A Bad Real Estate Market?

Yes, it has been a bad real estate market in many ways (this is being written in early 2010). But there are ways to protect yourself when buying a home. If the following tips are coming too late to help you in your current situation, at least remember them for next time.

In May of 2006, at the end of the biggest real estate bubble in our lives – we bought a home. My wife and I had been renting in Tucson, Arizona, and decided to move to Canon City, Colorado. We had never been there, but the weather statistics and local photos we saw on the internet convinced us it was a good place to live, so we got in the car and drove the 800 miles in about twelve hours.

The next day we bought a house, offering the full asking price. It was May, 2006, and we closed in the first week of June – arguably within a few weeks of the top of the real estate market. In February of 2009 we moved on to a bigger home, even though we suspected prices would fall another 5 percent in the coming year. In May our first Canon City home sold for 11% more than we originally paid for it. Now, for the rest of the story, and some lessons about bad real estate markets.

The Little House

When we first moved to Colorado, we bought one of the cheapest homes in town that was ready to live in. We didn’t really want a fixer-upper, but we also didn’t want a home that could fall in value too much. As it turned out, with about $2,000 worth of minor improvements we had added, the house we bought for $65,000 sold for $72,500 after three years of falling real estate prices.

Lesson number one: Homes at the lower end of the market will never lose as much in value as the more expensive ones. In fact, as our experience indicates, they may not go down at all even as owners of other homes for sale in the same town are dropping their prices. This makes sense if you consider it for a moment. People don’t need to live in a big house with fine cabinets, but they need to live somewhere. Thus the market for lower-priced homes has more support in tough times.

In fact, a bad real estate market often comes with bad economic times, there may be more people looking for the small cheap homes than there were before. Almost anyone can afford a home like that one we had. It definitely cost us less to buy it than renting a two-bedroom apartment. Perhaps another lesson is to clean the house up and leave some furniture in it when selling it – we think that helped.

Buying During Declines

I wouldn’t try too hard to predict when a bad real estate market is going to get better, but in early 2009 I guessed that in our little town in Colorado, prices would fall another 5 percent at least. So why would we buy a home that cost more than twice as much as the first one we bought when we anticipated more price declines? Well, we had to live somewhere, and we liked it.

Honestly, it had to do with many factors. It suited us perfectly, was cheap to heat and maintain (not as old as the other), and we didn‘t plan to move for many years, so we were less worried than before about where values went in the meantime. But one of the things that really made us feel good about it, was the loan. We are paying just 4.5 percent interest, and yes, it is a fixed rate 30-year mortgage loan. I figured if we waited for good times, we might be facing higher interest rates.

In other words, we might save as much as seven or eight thousand dollars on the price of a home by waiting, but if interest rates had ticked up to 6.5 percent, we could easily pay several times those savings in additional interest over the following years. So why wait when we could afford the house we were looking at, and had no guarantee that we would save a penny by waiting?

Lesson number two, then, is that the cost of home ownership is not just in the price of the home. We found a house that won’t need major repairs for years, is very energy efficient, in a town with very low property taxes and insurance rates, and with very low payments thanks to that interest rate. And who knows, the bottom may already be here. A bad real estate market can be a good time to buy a home.