June 2008 Update: When is the right time to buy an investment home?

(NOTE: This post is geared towards investors ONLY, because it focuses solely on issues of price and timing. If you are buying a home for yourself, you'll want to consider other factors as well, such as the school boundaries, your ideal floorplan, the size of the backyard, etc. If you think of buying your own home just in terms of an investment, you may be sorely disappointed.)

When is the right time to buy an investment home(s)?

Here’s my thought about investment purchase timing: using metrics of inventory/sales and prices, I’m observing that inventory is starting to flatten, sales are definitely rising, and prices are still falling but only very slightly. I think we’re about at the bottom as far as prices go. However, there are some unknowns.

• Perhaps foreclosures continue to come to market and we run out of first-time homebuyers. It’s hard to quantify but an important question to consider: which will we run out of first? Foreclosures? Or first-time buyers? If we run out of foreclosures first, then we may be at the bottom of the market right now (though we won’t know for sure for several months from now). But if we run out of first-time homebuyers first, then expect prices to take another step southwards. It’s like an endurance contest, and I’m not sure who’ll win.
• If perception becomes reality, then expect price declines to stop soon. With more and more buyers deciding that this (2008) is the time to buy, they may absorb every bit of inventory as it comes available on the market. I’m seeing some of this already. I have twice as many pendings as I have listings, and most of the still-actives are either overpriced REO listings from unrealistic REO sellers or else homes that nobody seems to want. But the good stuff is going quick, often with multiple offers and with a lot of them over asking price.

Here’s the thing: right now, banks are going off of recent comparable sales which show the trend of lower prices. When pendings are lower still, we have a declining market. But I’m beginning to notice that the newer the pending date, the fewer days on market and better list prices they seem to have. In other words, there may be a potential for arbitrage purchasing right now due to the delay in reliable, confirmed data.

Because it may take another 4-6 months to for today’s listings and pendings to be reflected as sold comparables, during this time many REO sellers will continue with the status quo of declining prices. But once they realize they don’t need to price it lower, because that stuff sold in a week over list price with multiple offers, then the day of the price declines will be gone.

Another question becomes: what then? Will buyers not want to play anymore, walk out on the market and give sellers another dry spell with few sales, and pressure sellers to come down in price again? Or will the herd mentality become “prices are rising again, therefore I should hurry up and buy,” which would sustain further price increases?

One thing I feel pretty confident about: I don’t think we’ll have another 10-20% drop in starter home prices ($150K--$250K). We may on larger, luxury homes, but I think increased demand at the low end is showing enough resistance that it won’t be dropping much more.

Of course, I could be totally wrong… after all, prices went a lot higher and lasted longer than anyone thought, too…

Comments

[Daniels Team]

Great read!