Unsettling economic news at the beginning of July caused some economists to fear a double-dip recession. The stock market sold off, pushing the Dow below 10,000. A weak employment report increased fears of a tepid jobs recovery. Manufacturing activity fell to its lowest level since December.
The National Association of Realtors’ Pending Home Sales Index (PHSI) dropped a record 30 percent in May — almost 16 percent below its 2009 level.
NAR’s PHSI is an indicator of future home sales activity. The index is based on executed purchase contracts that have not yet closed. A drop in the May index was not unexpected. The federal homebuyer tax credits that were generally recognized as stimulating a struggling home-sale market expired on April 30.
The large drop in pending sales indicates a drop-off in buyer demand. It’s impossible to know whether this will develop into a trend as buyers pull back in the face of worrisome economic news or until prices fall to a level they can’t pass up. A certain number of buyers will retreat to the sidelines and wait until the news turns positive.
A big concern is the direction of home prices. At the end of 2009, it appeared that home prices were stabilizing. In some niche markets, home prices inched up a bit. However, David Blitzer, committee chairman of the Standard & Poor’s/Case-Shiller Home Price Indices (a much-watched measure of U.S. home prices), reported in June that "consistent and sustained boosts to economic growth from housing may have to wait to next year."
It’s impossible to generalize about a national housing market that is so fragmented in terms of location, price range and neighborhood. Prices at the low end of the market have dropped so far in some places that they may be good deals.
In areas with a lot of high-end inventory that’s not selling, it may be difficult to find a good buy unless the sellers are motivated and are not in denial about the current market value of their home. Such a market provides a good opportunity for realistic sellers who prepare and price their home at or under market value.
Except for low interest rates, there’s no urgency for most buyers to buy now. Buyers are content to wait for the right house at the right price. When one comes along, it can draw offers from multiple buyers who are also waiting for prime property. It’s telling that the losing buyers don’t snap up overpriced listings.
The question for many homebuyers and sellers is: How long do you wait for a better time to buy or sell? The herd phenomenon tends to apply to home sales. People feel more comfortable buying or selling when everyone else is. This approach turned into disaster for homebuyers during the recent bubble.
The contrarian strategy is to buy when others aren’t and sell when the inventory is low. This buy-low, sell-high approach works well for investors. But, when you buy a home, your personal life limits your options. A death in the family, a divorce or job transfer could cause you to move in a down market.
Near record low interest rates are enticing, particularly if your home no longer suits your needs. But, you should only do so if you can live with the fact that the market value of your home could fall further before stabilizing. You should be financially secure and buy a home that will suit your long-term needs — ideally at a price that is less than you can afford.
THE CLOSING: To cover the bases, buy an affordable house that will generate enough rental income to cover the carrying costs if you need to move during a down market.