This guest post was written by Go Banking Rates, bringing you informative personal finance content and helpful tools, as well as the best interest rates on financial services nationwide.
Buying a home is especially difficult these days, especially because it’s hard to predict what will happen next. Mortgage interest rates and home prices are at their lowest in decades, but it doesn’t mean now is the time to buy.
The real issue is whether you’re really getting the best deal possible on your home: Interest rates are low, but they could keep dropping. Prices are down, but they may not seem so spectacular in a couple of years from now. A home you would have considered a steal five years ago may be ridiculously expensive now, right? So how do you buy a home in a down market and know you’re paying what you should?
How Market Value Is Determined
The market value of a home is what a seller can expect to receive from a buyer at any given time. It’s sort of like the Blue Book value on a car–an average asking price, but not necessarily the exact amount someone would pay.
The market value is determined by a professional like a real estate appraiser or agent based on a number of considerations. These can include what homes of similar size and location have sold for in the past six months to a year, but does not factor in things like cosmetic improvements made to the property. Importantly, the market value of a home can change dramatically over a short period of time, which is why the number is not completely reliable.
How To Tell If a Home is Worth Its Price
One way many potential buyers gauge whether the property they’re interested in is a fair price is similar to how appraisers judge market value–by comparing it to similar homes for sale in the area. However, this can be misleading. According to lendingtree.com, homes that have been on the market for just over three weeks might be priced too high.
Valuation
This is why valuation is important to consider. Valuation is the difference between what a home should cost and what the actual price is. For example, CNNMoney reports in mid-2006, at the height of the housing bubble, 53 metro areas were considered to have over-valued properties. Just two years later, that number dropped to only 8.
Aim for Pre-Bubble Prices
Right now, most areas are considered to be undervalued, which means you could score a good deal on a home. Additionally, due to the recession, unemployment and high rates of foreclosure, the demand for homes for sale is weak. This means sellers are forced to cut prices even further to entice buyers.
Even if it’s already a bargain basement price, judging the accuracy of a home’s market value can still be difficult. To be sure you’re really going to get your money’s worth from a purchase and not want to kick yourself years down the road when prices drop further, judge how closely the asking price matches what you would expect in a “pre-bubble” environment.
MSN Real Estate writer Luke Mullins describes a scenario where we will return to pre-bubble prices where there was only an increase of one to two percent above the inflation rate over the next decade. This is in line with average historical appreciation rate of about half a percent every year when adjusted for inflation. So, with this trend in mind, compare the historical value of a property you’re interested in against the asking price today. Ascertain whether the two match up by starting from 1995 and adding a percentage point or two above inflation each year until you get to 2010.
Will Home Prices Continue to Drop?
Even if home prices are abnormally low now, they might continue falling, making a premature purchase more expensive than necessary. Associated Press real estate writer, Alan Zibel, explains that home values are projected to to decline well into 2011 and maybe even 2012. He writes that Moody’s Analytics senior director expects “home prices could drop another 20 percent by early 2012 if there is another recession. If the economic recovery remains on track, she sees prices falling another 5 percent and hitting bottom early next year.”
Waiting for home prices to fall further could really be a gamble, though. It seems they will trend downward at least for a little while longer, but wait too long and you might miss out on rock-bottom numbers. Homes are already priced at historical lows, so if you use the above criteria to judge a home’s true value and find you’re set-up to profit from your purchase in the future, you might want to snag the opportunity while it presents itself. Of course, missing the boat and buying on the way up will still ensure that you’re purchasing during a time when home prices will continue up.
4 Comments
Such an art, determining home values. At the end of the day it’s what someone is willing to pay at that moment in time, which hopefully coincides with what you want!
.-= Financial Samurai´s last blog ..On A Mission To Refinance America =-.
@Financial Samurai – Very true. Just a few years ago, people were willing to pay over $500,000 for homes in my neighborhood because realtors and everyone else said that’s what they were worth. Now, most people, including the realtors, believe they’re worth about $300,000. Go figure! In my very biased opinion, I like to gauge homes in any neighborhood by quality; and a 3x an average income ratio. So, if my neighborhood’s average income is $80,000, homes should be worth $240,000.
I’m glad the market interest rates are still low, soon I may start looking at buying rental property.
I suppose once the job market starts to brighten up, housing will pop back up too.
@Money Reasons – Rental properties are a good investment as long as the owner takes care of their property. My husband and I are currently renting and our landlord loves the benefits of owning rental property, but really doesn’t want the responsibility (meaning, nothing gets fixed and it’s entirely up to us!) And…slumlords usually are only able to keep crummy tenants, me being an exception to the rule (I just really hate moving so have stuck it out for almost 5 years, ugh!). Good landlords can usually capture the best tenants; the ones who pay their rent on time, rent for many years, keep the place intact, etc. If you have the money, I’d say go for it as long as you’re up for the challenge, and handy.