close to a bottom. Nowhere close right now. Even if I miss the exact bottom, I'm not terribly worried. We won't see the appreciation of prices like we saw during the bubble. Probably won't see that in our lifetimes.

The odds are good that prices have not bottomed. The odds are good that when they do bottom finally, we won't get rampant appreciation. Plenty of time. I'm waiting.

Philip Brewer's picture

The buy versus rent decision is a different--and I would argue far more important--question than "catching the bottom" in housing prices.  I've talked about that a couple of times.  My artice What your house is really worth provides a framework for doing the analysis.

Lots of people would rather own a house than rent one, and that's just fine.  But many of those people try to convince themselves (or their spouses) that the boost in quality of life that comes from owning is cheap.  Or free.  Or even that they'll get paid to have a better quality of life because their house will soar in value.  For long stretches of time rising home values have made that analysis seem true, but I think that's just an artifact of a particular time and place.

If you want to buy a place, and you find one you like, and you can afford it, then buying may well make sense.  But there's really no need to snap a place up just because house prices may be bottoming.

Carlos Portocarrero's picture

Philip:

My wife and I were talking about this yesterday and she told me she was a little concerned about "Missing the bottom." 

I'm in the same boat you are, but for more practical reasons. I'd never buy a place unless we loved it, could afford it, and planned to live in it for X amount of years. That the market is "down" or "coming back up" wouldn't factor into my decision. Price certainly would, but that always will.

We have to go by the things we can control, and the housing recovery (or not) isn't one of them.

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