By Dian Hymer
Some real estate markets around the country, like Miami, Seattle and the San Francisco Bay Area, are hotter than a pistol. Home buyers who are eager to buy before higher interest rates price them out of the market see residential real estate as a far better investment than the stock market. To aggravate an already frenzied situation, inventories remain low in the areas where demand is the highest.
Some analysts are concerned that the supply-and-demand imbalance in some areas is driving prices higher at a pace that can't be sustained. Also, many buyers are turning to risky mortgage options, such as interest-only and negative amortization mortgages, in order to qualify to buy at stratospheric prices. What happens if the market turns? Is there a disaster waiting to happen?
The market will cool down at some point. How much is anyone's guess. When it does happen, it won't happen uniformly. Areas like Las Vegas where there is a surplus of new houses in the pipe line could experience a more significant slowdown than an area like Oakland/Piedmont/Berkeley, Calif., in the San Francisco Bay Area where there's a scarcity of raw land for home building.
HOUSE HUNTING TIP: You won't be hurt financially if the market corrects in your area unless you're forced to sell in a down market. If there's a possibility that you'll be transferred within a couple of years, you should continue renting until you're ready to set up a permanent residence. It's foolish to buy into a rapidly escalating market unless you plan to own your home for at least five to 10 years.
Rapidly appreciating markets give rise to speculative home buying. How can you lose with the market rising so quickly? This is just the sort of attitude that can get you into trouble.
Years ago, a developer paid a premium price for a fixer-upper. It took him six months to renovate the property and put it back on the market. The market suffered a downturn just before the developer put his project on the market. He ended up losing a lot of money, not to mention time lost working on a fruitless endeavor.
It can be costly to assume that because the market has appreciated handsomely for the past several years that it will continue to do so. In fact, it's wise to assume that it won't, and see if buying now still makes sense for you.
It's tempting to buy a home when all your friends are buying. Try to resist the herd syndrome and consider what is best given your particular situation.
Real estate markets don't stay hot for ever. For instance, during 2004, the market was particularly hot during the beginning of the year when there were many more buyers than sellers. Later in the year, as more inventory increased, conditions improved for buyers. It's easy to convince yourself that if you don't buy now, there will never be another chance. However, there usually are other opportunities for buyers who are patient.
Make sure the home you buy will suit your long term needs. Many first-time buyers make the mistake of buying a small starter home just to get into the market. This can turn into an expensive proposition if you feel pressured to buy a bigger home within a few years. Buying and selling homes is expensive. Moving less often can save you money.
THE CLOSING: Be careful what you buy. In a hot seller's market, virtually everything sells, if it's priced right. When the market slows, it can be difficult to sell a house that has an incurable defect, such as a location on a busy street, or only one bathroom.
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