As housing prices soared from 2002 to 2006 the housing hysteria spread throughout the nation. Everyone was talking about how much their home was worth, it seemed as though every other person I spoke to was either a real estate agent, loan broker, or a smart real estate investor. We witnessed appreciation rates that were 5-7 times that of historical rates. In late 2004 I wondered how can prices go any higher. Homes that were selling for $240,000 in late 2003 were selling for $325,000, 1.5 years later. Boy was I wrong.
Prices continued their torrid climb higher and in late 2005 as my family grew, we decided it was time to find a larger home. I was somewhat nervous at the thought of purchasing a home at what seemed to be incredibly high prices. Memories of the late 1980’s and early 90’s entered my mind. The housing slump during that period left many homeowners upside down on their mortgages for 7-10 years. However, I wasn’t buying an investment property, I was looking for a home for my family.
My wife and I decided to go ahead and begin our search. We felt even if home prices dropped we weren’t planning on moving anytime soon and buying a home is a lifestyle decision, not an investment decision. We looked at over a 100 homes and bid on a few, yes remember the bidding days. Finally we located what seemed to be the right home. After some negotiating we settled on a price of $606,000. I couldn’t believe it, I was buying a $600,000 home.
Over the next 2 years we watched prices skyrocket, similar homes were selling for $900,000 to $1.1 million. What a smart decision I thought. And the cynic in me thought homes were overvalued at $600,000. Just like thousands of other Ventura County Residents, I could now brag about how smart I was, buying a home when I did. Boy we were shrewd.
I hadn’t planned on values going any higher, nor was it much of a concern of mine, I had owned another home starting in 1993 and seven years later it was worth perhaps 10% more than I had paid for it. We bought a home because we needed more space and a few more amenities. Our 5×5 bathroom required a traffic flow study to get in and out of. It was great that values continued to go higher after our purchase, but buying a home is a decision you make based on needs, wants, etc. want a good deal but buying at the “bottom” shouldn’t be the deciding factor.
Our home is now valued at about what we paid for it. But who cares, the true value will be determined on the day we sell it. Which won’t be for many years. Our buying decision was well thought out and we selected a home we could ultimately retire in.
I hear all the time from prospective buyers, I am going to wait until prices drop further. I will buy at the bottom and rent a home for the next few years. Is this really a smart decision ? Rents average around $2200.00-$2500.00 per month for a decent 3+2 home in the Conejo Valley. Multiplied by 24 months that is $60,000 in rent. Add in another $5000-$10,000 for maintenance, utilities, etc and you’re at $70,000. If you assume you are in the 30% tax bracket ownership in that same period would have saved you about $15,000 in taxes. That $15,000 savings invested in a ROTH IRA for 30 years would be a nice $100,000 nest egg for retirement.
Another important factor is the inverse relationship with interest rates and prices, a 1% hike in rates on a $400,000 loan would mean the house would need to drop 10% in value to maintain the same payment. In effect you would need a $360,000 loan to have the same payment. This is just an example.
I do feel prices remain overvalued in many areas. I have seen a lot of great deals come through our office though. However, there are good deals to be had and buying a home shouldn’t be based on price alone. A home is where you spend over 1/3 of your day. You should enjoy it. Too many people are treating buying a home the same way they would approach buying a stock. Yes I agree you want to buy at the lowest possible price, but don’t get caught in the “bottom” trap. What if prices suddenly rebound ? Not likely, but when it does turn around we should get some pop to pricing for the short term.
And in all lilkelihood, by the time you hear about a bottom, you will have missed the “bottom” you were waiting for. There are professionals out there snapping up good deals. Buying a personal residence is a lifestyle decision, treat it as one.