Nervous About Buying in this “Scary” Real Estate Market?
Watch the evening news enough and you will be scared to even walk close to that deadly beast known as “real estate”. Is it REALLY as bad as the media suggests? Well, it depends who you are! If you are a large corporation that buys mortgages in mass quantities from the lending institutions who initially issued them, and now a high percentage (compared to normal) of debtors cannot pay their loans because they got in over their heads, um, yeah, it’s probably not going so well for you right now. If you are that person who is unable to make his mortgage payment and you’re at risk of losing your home, you’ve probably experienced better days. If you’re a buyer, however, right now is the best market that you’ve had in a long time–if not ever!
There are many intricacies that caused the real estate boom of the early 21st century (i.e., a few years ago) to fall and this article does not intend to explain them. To begin with, though, you have to understand that the housing market, just like markets for anything, is cyclical. There are times when prices are high and times when they are low. It’s normal. In this particular instance the housing “high” crashed a little more quickly due to the type of lending practices that were occurring. Quite frankly, people were getting loans that they shouldn’t have been getting. People were stretching their buying power beyond what their incomes could really support with the help of various lenders who were not only going along with it, but also promoting it. I certainly do not wish for anyone to lose his home, and there are many unfortunate circumstances for which someone might find himself in tough financial times and risk foreclosure other than bad lending practices. In general, however, the lending practices in place at the time played a part in driving the housing market to its peak and then causing it to fall hard when it could no longer sustain such rapid growth.
Again, for the sake of this article we don’t have to be concerned about what exactly caused the scenario that led up to the circumstances that are in front of us today; it is what it is! Some lending guidelines have changed, and rightfully so, but plenty of great mortgage products are out there right now, so that’s not really a concern. The bottom line is that as a buyer you are currently being presented with HUGE opportunity to invest in real estate at rock-bottom prices. Not only are the prices extremely low, but there’s also a huge selection of properties to choose from. What more could you ask for? A HUGE SELECTION at GREAT PRICES! It’s like Wal-Mart on steroids!
But, you ask, “Even if I’m currently able to buy homes at good prices, how can I be sure that the value will ever go up again?” The answer is, you can’t be sure! There are very few things in life that are certain. The important thing to consider is the historical performance of real estate. The average yearly appreciation on home values in Minnesota from 1940 to 2000 was 6.15% (you can see for yourself at http://www.census.gov/hhes/www/housing/census/historic/values.html). With any bit of research one can reasonably presume that these levels of growth will continue into the future. (Note: You may ask why 6.15% is that great when stocks perform much higher than that on average. One key difference is leverage. If you have $10,000 to invest, and you choose stocks, you might earn, for example, 10% interest on just that amount. If you use that $10,000 instead to make a 10% down-payment on a $100,000 home, you will be gaining 6.15% appreciation on $100,000, not just on $10,000. So which is better? Get out your calculator! You could earn 20% in the stock market and only gain 3% appreciation on your home and the home would STILL be a better investment!) And while appreciation is a large portion of the financial gain made in real estate, it’s not the only way your personal finances benefit from owning a home; there are multiple tax benefits and equity building advantages to owning, especially if you invest in rental properties in addition to the home where you reside. The point is, even in the VERY RARE occasion that home prices do not go back up, they are not likely to go down any further and there are still many benefits of owning a home even excluding gains through appreciation.
People who try to make quick money in anything, be it in stock markets, starting businesses, or investing in short-term real estate transactions (eg, “flippers”), are taking larger risks inherently because they are speculating on something that is largely out of their control. If you are patient and persistent, however, real estate has shown consistent long-term results that you can greatly benefit from if you practice buy and hold investment strategies. You can especially benefit by taking advantage of the selection and prices that exist today. It’s a buyer’s market! Many experts agree that real estate investments will continue to outperform any other investment vehicle. If you are still heeding the warnings of the media and worried about putting any of your money towards real estate, that’s your prerogative, but I will hate to see your regret when you realize what a wonderful opportunity you passed up!
