Estimating a real estate bottom

DEAR BERNICE: My husband and I live in Florida and have been waiting for the market to "bottom" before we buy our first home. How can we tell when is the best time to buy? --Ashley B.

DEAR ASHLEY: There's no way to tell exactly when the bottom of the market will be in your area. I've been in the business 31 years and have seen numerous ways to predict what will happen. The truth is that no one has a crystal ball. The best predictor that I have found is "months of inventory." Here's how it works.

Assume that there are 96 houses on the market currently in the $200,000-$250,000 price range in your area. Last month 12 of these houses sold. If no new listings came on the market, it would take eight months (96 listings divided by 12 sales per month) for the entire current inventory to sell.

As a rule of thumb, if there are six months or less of inventory on the market, you are in what is known as a seller's market. A seller's market is one where the demand is greater than the supply. The result is upward pressure on the prices. The fewer months of inventory on the market, the greater the potential for price appreciation.

If there are seven or eight months of inventory, your market may be transitioning or flat. This means prices are generally stable and there is a good balance between the number of buyer and sellers.

If there are more than eight months of inventory, you are in a buyer's market where there may be downward pressure on home prices. The more months of inventory on the market, the steeper the rate of decline.

To determine the best time to buy, check regularly with a local Realtor to determine if the amount of inventory in your price range is increasing, staying steady or decreasing. The good news for you is that prices lag behind inventory changes. For example, many parts of Florida and California are currently seeing big drops in the amount of inventory on the market. Nevertheless, the property values are still decreasing. As the excess inventory is absorbed, prices will stabilize. This is the time that most sophisticated real estate investors like to buy -- when prices are still falling and the inventory is beginning to shrink.

DEAR BERNICE: When we bought our first home, the Realtor recommended that we get "prequalified." We're ready to buy another home as a rental. Our agent told us that we must be "preapproved," not just "prequalified." What's the difference? --Bill K.

DEAR BILL: First, congratulations on being a savvy real estate buyer. The people who have made the most money in real estate are contrarians. They sell when everyone else is buying and then buy when others are selling.

Your Realtor was smart to recommend that you get preapproved, especially since you are buying an investment property. When a lender says that they have "prequalified" a buyer, it means that they have looked at the buyer's loan application. Based upon the application, the buyer should be able to get a loan, provided everything checks out. In other words, the lender has not yet run a credit report, nor have they verified the source of the down payment or the buyer's employment. In addition, the lender has not yet appraised the property. They also have not ordered a title report that would show the existence of any outstanding liens that may prevent purchase of the property. ...CONTINUED

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