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Financial Security Best Reason to Buy Real Estate
By: Dian Hymer
September 29, 2003

Real estate brokers in many communities are reporting slower home sales this year. Nevertheless, the National Association of Realtors recently revised its projected homes sales upwards for 2003.

It's hard to generalize for the entire country. And it's impossible to know with certainty where home sales will go from here. But after years of record-breaking levels of home sales activity, the market could be poised for a slowdown. With this in mind, should you buy now or wait to see if home prices decline?

Real estate sales activity is cyclical. When buyer demand is high, interest rates are low and the supply of homes for sale is low, home prices tend to rise. In this sort of market, buyers are eager to buy. The problem is finding a place to buy when demand outpaces supply.

When home sales slow down, the supply of homes for sale tends to rise. This can lead to a softening in home prices.

The concern today is that home prices have risen significantly in many areas over the past five years. During the same period of time, interest rates dropped to multi-decade lows. Recently, rates began to rise. What happens to the real estate market if interest rates continue to climb?

The answer to that depends on the economic situation in your locale.

As the national economy picks up, interest rates will rise, hiring will hopefully improve and, if so, household incomes should grow. Unless interest rates rise rapidly, increasing incomes should make up for the decrease in housing affordability.

However, if your local economy lags behind the national economic recovery, you could be faced with higher interest rates—which mean higher housing costs—at the same time that the average local income is static or declining. In this situation, home prices could drop, particularly if there's a glut of inventory on the market.

HOUSE HUNTING TIP: To ensure that you don't over-pay at a precarious time in the housing cycle, take stock of the local housing market and economy, as well as your personal financial situation. A local real estate agent can provide you with valuable information about your housing market.

How long is it taking homes to sell? Is this more or less time than it took homes to sell a year ago? How long would it take to sell off the entire inventory in your price range? How does this time compare with a year ago? The longer the time to sell, the more bloated the inventory. More inventory tends to lead to price dilution. A low housing supply, however, will tend to prop up prices.

Next look at the local economy. Is hiring on the increase, or are more layoffs in the works? Are businesses moving into or out of the area? If you live in a one-industry town, do some research on that industry to determine if a turnaround is in the offing.

Finally, carefully examine your personal financial situation.

There's no harm buying at the high point in a market cycle as long as you're not forced to sell when the market is down. If you have any concerns about the stability of your employment, this may not be a good time to buy.

Timing markets is difficult. Some people wait to buy until all the conditions are right, which you may not know until after the fact.

You could miss opportunities if you wait too long.

THE CLOSING: The right time to buy is when you have financial security; you can afford to buy; you find the right house; and you know that you won't have to move again for 5 to 10 years.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers," and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.

Copyright 2003 Dian Hymer

Distributed by Inman News

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